PROSPECTUS SUPPLEMENT
(To prospectus dated September 9, 1999)
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NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2000-1
$226,320,000
NOVASTAR HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES,
SERIES 2000-1
NOVASTAR MORTGAGE, INC.
Seller and Servicer
RESIDENTIAL ASSET FUNDING CORPORATION
Depositor
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The certificates will be backed by a pool of residential mortgage loans. The
pool contains both adjustable-rate mortgage loans and fixed-rate mortgage loans.
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CONSIDER CAREFULLY THE RISK FACTORS STARTING ON PAGE S-6 OF THIS PROSPECTUS
SUPPLEMENT AND PAGE 3 OF THE PROSPECTUS BEFORE MAKING A DECISION TO INVEST IN
THE CERTIFICATES.
The offered certificates represent beneficial ownership interests in the trust
fund. The offered certificates are not interests in or obligations of any other
person.
No governmental agency or instrumentality has insured or guaranteed the offered
certificates or the underlying mortgage loans.
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THE CERTIFICATES--
Interest and principal on each class of certificates is scheduled to be paid
monthly on the 25th day of the month or, if such day is not a business day, the
next succeeding business day. The first scheduled distribution date is April 25,
2000.
CREDIT ENHANCEMENT--
The more senior classes of certificates will have the benefit of the
subordination of the more subordinated classes.
All classes of underwritten certificates will be supported by
overcollateralization, which is available to absorb losses.
Most of the mortgage loans are covered by mortgage insurance policies.
Interest payments on all classes of underwritten certificates will be supported
by cash flows from certain interest rate cap agreements for a limited period of
time.
PRE-FUNDING--
The certificates have a pre-funding feature.
<TABLE>
<CAPTION>
INITIAL AGGREGATE PASS-THROUGH PRICE UNDERWRITING PROCEEDS TO THE
OFFERING INFORMATION CERTIFICATE BALANCE RATE TO PUBLIC DISCOUNT DEPOSITOR(2)
-------------------- ------------------- ------------ --------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 Certificates $ 216,200,000 LIBOR + 0.35% (1) 100.00% 0.32% $ 215,508,160
Class M-1 Certificates $ 4,600,000 LIBOR + 0.65% (1) 100.00% 0.32% $ 4,585,280
Class M-2 Certificates $ 2,760,000 LIBOR + 1.30% (1) 100.00% 0.32% $ 2,751,168
Class M-3 Certificates $ 2,760,000 LIBOR + 2.70% (1) 100.00% 0.32% $ 2,751,168
Class AIO Certificates (3) N/A (4) N/A N/A N/A
------------------- ------------ --------- ------------ ----------------
Total $ 226,320,000 100.00% 0.32% $ 225,595,776
</TABLE>
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(1) Subject to an available funds cap.
(2) Before deducting expenses, estimated to be $400,000.
(3) The class AIO certificates will not be purchased by the underwriter. They
will be transferred to an affiliate of the seller and servicer as partial
consideration for the sale of the mortgage loans to the depositor.
(4) Formula-based pass-through rate.
Neither the Securities and Exchange commission nor any state securities
commission has approved or disapproved of these securities or determined
if this prospectus supplement or the prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
FIRST UNION SECURITIES, INC., AS UNDERWRITER, WILL OFFER THE UNDERWRITTEN
CERTIFICATES ONLY AFTER THE CERTIFICATES HAVE BEEN ISSUED, AND DELIVERED
TO AND ACCEPTED BY THE UNDERWRITER. THE UNDERWRITER HAS THE RIGHT TO
REJECT ANY ORDER. WE EXPECT TO DELIVER THE OFFERED CERTIFICATES ON OR
ABOUT MARCH 31, 2000 THROUGH THE DEPOSITORY TRUST COMPANY, CLEARSTREAM
BANKING, SOCIETE ANONYME OR THE EUROCLEAR SYSTEM.
<PAGE>
FIRST UNION SECURITIES, INC.
The date of this prospectus supplement is March 28, 2000
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered 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.
This prospectus supplement does not contain complete
information about the offering of the certificates. Additional information is
contained in the prospectus. You are urged to read both this prospectus
supplement and the prospectus in full. We cannot sell the offered certificates
to you unless you have received both this prospectus supplement and the
prospectus.
The prospectus contemplates several different types of
securities, some of which are not relevant to this offering. You should rely on
the information in this prospectus supplement with respect to the four classes
of certificates offered hereby.
The depositor has filed with the Securities and Exchange
commission a registration statement under the Securities Act of 1933, as
amended, with respect to the certificates offered pursuant to this prospectus
supplement. This prospectus supplement and the prospectus, which form a part of
the registration statement, omit certain information contained in such
registration statement pursuant to the rules and regulations of the commission.
You may inspect and copy the registration statement at the Public Reference Room
at the commission at 450 Fifth Street, N.W., Washington, D.C. and the
commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can obtain copies of such materials at
prescribed rates from the Public Reference Section of the commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
We include cross-references in this prospectus supplement and
the accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
i
<PAGE>
TABLE OF CONTENTS
Summary...........................................S-1
Description of the Offered Certificates........S-1
Payments on the Certificates...................S-2
Credit Enhancement.............................S-3
Pre-Funding Feature............................S-4
Clean-up Call..................................S-4
Federal Income Tax Consequences................S-4
ERISA Considerations...........................S-4
Legal Investment...............................S-4
Ratings........................................S-4
Risk Factors......................................S-6
Use of Proceeds..................................S-11
Description of the Mortgage Pool.................S-11
Prepayment Charges............................S-12
Adjustable Rate Feature of the ARM Loans......S-13
Pool Stratifications..........................S-13
Conveyance of Subsequent Mortgage Loans and
the Pre-Funding Account.......................S-29
Underwriting Standards for the Mortgage Loans.S-30
Private Mortgage Insurance Policies...........S-34
Additional Information........................S-35
The Seller.......................................S-35
The Converted Loan Purchaser.....................S-36
NovaStar Financial...............................S-36
The Transferor...................................S-37
The Depositor....................................S-37
The Trustee......................................S-37
The Certificate Administrator....................S-37
Description of the Certificates..................S-38
General.......................................S-38
Payments......................................S-39
Available Funds...............................S-39
Interest Payments on the Certificates.........S-41
Supplemental Interest Payments................S-42
Interest Allocations..........................S-43
Principal Allocations.........................S-44
Credit Enhancement............................S-45
Overcollateralization Provisions, Allocation
of Losses.....................................S-46
Definitions...................................S-47
Restrictions On Transfer Of The Mezzanine
Certificates..................................S-50
Calculation of One-Month LIBOR................S-51
Advances......................................S-51
Book-Entry Certificates.......................S-52
Assignment of Mortgage Loans..................S-57
The Paying Agent..............................S-58
Optional Termination..........................S-58
Mandatory Prepayments on the Certificates.....S-58
Interest Coverage Account.....................S-58
Certain Yield and Prepayment Considerations......S-58
The Pooling and Servicing Agreement..............S-69
Servicing.....................................S-69
Servicing Defaults............................S-72
Limitation on Suits...........................S-74
The Certificate Administrator and the Trustee.S-74
Certain Federal Income Tax Considerations........S-74
Supplemental Interest Amounts.................S-76
ERISA Considerations.............................S-76
Method of Distribution...........................S-78
Certain Legal Matters............................S-79
Ratings..........................................S-79
Legal Investment.................................S-80
Annex I Global Clearance, Settlement and Tax
Documentation Procedures......................S-81
Initial Settlement............................S-81
Secondary Market Trading......................S-82
Certain U.S. Federal Income Tax
Documentation Requirements....................S-84
ii
<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, read carefully this entire prospectus
supplement and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is qualified
by the full description of these calculations, cash flow priorities and
other information in this prospectus supplement and the accompanying
prospectus.
TRUST
NovaStar Mortgage Funding Trust, Series 2000-1
SELLER AND SERVICER
NovaStar Mortgage, Inc., a Virginia corporation.
TRANSFEROR
NovaStar Mortgage Funding Corporation III, a Delaware corporation.
THE DEPOSITOR
Residential Asset Funding Corporation, a North Carolina corporation.
TRUSTEE
The Chase Manhattan Bank, a New York banking corporation. Chase will act as the
initial paying agent.
CERTIFICATE ADMINISTRATOR AND BACKUP SERVICER
First Union National Bank, a national banking association. In its capacity as
certificate administrator, First Union will act as the initial certificate
registrar and custodian in addition to performing other administrative functions
on behalf of the trustee.
CONVERTED LOAN PURCHASER
NovaStar Capital, Inc., a Delaware corporation.
NOVASTAR FINANCIAL
NovaStar Financial, Inc., a Maryland corporation.
DESCRIPTION OF THE OFFERED CERTIFICATES
The trust will issue Home Equity Loan Asset Backed Certificates, Series 2000-1,
in five classes of offered certificates, class A-1, which is the senior most
class, three classes of subordinated, mezzanine certificates, class M-1, class
M-2, class M-3 and a senior interest-only certificate, class AIO. Class M-1 is
senior to class M-2 and to class M-3. Class M-2 is senior to class M-3. The
initial principal amount of each class of offered certificates is shown on the
front cover.
The trust will also issue several other classes of certificates which are not
being offered.
THE TRUST FUND
The certificates will represent ownership interests in the trust fund, which
will consist primarily of:
o a pool of residential first lien, fixed and adjustable rate mortgage loans;
o a security interest in the properties securing the mortgage loans;
o collections on the mortgage loans;
o money on deposit in a pre-funding account which will be used to purchase
additional mortgage loans for inclusion in the pool;
o certain lender paid mortgage insurance policies and related proceeds; and
o interest rate cap agreements and related supplemental interest payments.
S-1
<PAGE>
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date for all the certificates is July 25, 2030.
We anticipate that the actual final payment on each class will occur
significantly earlier then the indicated date.
BOOK-ENTRY FORMAT
The certificates will be issued, maintained and transferred on the book-entry
records of the Depository Trust Company. The certificates will be offered in
registered form, in minimum denominations of $25,000 and integral multiples of
$1,000 in excess thereof.
PAYMENTS ON THE CERTIFICATES
DISTRIBUTION DATES
Payments on the certificates will be made on the 25th day of each month, or, if
that day is not a business day, on the next business day, commencing on April
25, 2000.
RECORD DATES
The trustee will make payments to the certificateholders of record as of the
prior record date. The record date is the last business day prior to the
distribution date, except that the record date for the first distribution date
is the closing date.
PAYMENT PRIORITIES
On each distribution date, the available funds representing interest collections
on the mortgage pool, plus cash flows from the cap agreements will be
distributed to pay interest on the certificates in the following order: first,
pro rata, to class A-1 and class AIO, and then class M-1, class M-2, and class
M-3 in that order.
On each distribution date, the available funds representing principal
collections will be distributed to pay principal on the certificates in the
following order: class A-1, class M-1, class M-2, and class M-3.
We refer you to "Description of the Certificates" in this prospectus supplement
for additional information.
INTEREST
Interest on the certificates will accrue at the interest rate for that class
during the prior accrual period. The accrual period will run from each
distribution date to and including the day preceding the next distribution date,
except that for the first distribution date, interest begins to accrue on the
closing day.
Interest will be calculated on the basis of the actual number of days elapsed in
the accrual period in a year of 360 days.
PASS-THROUGH RATES
The annual rate of interest on each class of offered certificates will be,
subject to the available funds cap rate, as follows:
Class Rate
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A-1 LIBOR + 0.35%
M-1 LIBOR + 0.65%
M-2 LIBOR + 1.30%
M-3 LIBOR + 2.70%
If the certificates remain outstanding after the first distribution date on
which the clean-up call could be exercised, which is at a 10% level, then the
rates of interest on each class of certificates will increase to the following
rates:
Class Rate Step Up
------- ---------------
A-1 LIBOR + 0.70%
M-1 LIBOR + 0.975%
M-2 LIBOR + 1.95%
M-3 LIBOR + 4.05%
The stepped-up rates are also subject to the available funds cap rate.
S-2
<PAGE>
PRINCIPAL
On each distribution date, the certificateholders are scheduled to receive an
amount of principal generally equal to the sum of:
o the scheduled principal on the mortgage loans collected or advanced during
the prior period; and
o unscheduled principal on the mortgage loans collected during the prior
prepayment period.
The mezzanine certificates are unlikely to receive any principal payments until,
at the earliest, the distribution date occurring in April 2003.
The principal will be distributed to the certificateholders of each class in
accordance with a payment priority which is designed to maintain a specified
level of support below each class. This support consists of the certificates
that are more subordinated to that class, as well as the overcollateralization,
which is subordinated to all classes of the offered certificates.
DISTRIBUTIONS ON THE CLASS AIO CERTIFICATES
The class AIO certificates represent the right to receive:
o excess interest, which is generally the interest due on the mortgage loans
minus administrative fees and interest on the underwritten certificates;
and
o a portion of the supplemental interest, to the extent that such interest is
not allocated to the other certificates, from the cap agreements.
CREDIT ENHANCEMENT
SUBORDINATION
The rights of the holders of the mezzanine certificates to receive distributions
will be subordinated, to the extent described in this prospectus supplement, to
the rights of the holders of the class A-1 and class AIO certificates.
In addition, the rights of the holders of mezzanine certificates with higher
numerical class designations will be subordinated to the rights of holders of
mezzanine certificates with lower numerical class designations.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates and to afford those certificates protection against
losses.
OVERCOLLATERALIZATION
The trust will have an initial level of overcollateralization of approximately
1.6%. The overcollateralization is available for the benefit of all classes of
certificates. Overcollateralization, if reduced, will not hereafter be increased
through the application of "excess interest," or otherwise.
MORTGAGE INSURANCE
Approximately 97.84% and 0.60% of the mortgage loans with a loan-to-value ratio
in excess of 50% are covered by a mortgage insurance policy issued by PMI
Mortgage Assurance Company and Radian Guaranty, Inc., respectively. Each
mortgage insurance policy insures losses to the extent that the uninsured
exposure of the related mortgage loan is reduced to an amount equal to 50% of
the original loan-to-value ratio of such mortgage loan, as more fully described
in the policy.
CAP AGREEMENTS
The available funds to pay the pass-through rates on the offered certificates
will include cash flows from certain interest rate cap agreements. Such cash
flows will not be available to pay the principal of any offered certificate or
to cover losses on the mortgage loans.
S-3
<PAGE>
PRE-FUNDING FEATURE
On the closing date the trust will deposit $101,715,093.81 into a pre-funding
account which will be used from time to time on or before June 25, 2000 to
acquire subsequent mortgage loans.
To the extent that the trust does not fully use amounts on deposit in the
pre-funding account to purchase additional mortgage loans by June 25, 2000, the
trust will apply the remaining amounts as a prepayment of the principal of the
certificates on the distribution date on June 25, 2000. Although no assurance is
possible, we do not anticipate that a material amount of principal will be
prepaid on the certificates from amounts in the pre-funding account.
CLEAN-UP CALL
The servicer has a clean-up call option which, if exercised, would result in
early redemption of the certificates on any distribution date on or after the
date on which the aggregate principal balance of the mortgage loans has declined
to be 10% or less of the sum of the principal balance of the initial mortgage
loans as of the cut-off date plus the initial principal amount of the
pre-funding account.
FEDERAL INCOME TAX CONSEQUENCES
The trust will elect to be treated as one or more REMICs for federal income tax
purposes. The offered certificates will be designated as "regular interests" in
a REMIC. Certificateholders will include interest on the certificates in income
in accordance with an accrual method of accounting.
ERISA CONSIDERATIONS
The class A-1 certificates may be purchased by ERISA plans after the expiration
of the funding period, provided that certain conditions are satisfied. A
fiduciary of any ERISA plan that is considering a purchase of class A-1
certificates should, among other things, consult with experienced legal counsel
in determining whether all required conditions for purchase have been satisfied.
The mezzanine certificates and the class AIO certificates may not be acquired by
or on behalf of an ERISA plan.
LEGAL INVESTMENT
The class A-1, class AIO and class M-1 certificates will constitute "mortgage
related securities" for purposes of SMMEA for so long as they are rated in at
least the second highest rating category by one or more nationally recognized
statistical rating agencies. Institutions whose investment activities are
subject to legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on investment in the
certificates.
RATINGS
The offered certificates must receive at least the following ratings from
Standard & Poor's and Moody's in order to be issued:
Class Rating
------- ---------------
S&P Moody's
--- -------
A-1 AAA Aaa
M-1 AA Aa2
M-2 A A2
M-3 BBB Baa2
AIO AAAr Aaa
S-4
<PAGE>
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
agency. A security rating does not address the frequency of principal
prepayments, the corresponding effect on yield to investors or the payment of
any shortfall resulting from the effect of the available funds cap rate.
S-5
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the
items discussed under "Risk Factors" in the prospectus and the following factors
in connection with the purchase of the certificates:
THE LOANS IN THE MORTGAGE POOL WERE UNDERWRITTEN TO NON-CONFORMING STANDARDS AND
MAY EXPERIENCE HIGHER DELINQUENCY AND LOSS RATES
The underwriting standards for the mortgage loans are
described under "Description of the Mortgage Pool--Underwriting Standards for
the Mortgage Loans", and are primarily intended to provide single family
mortgage loans for non-conforming credits which do not satisfy the requirements
of typical "A" credit borrowers. A "non-conforming credit" means a mortgage loan
which is ineligible for purchase by Fannie Mae or Freddie Mac due to credit
characteristics that do not meet the Fannie Mae or Freddie Mac underwriting
guidelines, for reasons such as creditworthiness and repayment ability, these
mortgagors may have a record of credit write-offs, outstanding judgments, prior
bankruptcies and other negative credit items. Accordingly, mortgage loans
underwritten to non-conforming credit underwriting standards or to standards
that do not meet the requirements for typical "A" credit borrowers are likely to
experience rates of delinquency, foreclosure and loss that are higher, and may
be substantially higher, than mortgage loans originated in accordance with the
Fannie Mae or Freddie Mac underwriting guidelines or to typical "A" credit
borrowers.
THE MORTGAGE POOL CONTAINS DELINQUENT LOANS WHICH, IF SUCH LOANS DO NOT BECOME
CURRENT, COULD CAUSE LOSSES TO HOLDERS OF THE OFFERED CERTIFICATES
Approximately 1.67% by principal balance of the initial
mortgage loans were thirty days or more but less than sixty days delinquent in
their monthly payments as of the cut-off date (all percentages in this section
determined by aggregate principal balance as of the cut-off date). Approximately
0.22% by principal balance of the initial mortgage loans were sixty days or more
but less than ninety days delinquent as of the cut-off date. It is anticipated
that, on the closing date, none of the initial mortgage loans will be 90 days or
more delinquent.
Approximately 98.44% of the initial mortgage loans with an
original loan-to-value ratio in excess of 50% will be covered by a lender-paid
mortgage insurance policy.
Approximately 50.49% of the initial mortgage loans have
original loan-to-value ratios in excess of 80%. Mortgage loans with a
loan-to-value ratio in excess of 80% will be affected to a greater extent than
mortgage loans with a loan-to-value ratio equal to or less than 80% by any
decline in the value of the related property securing such mortgage loans. We
can give no assurance that values of the mortgaged properties have remained or
will remain at their levels on the dates of origination of the related mortgage
loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the mortgage
loans, and any secondary financing on the mortgaged properties, become equal to
or greater than the value of the mortgaged properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
S-6
<PAGE>
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT
The overcollateralization, subordination, loss allocation and
primary mortgage insurance features described in this prospectus supplement are
intended to enhance the likelihood that the certificateholders will receive
regular payments of interest and principal, but such credit enhancements are
limited in nature and may be insufficient to cover all losses on the mortgage
loans. The credit enhancement does not include the subordination of excess
interest to payments of interest and principal on the class A-1 and mezzanine
certificates. Further, there is no provision for the application of excess
interest to build up overcollateralization, or to restore overcollateralization
if it is depleted. If the initial overcollateralization is depleted, it will not
be restored out of excess interest payments, or otherwise.
Further, because there will be no excess interest available
for these purposes, to the extent the full amount of interest payable on the
mortgage loans for a due period is not collected or advanced, there will not be
sufficient funds available to make the required distribution of interest on the
certificates. Such a shortfall would reduce the interest distributed to class
M-3, class M-2, class M-1 and class A-1, in that order.
THE MORTGAGE POOL INCLUDES BALLOON LOANS, WHICH CAN CREATE INCREASED RISK OF
LOSSES
Approximately 26.89% by principal balance of the initial
mortgage loans are "balloon loans"; that is, they require monthly payments of
principal based on 30 year amortization schedules and have scheduled maturity
dates of 15 years from the due date of the first monthly payment, in each case
leaving a substantial portion of the original principal amount due and payable
on the respective scheduled maturity date. The balloon loans entail a greater
degree of risk for prospective investors because the ability of a mortgagor to
make a balloon payment typically will depend upon the mortgagor's ability either
to refinance the related balloon loan or to sell the related mortgaged property.
The mortgagor's ability to sell or refinance will be affected by a number of
factors, including the level of prevailing mortgage rates at the time of sale or
refinancing, the mortgagor's equity in the related mortgaged property, the
financial condition and credit profile of the mortgagor, applicable tax laws and
general economic conditions. No person is obligated to refinance any balloon
loan.
THE MORTGAGE LOANS HAVE GEOGRAPHIC CONCENTRATIONS WHICH COULD CAUSE LOSSES TO
THE HOLDERS IF CERTAIN EVENTS OCCUR IN SUCH REGIONS
Approximately 14.68% by principal balance of the initial
mortgage loans are secured by mortgaged properties located in the State of
Florida and approximately 10.85% by principal balance of the initial mortgage
loans are secured by mortgaged properties located in the State of California. In
the event Florida or California experiences a decline in real estate values,
losses on the mortgage loans may be greater than otherwise would be the case.
THE FINAL MORTGAGE POOL WILL INCLUDE MORTGAGE LOANS WHICH WILL DIFFER FROM THE
POOL OF INITIAL MORTGAGE LOANS DESCRIBED IN THIS PROSPECTUS SUPPLEMENT
Subsequent mortgage loans may have characteristics different
from those of the initial mortgage loans. However, each subsequent mortgage loan
must satisfy the eligibility criteria referred to under "Description of the
Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Account" at the time of its conveyance to the trust and must be underwritten in
accordance with the criteria described under "Description of the Mortgage Pool--
Underwriting Standards for the Mortgage Loans" herein.
S-7
<PAGE>
THE PRE-FUNDING FEATURE COULD RESULT IN A SIGNIFICANT PAYMENT ON THE
CERTIFICATES AT THE END OF THE PRE-FUNDING PERIOD
If the pre-funding account moneys are not fully applied to the
purchase of subsequent mortgage loans by the end of the funding period, the
remaining funds will be used to make a principal payment on the certificates. No
assurances can be given that there will not be such a payment.
THE RATE AND TIMING OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS COULD
ADVERSELY AFFECT THE YIELD ON THE OFFERED CERTIFICATES
The rate and timing of principal payments on the certificates
will depend on the rate and timing of principal payments (including prepayments,
defaults, liquidations, purchases of the mortgage loans due to a breach of a
representation or warranty and the servicer's limited right to purchase
delinquent mortgage loans) on the mortgage loans. Accordingly, the certificates
are subject to inherent cash-flow uncertainties because the mortgage loans may
be prepaid at any time. Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease, resulting in a slower
return of principal to investors at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
decline, prepayment rates on mortgage loans tend to increase, resulting in a
faster return of principal to investors at a time when reinvestment at
comparable yields may not be possible.
Approximately 90.03% by principal balance of the initial
mortgage loans are subject to prepayment penalties. Of the 90.03%, 56.95%
represented ARM loans and 43.05% represented fixed-rate loans. Typically, the
mortgage loans with a prepayment penalty provision provide for a prepayment
charge for partial prepayments and full prepayments. Prepayment charges may be
payable for a period of time ranging from one to five years from the related
origination date. Such prepayment charges may reduce the rate of prepayment on
the mortgage loans.
See "Certain Yield and Prepayment Considerations" in this
prospectus supplement and "Description of the Securities--Weighted Average Life
of the Securities" in the prospectus.
The yield to maturity on the certificates will depend on,
among other things, the rate and timing of principal payments (including
prepayments, defaults, liquidations, purchases of the mortgage loans due to a
breach of a representation or warranty and purchases of delinquent loans by the
servicer) on the mortgage loans. The yield to maturity on the certificates will
also depend on the related certificate interest rate and the purchase price for
such certificates.
If the certificates are purchased at a premium and principal
payments thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if the certificates are purchased
at a discount and principal payments thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase. The certificates were
structured assuming, among other things, a prepayment rate and corresponding
weighted average lives as described herein. The prepayment, yield and other
assumptions to be used for pricing purposes for the certificates may vary as
determined at the time of sale.
See "Certain Yield and Prepayment Considerations" in this
prospectus supplement and "Description of the Securities--Weighted Average Life
of the Securities" in the prospectus.
S-8
<PAGE>
THE AVAILABLE FUNDS CAP RATE CAN CAUSE REDUCTIONS IN THE AMOUNT OF INTEREST
PAYABLE ON THE OFFERED CERTIFICATES
Each class of offered certificates, except the class AIO
certificates, bears interest at a rate subject to an available funds cap rate.
The fixed interest rate on a converted mortgage loan in most cases may be lower
than the variable rate that would have been in effect on such loan if it had not
been converted. If NovaStar Capital, Inc. or NovaStar Financial, Inc., as
guarantor, fails to purchase such converted mortgage loans, then the weighted
average coupon rate on the mortgage loans may decline, possibly significantly.
In such event, the interest rate on the underwritten certificates may be reduced
through operation of the available funds cap rate.
This risk would be exacerbated if the adjustable rate loans in
the pool were to be prepaid, increasing the proportion of fixed rate loans
remaining in the pool.
SALE OF CONVERTED MORTGAGE LOANS CAN ACCELERATE THE AMORTIZATION OF THE
CERTIFICATES; FAILURE TO PURCHASE SUCH LOANS COULD REDUCE THE WEIGHTED AVERAGE
COUPON RATE OF THE POOL
Approximately 40.09% of the initial mortgage loans are ARM
loans which may convert from an adjustable rate to a fixed rate at the option of
the borrower, as further described hereunder under "Description on the Servicing
Agreement--Sale of Converted Mortgage Loans." Up to 100% of the subsequent
mortgage loans which are ARM loans may be convertible loans. Within 30 days
after conversion of a convertible loan, the trust is required to sell and
NovaStar Capital is required to purchase such loan for a purchase price equal to
the then outstanding principal amount, plus accrued interest. Proceeds of the
sale of converted loans will be applied in the same manner as prepayments of
mortgage loans. Accordingly, conversion of convertible mortgage loans will have
the effect of accelerating payments of principal, and shortening the duration,
of the certificates.
The obligation of NovaStar Capital to purchase converted
mortgage loans is guaranteed by its affiliate, NovaStar Financial. The servicer
is not obligated to purchase converted mortgage loans.
The fixed interest rate on a converted mortgage loan in most
cases may be lower than the adjustable rate that would have been in effect on
such loan if it had not been converted. If NovaStar Capital or NovaStar
Financial fails to purchase such converted mortgage loans, then the weighted
average coupon rate on the mortgage loans may decline.
See "The Pooling and Servicing Agreement--Servicing--Sale of
Converted Mortgage Loans" herein.
THE MEZZANINE CERTIFICATES ARE PARTICULARLY SENSITIVE TO THE TIMING AND AMOUNT
OF LOSSES AND PREPAYMENTS ON THE MORTGAGE LOANS
The weighted average lives of, and the yields to maturity on,
the class M-1 certificates, the class M-2 certificates and the class M-3
certificates will be progressively more sensitive, in increasing order of their
numerical class designations, to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by an
investor in those certificates, the actual yield to maturity of such
certificates may be lower than the yield anticipated by such holder based on
such assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity.
S-9
<PAGE>
Realized losses on the mortgage loans, to the extent they exceed the amount of
overcollateralization following distributions of principal on the related
distribution date, will reduce the certificate principal balance of the class of
mezzanine certificate then outstanding with the highest numerical class
designation. As a result of such reductions, less interest will accrue on such
class of mezzanine certificates than would otherwise be the case. Once a
realized loss is allocated to a mezzanine certificate, no amounts will be
distributable with respect to such written down amount.
Unless the certificate balance of the class A-1 certificates
has been reduced to zero, the mezzanine certificates will not be entitled to any
principal distributions until at least April 25, 2003. Even after the date on
which the mezzanine certificates begin to amortize they may become locked out of
receiving principal distributions during periods in which delinquencies on the
mortgage loans exceed certain levels. As a result, the weighted average lives of
such certificates will be longer than would otherwise be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of such
certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
such certificates, for so long as the class A-1 certificates are outstanding, to
receive no principal distributions even if no losses have occurred on the
mortgage pool.
The structure of the class M-1 certificates, the class M-2
certificates and the class M-3 certificates causes the yield of such classes to
be particularly sensitive to changes in the rates of prepayment of the mortgage
loans. Because distributions of principal will be made to the holders of such
certificates according to the priorities described in this prospectus
supplement, the yield to maturity on such classes of certificates will be
sensitive to the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on such classes.
THE YIELD ON THE CLASS AIO CERTIFICATES IS EXTREMELY SENSITIVE TO PREPAYMENTS,
LOSSES AND CHANGES IN LIBOR
The yield on the class AIO certificates is extremely sensitive
to rates of prepayments on the mortgage loans. Prepayments and losses on the
mortgage loans have the effect of reducing the amount distributable to the class
AIO certificates. If the servicer were to exercise the clean up call and
terminate the trust, the holders of the class AIO certificates would not be
entitled to further payments.
Further, the amount payable to the class AIO certificates will
be reduced to the extent necessary to pay interest on the class A and mezzanine
certificates at their pass through rates, as well as to pay available funds cap
carry-forward amounts. Consequently, holders of the AIO certificates will bear
the basis risk associated with changes in six month LIBOR or one-year CMT, the
index rates for the mortgage loans, and one-month LIBOR, the index rate for the
class A and mezzanine certificates.
RATINGS ON THE OFFERED CERTIFICATES ARE DEPENDENT UPON THE CREDITWORTHINESS OF
PMI MORTGAGE ASSURANCE COMPANY AND RADIAN GUARANTY, INC.
The ratings assigned to the offered certificates by the rating
agencies will be based in part on the credit characteristics of the mortgage
loans and on ratings assigned to PMI Mortgage Assurance Company and Radian
Guaranty, Inc., the mortgage insurance providers with respect to 96.12% and
0.59% of the mortgage loans, respectively. The ratings assigned to the
certificates do not address the ability of the converted loan purchaser to
purchase any converted mortgage loans. Any reduction in the ratings
S-10
<PAGE>
assigned to the insurers by the rating agencies could result in the reduction of
the ratings assigned to the offered certificates. This reduction in ratings
could adversely affect the liquidity and market value of the offered
certificates.
THE CAP AGREEMENTS ARE LIMITED IN TERM AND AMOUNT
The cap agreements have varying terms up to February 2003
which are significantly shorter than the final maturities of the offered
certificates. To the extent that the rate of interest on the underwritten
certificates were reduced by application of the available funds cap rate after
the cap agreements had terminated, payments under the cap agreements will no
longer be available to make supplemental interest payments. Further, each cap
agreement is limited as to the total amount payable by the counterparty. The
notional balance of the combined interest rate cap agreements is $185,000,000,
which is less than the aggregate certificate balance of the class A-1, class
M-1, class M-2 and class M-3 certificates.
USE OF PROCEEDS
After deducting the estimated expenses of this offering, the
net proceeds to the depositor from the sale of the certificates offered hereby
are estimated to be $400,000. The depositor anticipates that the entire net
proceeds will be used to purchase the initial mortgage loans and the cap
agreements from the transferor and to fund the pre-funding account and the
interest coverage account. The transferor anticipates that it will use the
entire net proceeds to it to purchase the initial mortgage loans from the
seller. The seller anticipates that it will use the entire net proceeds to it to
repay indebtedness and accrued interest under its warehouse lines of credit,
including a loan made to the seller by an affiliate of the depositor. The
depositor and the seller believe that funds provided by the net proceeds of this
offering will be sufficient to accomplish the purposes set forth above.
DESCRIPTION OF THE MORTGAGE POOL
The statistical information presented in this prospectus
supplement describes only the initial mortgage loans included in the trust
estate on the closing date and does not include the subsequent mortgage loans
which may be acquired through the pre-funding feature. All statistical
information is stated as of March 1, 2000 and all percentages, unless otherwise
stated, are by aggregate principal balance. The actual principal balances of the
initial mortgage loans as of the closing date will be lower, and may be
significantly lower, than the principal balances thereof as of the cut-off date.
Subsequent mortgage loans are intended to be purchased by the
trust from the seller from time to time on or before June 25, 2000, from funds
on deposit in the pre-funding account. The subsequent mortgage loans must
conform to certain specified characteristics described below under "--Conveyance
of Subsequent Mortgage Loans and the Pre-Funding Account."
The mortgage pool will consist of conventional, monthly
payment, first lien mortgage loans with terms to maturity of not more than 30
years from the date of origination or modification. The mortgage pool will
consist of both adjustable-rate mortgage loans ("ARMs") and fixed-rate mortgage
loans.
NovaStar Mortgage in its capacity as seller, will convey the
mortgage loans to NovaStar Mortgage Funding Corporation III pursuant to a
mortgage loan purchase agreement. NovaStar Mortgage
S-11
<PAGE>
Funding Corporation III will then convey the mortgage loans to the Residential
Asset Funding Corporation, and Residential Asset Funding Corporation will convey
the mortgage loans to the trust. All of the mortgage loans will be serviced by
NovaStar Mortgage, as the servicer. The seller will make various representations
and warranties regarding the mortgage loans under the purchase agreement and
will have repurchase or substitution obligations if those representations or
warranties are violated. The obligations of NovaStar Mortgage under the purchase
agreement will be guaranteed by an affiliate, NovaStar Financial. See
"Description of the Certificates--Assignment of Mortgage Loans" in this
prospectus supplement.
Approximately 50.49% by principal balance of the initial
mortgage loans will have loan-to-value ratios in excess of 80%. Approximately
98.44% by principal balance of the initial mortgage loans with a loan-to-value
ratio in excess of 50% are covered by a lender-paid primary mortgage insurance
policy insuring first losses on the principal balance of each initial mortgage
loan. See "Description of the Mortgage Pool--Private Mortgage Insurance" herein.
The remainder of the initial mortgage loans will not be covered by a mortgage
insurance policy.
As of the cut-off date, the minimum loan-to-value ratio at
origination for the initial mortgage loans was approximately 17.65%, the maximum
loan-to-value ratio at origination was approximately 100%, respectively, and the
weighted average loan-to-value ratio at origination was approximately 80.71%.
All of the mortgage loans will contain a customary
"due-on-sale" clause, although the mortgage loans may be assumable if permitted
by the servicer under certain circumstances. See "Certain Yield and Prepayment
Considerations" herein. Pursuant to the terms of the servicing agreement, the
servicer will be entitled to all late payment charges received on the mortgage
loans as additional servicing compensation and such amounts will not be
available for distribution on the certificates.
Except for the balloon loans, the initial mortgage loans
generally have original terms to stated maturity of approximately 30 years.
None of the initial mortgage loans are secured by junior liens
on the related mortgaged properties.
None of the initial mortgage loans are subject to temporary
buydown plans, pursuant to which the monthly payments made by the mortgage
during the early years of the loan are less than the scheduled monthly payments
thereon.
The due date for substantially all the initial mortgage loans
is the first day of the month.
Of the initial mortgage loans, 56.21% by principal balance are
ARM loans and 43.79% are fixed-rate loans. Of the 56.21% which were ARM loans,
the mortgage rate on 99.41% adjusts semi-annually, and the mortgage rate on
0.59% adjusts annually.
PREPAYMENT CHARGES
Of the initial mortgage loans, 90.03% by principal balance are
subject to prepayment penalties. Of the 90.03% of loans subject to prepayment
penalties, approximately 56.95% are initial ARM loans, and approximately 43.05%
are initial fixed-rate loans. The prepayment penalty provisions typically
provide for payment of a prepayment penalty for partial prepayments and full
prepayments. Prepayments may be payable for a period of time ranging from one to
five years from the related
S-12
<PAGE>
origination date. Prepayment penalties received on the mortgage loans will not
be available for distribution on the offered certificates.
ADJUSTABLE RATE FEATURE OF THE ARM LOANS
Effective with the first payment due on an adjustable rate
mortgage loan after each related adjustment date, the monthly payment will be
adjusted to an amount that will fully amortize the outstanding principal balance
of the mortgage loan over its remaining term. The weighted average number of
months from the cut-off date to the next adjustment date for the initial ARM
mortgage loans is 23.45 months.
Adjustments to the mortgage rates on the ARM loans commence
after an initial period after origination of two years or three years, in each
case on each applicable adjustment date to a rate equal to the sum, generally
rounded up to the nearest one-eighth of one percentage point (12.5 basis
points), of (i) the related index plus (ii) a fixed gross margin. In addition,
the mortgage rate on each adjustable rate mortgage loan is subject on its first
adjustment date following its origination to a cap and on each adjustment date
thereafter to a periodic rate cap. All of the ARM loans are also subject to
specified maximum and minimum lifetime mortgage rates. The initial ARM loans
were generally originated with an initial mortgage rate below the sum of the
current index and the gross margin. Due to the application of the periodic rate
caps, maximum mortgage rates and minimum mortgage rates, the mortgage rate on
any initial ARM loan, as adjusted on any related adjustment date, may not equal
the sum of the related index and the gross margin.
Substantially all of the initial ARM loans will not have
reached their first adjustment date as of the closing date. The initial mortgage
rate is generally lower than the rate that would have been produced if the
applicable gross margin had been added to the related index in effect at
origination. Adjustable rate mortgage loans that have not reached their first
adjustment date are, therefore, subject to the initial periodic rate cap on
their first adjustment date.
The index applicable to the determination of the mortgage rate
on approximately 55.87% by principal balance of the initial mortgage loans will
be the average of the interbank offered rates for six-month United States dollar
deposits in the London market based on quotations of major banks, as published
in the Western Edition of The Wall Street Journal, and most recently available
as of the first business day generally 30 days prior to the adjustment date
("Six-Month LIBOR").
The index applicable to the determination of the mortgage rate
on approximately 0.33% by principal balance of the initial mortgage loans will
be the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year as published by the Federal Reserve Board in Statistical
Release H.15(519) and most recently available as of the first business day
generally 30 days prior to the adjustment date ("One-Year CMT").
Approximately 40.09% of initial ARM loans are convertible
mortgage loans.
POOL STRATIFICATIONS
Set forth below is a description of certain additional
characteristics of the initial mortgage loans as of the cut-off date (except as
otherwise indicated). Dollar amounts and percentages may not sum to totals due
to rounding.
S-13
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF ALL INITIAL MORTGAGE
LOANS
<TABLE>
<CAPTION>
Percentage of All Initial
Mortgage Loans by
Number of Aggregate Aggregate Principal
Location Mortgage Loans Principal Balance Balance
-------- -------------- ----------------- -------
<S> <C> <C> <C>
Alaska 1 $ 76,465.24 0.06%
Arizona 64 7,530,883.00 5.87
Arkansas 11 871,938.16 0.68
California 66 13,923,674.59 10.85
Colorado 28 4,432,738.80 3.46
Connecticut 5 590,939.23 0.46
Delaware 1 102,700.00 0.08
District of Columbia 1 212,000.00 0.17
Florida 198 18,827,943.75 14.68
Georgia 25 3,346,797.56 2.61
Hawaii 1 432,855.26 0.34
Idaho 6 676,593.71 0.53
Illinois 24 2,084,721.67 1.63
Indiana 25 1,538,466.65 1.20
Kansas 10 846,971.82 0.66
Kentucky 49 5,384,932.60 4.20
Maine 1 59,600.00 0.05
Maryland 5 611,407.45 0.48
Massachusetts 5 490,847.94 0.38
Michigan 132 11,089,919.82 8.64
Minnesota 8 1,382,727.75 1.08
Mississippi 11 552,218.90 0.43
Missouri 40 3,762,514.12 2.93
Montana 2 156,009.88 0.12
Nebraska 1 183,476.70 0.14
Nevada 47 6,930,036.17 5.40
New Hampshire 1 113,804.76 0.09
New Jersey 2 484,693.74 0.38
New Mexico 3 310,024.48 0.24
New York 1 552,862.18 0.43
North Carolina 14 944,410.08 0.74
Ohio 92 8,121,150.71 6.33
Oklahoma 10 614,664.07 0.48
Oregon 16 2,366,164.71 1.84
Pennsylvania 57 4,377,733.26 3.41
Rhode Island 3 162,380.06 0.13
South Carolina 7 649,996.57 0.51
Tennessee 94 8,608,659.18 6.71
Texas 19 2,344,059.11 1.83
Utah 21 3,762,739.75 2.93
Virginia 24 2,268,980.65 1.77
Washington 42 5,966,700.85 4.65
West Virginia 4 309,836.94 0.24
Wyoming 3 226,664.32 0.18
----- --------------------- ------
Totals 1,180 $ 128,284,906.19 100.00%
===== ===================== ======
</TABLE>
S-14
<PAGE>
No more than approximately 0.85% of the initial mortgage loans
will be secured by mortgaged properties located in any one zip code.
TYPES OF MORTGAGE PROPERTIES OF ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of All Initial
Mortgage Loans by
Aggregate Aggregate Principal
Property Type Number of Mortgage Loans Principal Balance Balance
- --------------------------- ------------------------ ----------------- -------
<S> <C> <C> <C>
Condo Hi-Rise 20 $ 2,027,631.76 1.58%
Condo Low-Rise 45 3,960,830.93 3.09
Manufactured 25 1,807,860.32 1.41
Multi-Unit 78 7,165,310.95 5.59
Pud 123 18,409,103.80 14.35
Single Family Residence 889 94,914,168.43 73.99
----- --------------------- ----
Total 1,180 $ 128,284,906.19 100.00%
===== ===================== ======
</TABLE>
USE OF PROCEEDS OF ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of All Initial
Mortgage Loans by
Number of Mortgage Aggregate Aggregate Principal
Use of Proceeds Loans Principal Balance Balance
- ------------------------------ ----- ----------------- -------
<S> <C> <C> <C>
Construction 2 $ 275,019.06 0.21%
Purchase 461 53,213,786.04 41.48
Refinance (cash out) 562 55,237,287.91 43.06
Refinance (rate term) 155 19,558,813.18 15.25
----- --------------------- ----
Total 1,180 $ 128,284,906.19 100.00%
===== ===================== ======
</TABLE>
In general, in the case of a mortgage loan made for "no equity
take-out" refinance purposes, substantially all of the proceeds are used to pay
in full the principal balance of a previous mortgage loan of the mortgagor with
respect to the related mortgaged property and to pay associated origination and
closing costs. Mortgage loans made for "equity take-out" refinance purposes may
involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the mortgaged
property. The amount of these proceeds retained by the mortgagor may be
substantial.
S-15
<PAGE>
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage Loans
Number of Mortgage Aggregate by Aggregate Principal
Occupancy Status Loans Principal Balance Balance
---------------- ------------------ ----------------- ----------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied 200 $ 14,768,190.59 11.51%
Investment Owner Occupied 3 207,830.60 0.16
Primary 923 107,779,883.05 84.02
Second Home 54 5,529,001.95 4.31
-----
Total 1,180 $ 128,284,906.19 100.00%
================== ================= ======================
</TABLE>
DOCUMENTATION TYPE OF ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of All Initial
Mortgage Loans by
Aggregate Aggregate Principal
Documentation Number of Mortgage Loans Principal Balance Balance
------------- ------------------------ ----------------- --------------------------
<S> <C> <C> <C>
Full 732 $ 72,219,129.31 56.30%
Limited 72 10,199,325.58 7.95
Stated 376 45,866,451.30 35.75
----- ----------------------- ------
Total 1,180 $ 128,284,906.19 100.00%
===== ======================= =======
</TABLE>
RISK CLASSIFICATIONS OF ALL INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of All Initial
Mortgage Loans by
Aggregate Aggregate Principal
Risk Classification Number of Mortgage Loans Principal Balance Balance
------------------- ------------------------ ------------------ -------------------------
<S> <C> <C> <C>
AAA 437 $ 49,425,527.53 38.53%
AA 265 32,583,143.69 25.40
A 215 20,802,110.14 16.22
A- 134 13,933,902.79 10.86
B 78 7,431,455.57 5.79
C 47 3,774,137.64 2.94
C- 4 334,628.83 0.26
------ ----------------------- ------
Total 1,180 $ 128,284,906.19 100.00%
====== ======================= ======
</TABLE>
S-16
<PAGE>
DELINQUENCIES OF CERTAIN INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage Loans
Aggregate by Aggregate Principal
Number of Days Delinquent Number of Mortgage Loans Principal Balance Balance
- ------------------------- ------------------------ ----------------- -----------------------
<S> <C> <C> <C>
30 - 59 22 $ 2,137,872.78 1.67%
60 - 89 4 279,923.16 0.22
90 or more (1) 1 72,346.93 0.06
--------- ----------------------- ----
Total 27 $ 2,490,142.87 1.94%
========= ======================= ====
</TABLE>
(1) It is anticipated that at the time of closing, none of the initial
mortgage loans will be over 90 days delinquent.
INITIAL PERIODIC RATE CAP OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Initial Periodic Rate Aggregate ARM Loans by Aggregate
Cap (%) Number of Mortgage Loans Principal Balance Principal Balance
--------------------- ------------------------ ----------------- ----------------------
<S> <C> <C> <C>
3.000 588 $ 72,103,841.81 100%
----- ----------------------- -----
Total 588 $ 72,103,841.81 100%
===== ======================= =====
</TABLE>
PERIODIC RATE CAP OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Aggregate Loans by Aggregate
Periodic Rate Cap (%) Number of Mortgage Loans Principal Balance Principal Balance
-------------------- ------------------------ ----------------- --------------------------
<S> <C> <C> <C>
1.000 586 $ 71,677,870.71 99.41%
2.000 1 113,267.08 0.16
3.000 1 312,704.02 0.43
---- ----------------------- ------
Total 588 $ 72,103,841.81 100.00%
==== ======================= ======
</TABLE>
S-17
<PAGE>
MAXIMUM RATES OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Range of Maximum Aggregate Loans by Aggregate
Rates (%) Number of Mortgage Loans Principal Balance Principal Balance
---------------- ------------------------ ----------------- --------------------------
<S> <C> <C> <C>
13.501 - 14.000 1 $ 312,704.02 0.43%
14.001 - 14.500 2 377,673.37 0.52
14.501 - 15.000 3 328,600.00 0.46
15.001 - 15.500 14 2,203,354.05 3.06
15.501 - 16.000 52 8,380,572.76 11.62
16.001 - 16.500 79 9,208,888.82 12.77
16.501 - 17.000 159 20,591,977.53 28.56
17.001 - 17.500 88 10,381,444.76 14.40
17.501 - 18.000 104 12,285,839.91 17.04
18.001 - 18.500 48 4,842,302.84 6.72
18.501 - 19.000 31 2,730,560.01 3.79
19.001 - 19.500 4 211,430.97 0.29
19.501 - 20.000 2 198,492.77 0.28
20.001 - 20.500 1 50,000.00 0.07
-------- ----------------------- ------
Total 588 $ 72,103,841.81 100.00%
======== ======================= ======
</TABLE>
Minimum: 13.625%
Maximum: 20.125%
Weighted Average: 17.016%
S-18
<PAGE>
NEXT INTEREST ADJUSTMENT DATE OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Aggregate Loans by Aggregate
Next Adjustment Date Number of Mortgage Loans Principal Balance Principal Balance
-------------------- ------------------------ ----------------- ------------------------
<S> <C> <C> <C>
July 2000 1 $ 72,346.93 0.10%
November 2000 1 100,788.86 0.14
February 2001 2 151,697.68 0.21
April 2001 1 71,243.22 0.10
May 2001 3 208,425.92 0.29
June 2001 6 581,653.22 0.81
July 2001 2 130,655.27 0.18
August 2001 10 978,873.88 1.36
September 2001 17 3,329,686.73 4.62
October 2001 28 2,996,626.67 4.16
November 2001 39 4,102,009.49 5.69
December 2001 55 7,653,008.69 10.61
January 2002 78 9,913,308.50 13.75
February 2002 97 11,503,404.68 15.95
March 2002 180 21,774,037.00 30.20
June 2002 1 298,698.64 0.41
August 2002 2 290,653.66 0.40
October 2002 3 651,583.79 0.90
November 2002 6 1,156,295.81 1.60
December 2002 5 478,492.42 0.66
January 2003 13 1,603,498.18 2.22
February 2003 8 943,823.55 1.31
March 2003 29 2,800,325.00 3.88
December 2003 1 312,704.02 0.43
---- --------------------- ------
Total 588 $ 72,103,841.81 100.00%
==== ===================== =======
</TABLE>
The weighted average remaining months to the next adjustment
date of the initial ARM loans as of the cut-off date will be approximately 23.45
months.
S-19
<PAGE>
GROSS MARGINS OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Range of Gross Aggregate Loans by Aggregate
Margins (%) Number of Mortgage Loans Principal Balance Principal Balance
-------------- ------------------------ ----------------- --------------------------
<S> <C> <C> <C>
3.501 - 4.000 4 $ 556,673.37 0.77%
4.001 - 4.500 27 4,490,734.38 6.23
4.501 - 5.000 80 10,078,205.50 13.98
5.001 - 5.500 152 20,025,566.26 27.77
5.501 - 6.000 185 20,325,697.56 28.19
6.001 - 6.500 99 11,957,871.84 16.58
6.501 - 7.000 36 4,262,369.70 5.91
7.001 - 7.500 4 344,809.12 0.48
7.501 - 8.000 1 61,914.08 0.09
----- ----------------------- ------
Total 588 $ 72,103,841.81 100.00%
===== ======================= ======
</TABLE>
Minimum: 3.625%
Maximum: 7.625%
Weighted Average: 5.578%
MORTGAGE LOAN TYPES OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Loans by Aggregate
Loan Type Number of Mortgage Loans Aggregate Principal Balance Principal Balance
--------- ------------------------ --------------------------- --------------------------
<S> <C> <C> <C>
2/28 6-month LIBOR 519 $ 63,454,499.66 88.00%
3/27 6-month LIBOR 67 8,223,371.05 11.40
3YR 1 year-CMT 1 113,267.08 0.16
5YR 1 year -CMT 1 312,704.02 0.43
----- ------------------------- ------
Total 588 $ 72,103,841.81 100.00%
===== ========================= ======
</TABLE>
S-20
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Range of Loan-to-Value Ratios Loans by Aggregate
at Origination (%) Number of Mortgage Loans Aggregate Principal Balance Principal Balance
- ----------------------------- ------------------------ --------------------------- -------------------------
<S> <C> <C> <C>
15.01 - 20.00 2 $ 148,788.33 0.21%
20.01 - 25.00 1 30,000.00 0.04
30.01 - 35.00 1 24,942.65 0.03
35.01 - 40.00 3 153,428.13 0.21
45.01 - 50.00 4 223,169.88 0.31
50.01 - 55.00 6 388,624.10 0.54
55.01 - 60.00 5 555,852.71 0.77
60.01 - 65.00 20 1,608,158.55 2.23
65.01 - 70.00 31 3,338,563.25 4.63
70.01 - 75.00 62 7,354,349.01 10.20
75.01 - 80.00 147 18,504,364.63 25.66
80.01 - 85.00 138 18,224,210.15 25.27
85.01 - 90.00 165 21,069,770.44 29.22
90.01 - 95.00 3 479,619.98 0.67
---- ------------------------ ------
Total 588 $ 72,103,841.81 100.00%
==== ======================== ======
</TABLE>
Minimum: 18.78%
Maximum: 95.00%
Weighted Average: 81.93%
S-21
<PAGE>
PRINCIPAL BALANCES OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Range of Principal Loans by Aggregate
Balances ($) Number of Mortgage Loans Aggregate Principal Balance Principal Balance
------------------ ------------------------ --------------------------- --------------------------
<S> <C> <C> <C>
15,000.01 - 25,000.00 1 $ 24,942.65 0.03%
25,000.01 - 50,000.00 78 3,259,067.40 4.52
50,000.01 - 75,000.00 126 7,941,696.50 11.01
75,000.01 - 100,000.00 92 8,076,373.50 11.20
100,000.01 - 125,000.00 108 12,138,747.20 16.84
125,000.01 - 150,000.00 48 6,564,011.21 9.10
150,000.01 - 175,000.00 35 5,667,144.01 7.86
175,000.01 - 200,000.00 23 4,256,004.50 5.90
200,000.01 - 225,000.00 19 3,980,075.68 5.52
225,000.01 - 250,000.00 11 2,584,063.36 3.58
250,000.01 - 275,000.00 6 1,605,220.57 2.23
275,000.01 - 300,000.00 10 2,869,992.40 3.98
300,000.01 - 325,000.00 7 2,201,313.21 3.05
325,000.01 - 350,000.00 3 1,001,151.91 1.39
350,000.01 - 375,000.00 3 1,101,194.36 1.53
375,000.01 - 400,000.00 1 395,815.25 0.55
400,000.01 - 425,000.00 4 1,632,859.73 2.26
425,000.01 - 450,000.00 3 1,312,944.74 1.82
450,000.01 - 475,000.00 1 457,722.78 0.63
475,000.01 - 500,000.00 3 1,462,784.43 2.03
500,000.01 - 525,000.00 1 513,500.00 0.71
525,000.01 - 550,000.00 1 526,200.00 0.73
550,000.01 - 575,000.00 2 1,134,021.65 1.57
625,000.01 - 650,000.00 1 639,000.78 0.89
750,000.01 - 775,000.00 1 757,993.99 1.05
----- ------------------------ ------
Total 588 $ 72,103,841.81 100.00%
===== ======================== ======
</TABLE>
Minimum: $ 24,942.65
Maximum: $757,993.99
Average: $122,625.58
S-22
<PAGE>
REMAINING TERMS TO MATURITY OF THE INITIAL ARM LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Loans by Aggregate
Remaining Term (months) Number of Mortgage Loans Aggregate Principal Balance Principal Balance
---------------------- ------------------------ --------------------------- --------------------------
<S> <C> <C> <C>
336 - 340 1 $ 72,346.93 0.10%
341 - 345 3 526,759.96 0.73
346 - 350 6 431,366.82 0.60
351 - 355 69 9,258,431.86 12.84
356 44 5,145,038.22 7.14
357 60 8,131,501.11 11.28
358 91 11,516,806.68 15.97
359 105 12,447,228.23 17.26
360 209 24,574,362.00 34.08
------ ------------------------ ------
Total 588 $ 72,103,841.81 100.00%
====== ======================== =======
</TABLE>
Minimum: 340 months
Maximum: 360 months
Average: 358 months
ORIGINAL TERMS TO MATURITY OF THE INITIAL ARM MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Loans by Aggregate
Original Term (months) Number of Mortgage Loans Aggregate Principal Balance Principal Balance
--------------------- ------------------------ --------------------------- -------------------------
<S> <C> <C> <C>
360 588 $ 72,103,841.81 100.00%
---- ------------------------ ------
Total 588 $ 72,103,841.81 100.00%
==== ======================== ======
</TABLE>
S-23
<PAGE>
CURRENT MORTGAGE RATES FOR INITIAL ARM MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial ARM
Loans by Aggregate
Range of Mortgage Rates (%) Number of Mortgage Loans Aggregate Principal Balance Principal Balance
--------------------------- ------------------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C>
7.001 - 7.500 1 $ 264,406.29 0.37%
7.501 - 8.000 4 641,304.02 0.89
8.001 - 8.500 15 2,316,621.13 3.21
8.501 - 9.000 52 8,380,572.76 11.62
9.001 - 9.500 79 9,208,888.82 12.77
9.501 - 10.000 158 20,513,776.89 28.45
10.001 - 10.500 89 10,459,645.40 14.51
10.501 - 11.000 103 12,119,770.05 16.81
11.001 - 11.500 48 4,842,302.84 6.72
11.501 - 12.000 32 2,896,629.87 4.02
12.001 - 12.500 4 211,430.97 0.29
12.501 - 13.000 2 198,492.77 0.28
13.001 - 13.500 1 50,000.00 0.07
------------------------ --------------------------- ---------------------------
Total 588 $ 72,103,841.81 100.00%
======================== =========================== ===========================
</TABLE>
Minimum: 7.500%
Maximum: 13.125%
Weighted Average: 10.024%
S-24
<PAGE>
MORTGAGE LOAN TYPE OF INITIAL FIXED-RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage Loans
by Aggregate Principal
Loan Type Number of Mortgage Loans Aggregate Principal Balance Balance
- ------------------------ ------------------------ --------------------------- -------------------------
<S> <C> <C> <C>
15 Year Balloon 323 $ 34,498,971.38 61.41%
10 Year Fixed-Rate 4 217,097.14 0.39
15 Year Fixed-Rate 87 5,884,056.32 10.47
20 Year Fixed-Rate 16 978,056.62 1.74
25 Year Fixed-Rate 1 42,962.44 0.08
30 Year Fixed-Rate 161 14,559,920.48 25.92
------------------------ --------------------------- -------------------------
Total 592 $ 56,181,064.38 100.00%
======================== =========================== =========================
ORIGINAL LOAN-TO-VALUE RATIOS OF THE INITIAL FIXED-RATE MORTGAGE LOANS
Percentage of Initial
Fixed-Rate Mortgage Loans
Range of Loan-to-Value Ratios by Aggregate Principal
at Origination (%) Number of Mortgage Loans Aggregate Principal Balance Balance
- ----------------------------- ------------------------ --------------------------- -------------------------
15.01 - 20.00 1 $ 29,078.53 0.05%
20.01 - 25.00 2 53,937.22 0.10
25.01 - 30.00 1 31,858.47 0.06
30.01 - 35.00 6 300,311.28 0.53
35.01 - 40.00 2 96,543.79 0.17
40.01 - 45.00 7 613,057.62 1.09
45.01 - 50.00 7 546,152.51 0.97
50.01 - 55.00 9 1,243,209.87 2.21
55.01 - 60.00 22 1,584,563.65 2.82
60.01 - 65.00 23 2,314,515.35 4.12
65.01 - 70.00 50 4,212,458.28 7.50
70.01 - 75.00 74 6,795,624.94 12.10
75.01 - 80.00 133 13,360,779.84 23.78
80.01 - 85.00 89 8,867,545.09 15.78
85.01 - 90.00 132 12,599,569.30 22.43
90.01 - 95.00 31 3,226,697.38 5.74
95.01 - 100.00 3 305,161.26 0.54
------------------------ --------------------------- -------------------------
Total 592 $ 56,181,064.38 100.00%
======================== =========================== =========================
</TABLE>
Minimum: 17.65%
Maximum: 100.00%
Weighted Average: 79.15%
S-25
<PAGE>
MORTGAGE RATES OF THE INITIAL FIXED-RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage Loans
By Aggregate Principal
Range of Mortgage Rates (%) Number of Mortgage Loans Aggregate Principal Balance Balance
- ----------------------------- ------------------------ --------------------------- -------------------------
<S> <C> <C> <C> <C>
7.501 - 8.000 9 $ 1,239,636.45 2.21%
8.001 - 8.500 28 3,682,575.71 6.55
8.501 - 9.000 46 5,040,770.72 8.97
9.001 - 9.500 72 6,953,154.18 12.38
9.501 - 10.000 137 12,435,287.32 22.13
10.001 - 10.500 102 9,620,586.37 17.12
10.501 - 11.000 103 8,842,870.36 15.74
11.001 - 11.500 56 5,382,671.48 9.58
11.501 - 12.000 29 2,376,311.27 4.23
12.001 - 12.500 7 388,549.12 0.69
12.501 - 13.000 2 93,815.63 0.17
13.001 - 13.500 1 124,835.77 0.22
------------------------ --------------------------- -------------------------
Total 592 $ 56,181,064.38 100.00%
======================== =========================== =========================
</TABLE>
Minimum: 7.625%
Maximum: 13.125%
Weighted Average: 10.052%
S-26
<PAGE>
PRINCIPAL BALANCES OF THE INITIAL FIXED-RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage Loans
Range of Principal Balances by Aggregate Principal
($) Number of Mortgage Loans Aggregate Principal Balance Balance
- ----------------------------- ------------------------ --------------------------- -------------------------
<S> <C> <C> <C> <C>
15,000.01 - 25,000.00 2 $ 49,675.86 0.09%
25,000.01 - 50,000.00 132 5,188,715.41 9.24
50,000.01 - 75,000.00 176 10,883,432.36 19.37
75,000.01 - 100,000.00 103 8,884,207.90 15.81
100,000.01 - 125,000.00 67 7,496,055.37 13.34
125,000.01 - 150,000.00 34 4,594,367.66 8.18
150,000.01 - 175,000.00 18 2,924,965.08 5.21
175,000.01 - 200,000.00 18 3,400,317.84 6.05
200,000.01 - 225,000.00 13 2,738,831.06 4.88
225,000.01 - 250,000.00 3 705,390.17 1.26
250,000.01 - 275,000.00 7 1,859,107.63 3.31
275,000.01 - 300,000.00 3 888,268.14 1.58
300,000.01 - 325,000.00 3 932,773.58 1.66
325,000.01 - 350,000.00 3 1,028,021.40 1.83
375,000.01 - 400,000.00 1 380,000.00 0.68
400,000.01 - 425,000.00 1 415,599.82 0.74
425,000.01 - 450,000.00 3 1,306,180.23 2.32
450,000.01 - 475,000.00 2 931,127.92 1.66
475,000.01 - 500,000.00 1 494,632.98 0.88
525,000.01 - 550,000.00 1 526,531.79 0.94
550,000.01 - 575,000.00 1 552,862.18 0.98
------------------------ --------------------------- -------------------------
Total 592 $ 56,181,064.38 100.00%
======================== =========================== =========================
</TABLE>
Minimum: $ 24,710.23
Maximum: $552,862.18
Weighted Average: $ 94,900.45
S-27
<PAGE>
REMAINING TERMS TO MATURITY OF THE INITIAL FIXED-RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage Loans
by Aggregate Principal
Remaining Term (months) Number of Mortgage Loans Aggregate Principal Balance Balance
- ----------------------------- ------------------------ --------------------------- -------------------------
<S> <C> <C> <C> <C>
111 - 115 1 $ 45,707.00 0.08%
116 - 120 3 171,390.14 0.31
166 - 170 12 1,724,243.30 3.07
171 - 175 40 5,441,460.03 9.69
176 - 180 358 33,217,324.37 59.13
221 - 225 1 29,078.53 0.05
231 - 235 3 166,542.54 0.30
236 - 240 12 782,435.55 1.39
296 - 300 1 42,962.44 0.08
341 - 345 3 218,192.72 0.39
346 - 350 3 241,143.08 0.43
351 - 355 22 1,856,992.97 3.31
356 15 1,025,482.82 1.83
357 20 1,831,726.23 3.26
358 41 3,925,057.56 6.99
359 29 2,508,875.10 4.47
360 28 2,952,450.00 5.26
------------------------ --------------------------- -------------------------
Total 592 $ 56,181,064.38 100.00%
======================== =========================== =========================
</TABLE>
Minimum: 115 months
Maximum: 360 months
Weighted Average: 225 months
S-28
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
On the closing date, approximately $101,715,093.81 will be
deposited in a pre-funding account which account will be in the name of the
trustee and shall be part of the trust estate and which amount will be used to
acquire subsequent mortgage loans. Of that amount, a minimum of $57,174,054.23
will be used to acquire subsequent ARM loans and the remaining amount will be
used to acquire subsequent fixed-rate loans. During the funding period, the
related original pre-funded amount will be reduced by the amount used to
purchase subsequent mortgage loans. The "funding period" is the period
commencing on the closing date and ending on the earlier to occur of (i) the
date on which the amount on deposit in the Funding Account is less than $10,000
and (ii) June 29, 2000.
The purchase price for such subsequent mortgage loan will be
approximately 100% of par.
Each subsequent mortgage loan will have been underwritten in
accordance with the criteria described under "Description of the Mortgage
Pool--Underwriting Standards for the Mortgage Loans."
Each subsequent mortgage loan will satisfy the following
criteria:
o the subsequent mortgage loan may not be 30 or more days
delinquent;
o the remaining stated term to maturity will not exceed
360 months;
o the lien securing the subsequent mortgage loan must be
first priority;
o the subsequent mortgage loan must have an outstanding
principal balance of at least $10,000;
o the subsequent mortgage loan will be underwritten in
accordance with the criteria described under
"Description of the Mortgage Pool--Underwriting
Standards for the Mortgage Loans" herein;
o the subsequent mortgage loan must have a loan-to-value
ratio equal to or less than 97%;
o the stated maturity of the subsequent mortgage loan will
be no later than July 1, 2030;
o the subsequent mortgage loan shall not provide for
negative amortization;
o the subsequent mortgage loan if it is a fixed rate loan,
must have a fixed mortgage rate of at least 7.625% or,
if an ARM loan, a gross margin of at least 3.625%; and
o most of the subsequent mortgage loans that are
underwritten to the seller's underwriting standards for
all credit risks will be covered by the PMI mortgage
insurance policy if their loan-to-value ratios are
greater than 50%.
Following the purchase of the subsequent mortgage loans by the
trust, all mortgage loans must have a weighted average interest rate, a weighted
average remaining term to maturity and a
S-29
<PAGE>
weighted average loan-to-value ratio which will not vary materially from those
statistics with respect to the pool of initial mortgage loans.
In addition, the certificate administrator shall not agree to
any transfer of subsequent mortgage loans without a confirmation from the rating
agencies that the acquisition of those subsequent mortgage loans will not result
in a downgrade, withdrawal or qualification of the ratings then in effect for
the outstanding certificates.
UNDERWRITING STANDARDS FOR THE MORTGAGE LOANS
All of the initial mortgage loans were originated or purchased
by the seller in the ordinary course of business on a loan by loan basis
directly from mortgage brokers and mortgage loan originators.
The underwriting guidelines of the seller are intended to
evaluate the credit history of the potential borrower, the capacity and
willingness of the borrower to repay the loan and the adequacy of the collateral
securing the loan. Each loan applicant completes an application that includes
information with respect to the applicant's income, assets, liabilities and
employment history. A credit report is also submitted by the broker along with
the loan application which provides detailed information concerning the payment
history of the borrower on all of their debts. Prior to issuing an approval on
the loan, the underwriter runs an independent credit report to verify that the
information submitted by the broker is still accurate and up to date. An
appraisal is also required on all loans and in many cases a review appraisal or
second appraisal may be required depending on the value of the property and the
underwriter's comfort with the original valuation. All appraisals are required
to conform to the Uniform Standards of Professional Appraisal Practice adopted
by the Appraisal Standards Board of the Appraisal Foundation and are generally
on forms acceptable to Fannie Mae and Freddie Mac. The properties securing the
mortgage loans are generally appraised by qualified independent appraisers who
are generally approved by the related originator. The mortgagor may also include
information regarding verification of deposits at financial institutions where
the mortgagor had demand or savings accounts. In the case of investment
properties, income derived from the mortgage property may have been used for
underwriting purposes.
The underwriting guidelines include three levels of applicant
documentation requirements, referred to as "Full Documentation," "Limited
Documentation" and "Stated Income." Under the Full Documentation program
applicants generally are required to submit verification of employment and most
recent pay stub or prior two years W-2 forms and most recent pay stub. Under the
Limited Documentation program, no such verification is required, however, bank
statements for the most recent consecutive 6-month period are required to
evidence cash flow. If business bank statements are used in lieu of personal
statements, an unaudited current profit loss statement must accompany the bank
statements. Under the Stated Income program, an applicant may be qualified based
on monthly income as stated in the loan application. Mortgage loans originated
under the "Limited Documentation" and "Stated Income" programs require less
documentation and verification than do traditional "Full Documentation"
programs. Generally, under such programs, minimal investigation into a
mortgagor's credit history and income profile would have been undertaken by the
originator and the underwriting for such mortgage loans will place a greater
emphasis on the value of the mortgaged property. Given that the seller primarily
lends to subprime borrowers, it places great emphasis on the ability of
collateral to protect against losses in the event of default by borrowers.
S-30
<PAGE>
On a case-by-case basis, exceptions to the underwriting
guidelines are made where the seller believes compensating factors exist.
Compensating factors may consist of factors like length of time in residence,
lowering of the borrower's monthly debt service payments, the loan-to-value
ratio or combined loan-to-value ratio on the loan, as applicable, or other
criteria that in the judgment of the underwriter warrants an exception. All
loans in excess of $350,000 currently require the approval of the underwriting
supervisor and all loans over $500,000 require the approval of the Chief Credit
Officer. In addition, the President of the seller approves all loans in excess
of $750,000.
The initial mortgage loans were underwritten by the seller
using the following categories and criteria for grading the credit history of
potential borrowers and the maximum loan-to-value ratios and combined
loan-to-value ratios allowed for each category.
S-31
<PAGE>
<TABLE>
<CAPTION>
AAA RISK AA RISK A RISK A- RISK
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Mortgage History No 30-day late within Maximum one 30-day Maximum one 30-day Maximum two 30-day
last 24 months late within last 24 late within last 12 late within last 12
months. (must be months. months.
0x30 in the most
recent 12 months)
Consumer Credit Minimum 640 FICO. Maximum three 30-day Maximum three 30-day Maximum three 30-day
Minimum 660 FICO for late within last 24 late within last 12 late and one 60-day
85 LTV. months. months. late, or five 30-day
Minimum 680 FICO for late within last 12
90 to 95 LTV. months.
Bankruptcy Chapter 7: Chapter 7: Chapter 7: Chapter 7:
Filings 3 Years since 3 Years since 3 Years since 2 Years since
discharge date. discharge date. discharge date. discharge date.
Chapter 13: Chapter 13: Chapter 13: Chapter 13:
2 Years since 2 Years since 2 Years since 1 Year since
discharge date. discharge date. discharge date. discharge date.
B RISK C RISK C- RISK
------ ------ -------
Mortgage History Maximum three 30-day Maximum five Max two 90-day
late and one 60-day 30-day late, two late within last
late or four 30-day 60-day late, and 12 months.
late within last 12 one 90-day late
months. within last 12
If 4x30 or 1x60, months.
reduce LTV by 5%. If 1x90, reduce
LTV by 5%.
Consumer Credit Maximum 30-day late, Maximum four Discretionary.
two 60-day late, and 60-day late, two Credit is
one 90-day late, or 90-day late, or generally
six 30-day late and six 60-day late, expected to be
three 60-day late and one 90-day late pay.
within last 12 months. late within last
If 1x90 is a major 12 months.
(>$5000), reduce LTV
by 5%.
Bankruptcy Chapter 7: Chapter 7: 1 Year Chapter 7 1 year
Filings 18 months since since discharge since Chapter
discharge date. date. 13. No
Chapter 13: Chapter 13: 12 seasoning
1 Year since month satisfactory required; buy
discharge date. pay history; buy out required.
out required.
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
AAA RISK AA RISK A RISK A- RISK
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Prior 60 Months 60 Months 60 Months 36 Months
Foreclosure
/NOD
Adverse Accounts All adverse accounts All adverse accounts All adverse accounts All adverse accounts
in the last 24 months in the last 24 in the last 24 months in the last 24
must be satisfied. months must be must be satisfied. months not to exceed
None>$1500 in last 12 satisfied. None>$1500 in last 12 $1000.
months. None>$1500 in last months.
12 months.
Debt to Service 45% 45% 45% 45%
Ratio
Maximum 95% 95% 90% 90%
Loan-to-Value
Ratio
Maximum 100% 100% 100% 100%
Combined
Loan-to-
Value Ratio
B RISK C RISK C- RISK
------ ------ -------
Prior 24 months 24 months 12 months
Foreclosure
/NOD
Adverse Accounts All adverse accounts All adverse Adverse accounts
in the last 24 months accounts in the in the last 24
not to exceed $2500. last 24 months not months not to
to exceed $5000. exceed $5,000.00
Debt to Service 50% 55% 65%
Ratio
Maximum 85% 75% 65%
Loan-to-Value
Ratio
Maximum 90% 80% No junior liens
Combined permitted.
Loan-to-
Value Ratio
</TABLE>
S-33
<PAGE>
Close attention is paid to geographic diversification in
managing credit risk. The seller believes one of the best tools for managing
credit risk is to diversify the markets in which it originates and purchases
mortgage loans. The seller has established a diversification policy to be
followed in managing this credit risk which states that no one market can
represent a percentage of total mortgage loans owned by the seller higher than
twice that market's percentage of the total national market share.
Quality control reviews are conducted to ensure that all
mortgage loans meet quality standards. The type and extent of the reviews depend
on the production channel through which the mortgage loan was obtained and the
characteristics of the mortgage loan. The seller reviews a high percentage of
mortgage loans with
o principal balances in excess of $450,000,
o higher loan-to-value ratios or combined loan-to-value
ratios (in excess of 75%),
o limited documentation, or
o made for `cash out' refinance purposes.
The seller also performs appraisal reviews and compliance
reviews as part of the quality control process to ensure adherence to state and
federal regulations.
PRIVATE MORTGAGE INSURANCE POLICIES
Approximately 97.84% by principal balance of the initial
mortgage loans with a loan to value ratio in excess of 50% are covered by
mortgage insurance policies issued by PMI Mortgage Assurance Company. PMI, an
Arizona corporation with its administrative offices in San Francisco,
California, is a private mortgage insurance company founded in 1972. PMI is
rated "AA" by S&P and "Aa2" by Moody's. Approximately 0.60% by principal balance
of the initial mortgage loans with a loan-to-value ratio in excess of 50% are
covered by mortgage insurance policies issued by Radian Guaranty, Inc. Radian is
a private mortgage insurance company with its administrative offices in
Philadelphia, Pennsylvania, and was formed by the merger in 1999 of CMAC
Investment Corporation and Amerin Corporation. Radian is rated "AA" by S&P and
"Aa3" by Moody's. The remainder of the initial mortgage loans will not be
covered by a mortgage insurance policy. In addition, most of the subsequent
mortgage loans with an original loan-to-value ratio in excess of 50% will be
covered by the PMI mortgage insurance policy.
Each mortgage insurance policy insures a portion of the loss
on the mortgage loan covered by such policy to the extent that the uninsured
exposure of the related mortgage loan is reduced to an amount equal to 50% of
the original loan-to-value ratio of such mortgage loan, as more fully described
in the policy. Under the mortgage insurance policies, the mortgage insurer
covers an amount generally equal to, at the option of the mortgage insurer,
either:
o the outstanding principal balance of the mortgage loan,
together with certain accrued interest due on the
mortgage loan and certain advances made by the servicer
(such as hazard insurance, taxes, maintenance expenses
and foreclosure costs), reduced by certain amounts such
as escrow deposits (collectively, the "Claim Amount"),
in which case the mortgage insurer would take title to
the related mortgaged property, or
S-34
<PAGE>
o an amount equal to the product of (i) the Claim Amount
and (ii) the coverage percentage specified in the
mortgage insurance policy, in which case the issuer
would retain title to (and the proceeds obtained in a
foreclosure and sale of) the mortgaged property.
The coverage percentage is a percentage equal to (i) the
original loan-to-value ratio of the mortgage loan (expressed as a percentage)
minus 50% divided by (ii) the original loan-to-value ratio of the mortgage loan
(expressed as a percentage). Thus, the covered portion of any loss will be
different depending upon the original loan-to-value ratio of the mortgage loan.
Mortgage loans with higher original loan-to-value ratios will have a higher
coverage percentage and mortgage loans with lower original loan-to-value ratios
will have a lower coverage percentage.
The mortgage insurance policies do not cover mortgage loans
with original loan-to-value ratios in excess of 100%, second-lien mortgage
loans, any mortgage loan in default at the applicable "effective date" of the
policies or any mortgage loan otherwise insured under the terms of a traditional
mortgage guaranty insurance policy. Each mortgage loan covered by a mortgage
insurance policy is covered by the mortgage insurance policy for losses up to
the policy limits, although the mortgage insurance policy will not cover special
hazard, bankruptcy, fraud losses and certain other types of losses as described
in the policy. Claims on insured mortgage loans will reduce uninsured exposure
to an amount equal to 50% of the lesser of the appraised value or purchase
price, as the case may be, of the related mortgaged property, in each case, at
the time of the applicable effective date of the mortgage insurance policy.
Claims payments under a mortgage insurance policy will be made
to the servicer, deposited in the collection account and treated in the same
manner as a prepayment of the related mortgage loan. Premiums payable on the
mortgage insurance policies will be paid monthly by the servicer with funds
withdrawn from the collection account with respect to the related mortgage
loans.
ADDITIONAL INFORMATION
Prior to the issuance of the certificates, certain of the
initial mortgage loans may be removed from the trust estate as a result of
incomplete documentation or otherwise, if the depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the certificates. The
depositor believes that the information set forth herein will be substantially
representative of the characteristics of the mortgage pool as it will be
constituted at the time the certificates are issued, although the range of
mortgage rates and maturities and certain other characteristics of the mortgage
loans in the mortgage pool may vary, although such variance will not be
material.
THE SELLER
NovaStar Mortgage, Inc., a Virginia corporation in its
capacity as seller, is a wholly-owned subsidiary of NFI Holding Corporation,
Inc., a Delaware corporation.
The seller originates subprime residential mortgage loans
through a network of unaffiliated wholesale loan brokers. The seller utilizes a
network of approximately 2,500 wholesale loan brokers in 48 different states. In
addition, the seller services loans nationwide, and is licensed to do
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business as a foreign corporation in 49 states. The seller's principal executive
offices are located at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205.
The principal office for the seller's mortgage lending operations are in Irvine,
California. The seller is an approved HUD lender.
NovaStar Financial has guaranteed the seller's obligations
with respect to the representations and warranties respecting the mortgage loans
and the remedies for any breach thereof that are assigned to the trustee for the
benefit of the certificateholders. See "NovaStar Financial" below. NovaStar
Financial and the seller have only limited assets available to perform the
repurchase obligations in respect of any breach of such representations and
warranties, relative to the potential amount of repurchase liability, and the
total potential amount of repurchase liability is expected to increase over time
as the seller and NovaStar Financial continue to originate, acquire and sell
mortgage loans. There can be no assurance that either the seller or NovaStar
Financial will generate operating earnings, or that it will be successful under
its current business plan. Therefore, prospective investors in the certificates
should consider the possibility that the seller or NovaStar Financial will not
have sufficient assets with which to satisfy its repurchase obligations in the
event that a substantial amount of mortgage loans are required to be repurchased
due to breaches of representations and warranties.
NovaStar Mortgage will also act as the servicer of the
mortgage loans. See "Description of the Servicing Agreement--The Servicer"
herein.
THE CONVERTED LOAN PURCHASER
NovaStar Capital, Inc., a Delaware corporation, is a
wholly-owned subsidiary of NFI Holding Corporation and an affiliate of the
seller. The converted loan purchaser's principal executive offices are located
at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205.
The converted loan purchaser will purchase from the trustee
each converted mortgage loan. See "The Pooling and Servicing
Agreement--Servicing Sale of Converted Mortgage Loans" herein.
NOVASTAR FINANCIAL
NovaStar Financial, Inc. was incorporated in the State of
Maryland on September 13, 1996. The common stock of NovaStar Financial is
registered under the Securities Act of 1933 and traded on the New York Stock
Exchange. NovaStar Financial is subject to the reporting requirements of the
Securities and Exchange Act of 1934, and in accordance therewith, files reports
and other information with the commission.
NovaStar Financial is a specialty finance company which:
o originates, acquires, and services residential subprime
mortgage loans;
o leverages its assets using bank warehouse lines and
repurchase agreements;
o issues collateralized debt obligations through special
purpose subsidiaries to finance its subprime mortgage
loans on a long-term basis;
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o purchases high quality mortgage securities in the
secondary mortgage market; and
o manages the resulting combined portfolio of mortgage
loans in its structure as a real estate investment trust
(a "REIT").
NovaStar Financial has elected to be taxed for federal income
tax purposes as a REIT. As a result, NovaStar Financial is generally not subject
to federal income tax to the extent that it distributes its earnings to
stockholders and maintains its qualifications as a REIT. The principal executive
offices of NovaStar Financial are at 1901 W. 47th Place, Suite 105, Westwood,
Kansas 66205.
THE TRANSFEROR
NovaStar Mortgage Funding Corporation III, a Delaware
corporation, was incorporated in the State of Delaware on March 27, 2000. The
transferor is a wholly-owned subsidiary of the seller.
The seller will convey the initial mortgage loans, the related
mortgage insurance policies and the cap agreements to the transferor, who will
in turn convey the initial mortgage loans, the related mortgage insurance
policies and the cap agreements to the depositor.
THE DEPOSITOR
Residential Asset Funding Corporation, a North Carolina
corporation, was incorporated in the State of North Carolina on December 29,
1997, and is a wholly-owned, special purpose subsidiary of First Union National
Bank, a national banking association, with its headquarters in Charlotte, North
Carolina. The principal executive offices of the depositor are located at 301
South College Street, Charlotte, North Carolina 28202-6001.
The depositor will convey without recourse the initial
mortgage loans, the related mortgage insurance policies and the cap agreements
to the trustee pursuant to the pooling and servicing agreement as security for
the certificates.
THE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation, will
act as trustee. A copy of the pooling and servicing agreement will be provided
by the trustee without charge upon written request. Requests should be addressed
to the trustee at The Chase Manhattan Bank, 450 West 33rd Street, 14th Floor,
New York New York 10001, Attention: NovaStar Mortgage Funding Trust, Series
2000-1. Chase will act as initial paying agent.
THE CERTIFICATE ADMINISTRATOR
First Union National Bank, a national banking association,
will act as certificate administrator and backup servicer. In its capacity as
certificate administrator, First Union shall perform certain administrative
functions on behalf of the trustee and shall act as the initial certificate
registrar and custodian. As the backup servicer, First Union shall assume the
function of servicer if NovaStar
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Mortgage, Inc. has been removed as such and another successor servicer has not
been appointed under the pooling and servicing agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a pooling and
servicing agreement among the depositor, the servicer, the trustee and the
certificate administrator.
The trust will issue
o the class A-1 certificates;
o the class M-1 certificates, the class M-2 certificates
and the class M-3 certificates (collectively, the
"mezzanine certificates");
o the class AIO certificates;
o the class O certificates;
o the class P certificates; and
o the residual certificates.
The class A-1 certificates, the mezzanine certificates, the
class AIO certificates, the class P certificates, the class O certificates and
the residual certificates are collectively referred to as the "certificates."
The class A-1 certificates, the class AIO certificates and the mezzanine
certificates are the "offered certificates" which are offered hereby. Only the
class A-1 and the mezzanine certificates are being purchased by the underwriter,
and are the underwritten certificates.
The mezzanine certificates and the class O certificates are
collectively referred to as the "subordinate certificates".
The class A-1 certificates and the mezzanine certificates will
have the original certificate principal balances specified on the cover, subject
to a permitted variance of plus or minus five percent. The class P certificates
will be entitled to all prepayment penalties received in respect of the mortgage
loans and such amounts will not be available for distribution to the holders of
the offered certificates.
The class AIO certificates represent the right to receive
excess interest, which is the interest due on the mortgage loans in excess of
the administrative fees and the certificate interest on the offered
certificates. The beneficial owner of the class AIO will also be entitled to
receive cap payments from each cap agreement which have not been used after
three consecutive distribution dates. The class O certificates are a subordinate
class, and represent the overcollateralization amount.
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 $1,000 in excess thereof. The
assumed final maturity date for the certificates is the distribution date in
July 25, 2030.
The certificates will be backed by the trust fund created by
the pooling and servicing agreement (which may include one or more subtrusts),
which consists of the following:
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o the mortgage loans;
o collections in respect of principal and interest of the
mortgage loans received after the cut-off date (other
than payments due on or before the cut-off date);
o the amounts on deposit in the collection account,
including the payment account in which amounts are
deposited prior to payment to the certificateholders,
including net investment earnings;
o mortgage insurance policies and certain other insurance
policies maintained by the mortgagors or by or on behalf
of the servicer or any subservicer;
o an assignment of the transferor's rights under the
purchase agreement;
o amounts on deposit in the interest coverage account and
the pre-funding account;
o the trustee's rights under the converted loan purchase
agreement;
o the cap agreements and all cash flows from such
agreements; and
o proceeds of the above.
PAYMENTS
Payments on the certificates will be made by the paying agent
on each "distribution date," which is the 25th day of each month or, if such day
is not a business day, then the next succeeding business day, commencing on
April 25, 2000. Payments on the certificates will be made to the persons in
whose names such certificates are registered on the record date. The record date
is the business day prior to the distribution date. In each case, the record
date for the initial distribution date is the closing date. Payments will be
made by check or money order mailed (or upon the request, at least five business
days prior to the related record date, of a holder owning a class of
certificates having denominations aggregating at least $5,000,000, by wire
transfer) to the address of the holder (which, in the case of book-entry
certificates, will be DTC or its nominee) as it appears on the certificate
register on the related record date. However, the final payment in respect of
the certificates will be made only upon presentation and surrender of the
certificates at the office or the agency of the trustee specified in the notice
to Holders of such final payment. A "business day" is any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in New York,
California, Kansas or Delaware or in the city in which the corporate trust
office of the trustee or the certificate administrator are located, is required
or authorized by law to be closed.
AVAILABLE FUNDS
The available funds for each distribution date will equal the
amount received by the trustee and available in the certificate account on that
distribution date. The available funds will generally be equal to the sum of,
net of administrative fees and amounts reimbursable to the servicer, the
following amounts:
o the aggregate amount of scheduled payments on the
mortgage loans due on the prior due date and received on
or prior to the determination date,
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o investment earnings on amounts in the collection
account, plus miscellaneous fees and collections,
including assumption fees and prepayment penalties, but
excluding late fees,
o any unscheduled payments and receipts, including
mortgagor prepayments on the mortgage loans, received
during the prior prepayment period and proceeds of
repurchases, and adjustments in the case of
substitutions and terminations, net liquidation
proceeds, insurance proceeds, proceeds from any mortgage
insurance policy and proceeds from the sale of converted
mortgage loans,
o all advances made for that distribution date. In
addition, on the distribution date which follows the
termination of the funding period, available funds will
include the remaining amount on deposit in the
pre-funding account at that time. During the pre-funding
period, available funds will also include the withdrawn
amount from the interest coverage account; and
o amounts on deposit in the supplemental interest account
from cash flows on the cap agreements. Because the cap
agreements are quarterly pay and the certificates are
monthly pay, one-third of the cash flows received under
each cap agreement will be available funds on each of
the three payment dates immediately following receipt of
such cash flows.
For any distribution date, the due date is the first day of
the month in which the distribution date occurs, and the determination date is
the 15th day of the month in which the distribution date occurs, or if such day
is not a business day, the immediately preceding business day.
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<PAGE>
AVAILABLE FUNDS CAP RATE
<TABLE>
<CAPTION>
Period Date AFC Rate Period Date AFC Rate Period Date AFC Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 3/30/00 35 2/25/03 9.63% 69 12/25/05 9.85%
1 4/25/00 10.42% 36 3/25/03 10.67% 70 1/25/06 9.53%
2 5/25/00 9.07% 37 4/25/03 9.64% 71 2/25/06 9.53%
3 6/25/00 8.79% 38 5/25/03 9.89% 72 3/25/06 10.54%
4 7/25/00 9.08% 39 6/25/03 9.56% 73 4/25/06 9.52%
5 8/25/00 8.80% 40 7/25/03 9.93% 74 5/25/06 9.85%
6 9/25/00 8.81% 41 8/25/03 9.61% 75 6/25/06 9.54%
7 10/25/00 9.11% 42 9/25/03 9.61% 76 7/25/06 9.86%
8 11/25/00 8.83% 43 10/25/03 9.92% 77 8/25/06 9.55%
9 12/25/00 9.13% 44 11/25/03 9.60% 78 9/25/06 9.56%
10 1/25/01 8.86% 45 12/25/03 9.92% 79 10/25/06 9.88%
11 2/25/01 8.87% 46 1/25/04 9.60% 80 11/25/06 9.57%
12 3/25/01 9.80% 47 2/25/04 9.59% 81 12/25/06 9.90%
13 4/25/01 8.90% 48 3/25/04 10.25% 82 1/25/07 9.59%
14 5/25/01 9.20% 49 4/25/04 9.59% 83 2/25/07 9.60%
15 6/25/01 8.92% 50 5/25/04 9.90% 84 3/25/07 10.63%
16 7/25/01 9.22% 51 6/25/04 9.58% 85 4/25/07 9.61%
17 8/25/01 8.66% 52 7/25/04 9.90% 86 5/25/07 9.94%
18 9/25/01 8.67% 53 8/25/04 9.58% 87 6/25/07 9.63%
19 10/25/01 8.96% 54 9/25/04 9.57% 88 7/25/07 9.96%
20 11/25/01 8.68% 55 10/25/04 9.89% 89 8/25/07 9.65%
21 12/25/01 8.98% 56 11/25/04 9.57%
22 1/25/02 8.62% 57 12/25/04 9.88%
23 2/25/02 9.10% 58 1/25/05 9.56%
24 3/25/02 10.08% 59 2/25/05 9.56%
25 4/25/02 9.11% 60 3/25/05 10.58%
26 5/25/02 9.42% 61 4/25/05 9.55%
27 6/25/02 9.12% 62 5/25/05 9.87%
28 7/25/02 9.84% 63 6/25/05 9.55%
29 8/25/02 9.53% 64 7/25/05 9.87%
30 9/25/02 9.54% 65 8/25/05 9.54%
31 10/25/02 9.86% 66 9/25/05 9.54%
32 11/25/02 9.55% 67 10/25/05 9.86%
33 12/25/02 9.87% 68 11/25/05 9.54%
34 1/25/03 9.56%
</TABLE>
The table set forth above was prepared on the basis of the following
assumptions: (i) the Modeling Assumptions, (ii) a prepayment assumption of 100%,
(iii) the clean-up call is exercised by the servicer and (iv) three month LIBOR
is equal to 6.21% in all periods.
INTEREST PAYMENTS ON THE CERTIFICATES
On each distribution date, the holders of each class of
certificates will be entitled to receive an interest payment amount equal to
interest accrued on the related certificate principal balance immediately prior
to such distribution date at the related pass-through rate for the related
accrual period.
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The pass-through rate for each class and distribution date is
the lesser of (1) the formula rate for that class and distribution date and (2)
the available funds cap rate for that distribution date.
The formula rate for each class is as follows:
Prior to the Rate Step Up Date
Class Rate
----- ----
A-1 LIBOR plus 0.35%
M-1 LIBOR plus 0.65%
M-2 LIBOR plus 1.30%
M-3 LIBOR plus 2.70%
On or after the Rate Step Up Date
Class Rate
----- ----
A-1 LIBOR plus 0.70%
M-1 LIBOR plus 0.975%
M-2 LIBOR plus 1.95%
M-3 LIBOR plus 4.05%
The "Rate Step Up Date" is the first distribution date to
occur after the clean-up call date.
The "available funds cap rate" for each distribution date is
the percentage equivalent of a fraction, the numerator of which is equal to the
Interest Remittance Formula Amount plus any Supplemental Interest Payment for
that distribution date, less the administrative fees for that distribution date,
and the denominator of which is the product of (1) the actual number of days in
the related accrual period, divided by 360 and (2) the aggregate certificate
principal balance of the offered certificates immediately prior to that
distribution date.
With respect to each class of offered certificates and any
distribution date, to the extent that the amount of interest paid to a class is
reduced because the formula rate exceeds the available funds cap rate (such
excess amount, the related "Available Funds Cap Carry-Forward Amount"), such
amount will be carried forward and distributed to the holders of that class,
together with interest on that amount at the related formula rate pass-through
rate applicable from time to time.
Interest on the certificates will accrue during each accrual
period. The accrual period is the period from the prior distribution date
through and including the day preceding the related distribution date. In the
case of the first distribution date, interest begins to accrue on the closing
date. Interest will accrue on the basis of the actual number of days in the
accrual period and a 360 day year.
SUPPLEMENTAL INTEREST PAYMENTS
To enable the trust to offer the offered certificates with a
higher available funds cap rate than would be the case if the only source of
funding interest were the interest collections on the mortgage loans, the trust
fund includes three interest rate cap agreements. Under each cap agreement, the
cap counterparty agrees to pay to the trust fund, on a quarterly basis, a
payment equal to the amount (if any) by which 3 month LIBOR exceeds a specified
strike price multiplied by a notional principal amount. No
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payments are due from the trustee to any cap counterparty. The cap agreements
have varying terms and maturities summarized as follows:
SUMMARY OF INTEREST RATE CAP AGREEMENTS
<TABLE>
<CAPTION>
Notional 3 Month LIBOR Maturity
Cap Counterparty Amount Strike Price Quarterly Payment Dates Dates
---------------- ------------------ --------------- --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Merrill Lynch Capital $100 million 5.75% Jan. 23, April 23, July 23, July 23, 2001
Markets Oct. 23
Citibank, N.A., New York $ 50 million 6.00% Mar. 13, June 13, Sep. 13, Dec. 13, 2001
Dec. 13
First Union National Bank $ 35 million 6.50% Feb. 18, May 18, Aug. 18, Feb. 18, 2003
Nov. 18
</TABLE>
The payments received by the trustee or the certificate
administrator under the cap agreements ("Cap Payments"), together with other
amounts which the beneficial owners of the class AIO certificates have agreed to
provide will be deposited into the supplemental interest account held by the
trustee or the certificate administrator . Amounts on deposit in the
supplemental interest account will also be used to fund the Available Funds Cap
Carry-Forward Amounts.
In each month in which Cap Payments are received, one-third of
the amount received will be available to increase the available funds cap rate
(and, as a second priority, to fund any Available Funds Cap Carry-Forward
Amount) on each of the next three distribution dates. To the extent these moneys
are not needed for a distribution date, they will be retained by the trustee or
the certificate administrator and added to the one-third figure otherwise
available on the next distribution date. If, however, these amounts have not
been applied by the close of the third distribution date following receipt, they
will be paid to the beneficial owners of the class AIO certificates.
To the extent that these Cap Payments are paid out to the
beneficial owners of the offered certificates, they are referred to as
"Supplemental Interest Payments".
INTEREST ALLOCATIONS
On each distribution date the trustee will first distribute
the prepayment penalties collected during the prior prepayment period to the
holders of the class P certificates. After making that distribution, the trustee
will apply that portion of the available funds which represents the Interest
Remittance Amount for that distribution date, plus any Supplemental Interest
Payments (except with respect to the class AIO certificates), to the payment of
any administrative fees of the trust which are due on that distribution date and
will then apply the remaining Interest Remittance Amount plus any Supplemental
Interest Payments (except with respect to the class AIO certificates) to the
payment of interest then due on the certificates in the following order of
priority:
(i) first, to the holders of the class A-1 certificates, the
Monthly Interest Distributable Amount for such class and to the holders of the
class AIO certificates, the class AIO Monthly Interest Distributable Amount;
these payments are of equal priority to those two classes, and, in the event
that the remaining amount is insufficient to pay both classes the full amount
due, the amount
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paid to the holders of each of these two classes will be a pro
rata portion of the remaining amount, with the allocation based on the relative
proportions of the Monthly Interest Distributable Amount for the class A-1 and
the class AIO Monthly Interest Distributable Amount;
(ii) second, to the holders of the class M-1 certificates, the
Monthly Interest Distributable Amount for class M-1;
(iii) third, to the holders of the class M-2 certificates, the
Monthly Interest Distributable Amount for class M-2;
(iv) fourth, to the holders of the class M-3 certificates, the
Monthly Interest Distributable Amount for class M-3;
(v) fifth, to the holders of each class of offered
certificates, the Available Funds Cap Carry-Forward Amount for that class, such
amount to be paid in the following order of priority: class A-1, class M-1,
class M-2 and class M-3; and
(vi) sixth, to the holders of the Residual Certificates, any
remainder.
On any distribution date, any shortfalls resulting from the
application of the Relief Act and any prepayment interest shortfalls to the
extent not covered by compensating interest paid by the servicer will be applied
to reduce the Monthly Interest Distributable Amounts with respect to the class
A-1, class M-1, class M-2, class M-3 and class AIO certificates on a pro rata
basis, based on the respective amounts of interest accrued on such certificates
for such distribution date. The holders of the certificates will not be entitled
to reimbursement for any such interest shortfalls.
PRINCIPAL ALLOCATIONS
On each distribution date (a) prior to the Crossover Date or
(b) on which a Trigger Event is in effect, the holders of each class of
certificates shall be entitled to receive distributions respect of principal to
the extent of the Principal Remittance Amount in the following amounts and order
of priority:
(i) first, to the holders of the class A-1 certificates, the
entire amount of the Principal Remittance Amount, until the Certificate Balance
of the class A-1 certificates has been reduced to zero;
(ii) second, to the holders of the class M-1 certificates, the
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class M-1 certificates has been reduced to zero;
(iii) third, to the holders of class M-2 certificates, the
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class M-2 certificates has been reduced to zero;
(iv) fourth, to the holders of the class M-3 certificates, the
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class M-3 certificates has been reduced to zero;
(v) fifth, to the holders of the class O certificates, the
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class O certificate has been reduced to zero; and
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(vi) sixth, to the holders of the class R certificates, any
remainder.
On each distribution date (a) on or after the Crossover Date
and (b) on which a Trigger Event is not in effect, the holders of each class of
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Remittance Amount in the following amounts and
order of priority:
(i) first, to the holders of the class A-1 certificates, the
Class A-1 Principal Distribution Amount, until the Certificate Balance of the
class A-1 certificates has been reduced to zero;
(ii) second, to the holders of the class M-1 certificates, the
Class M-1 Principal Distribution Amount, until the Certificate Balance of the
class M-1 certificates has been reduced to zero;
(iii) third, to the holders of the class M-2 certificates, the
Class M-2 Principal Distribution Amount, until the Certificate Balance of the
class M-2 certificates has been reduced to zero;
(iv) fourth, to the holders of the class M-3 certificates, the
Class M-3 Principal Distribution Amount, until the Certificate Balance of the
class M-3 certificates has been reduced to zero;
(v) fifth, to the holders of the class O certificates, the
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class O certificates has been reduced to zero; and
(vi) sixth, to the holders of the class R certificates, any
remainder.
The allocation of principal with respect to the class A-1
certificates on each distribution date prior to the Crossover Date or on which a
Trigger Event has occurred will have the effect of accelerating the amortization
of the class A-1 certificates while, in the absence of realized losses,
increasing the relative proportion of the trust's assets represented by the
mezzanine certificates. Increasing the relative proportion of the trust's assets
in the mezzanine certificates relative to that of the class A-1 certificates is
intended to preserve the availability of the subordination provided by the
mezzanine certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders
of the class A-1 and class AIO certificates consists of subordination, as
described below, and overcollateralization, as described under
"--Overcollateralization Provisions, Allocation of Losses" and "Private Mortgage
Insurance Policies".
The rights of the holders of the Subordinate Certificates to
receive distributions will be subordinated, to the extent described herein, to
the rights of the holders of the class A-1 and class AIO certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the class A-1 and class AIO certificates of the full amount of their
scheduled monthly payments of interest and principal and to afford such holders
protection against realized losses.
The protection afforded to the holders of the class A-1
certificates by means of the subordination of the Subordinate Certificates will
be accomplished by (i) the preferential right of the holders of the class A-1
and class AIO certificates to receive on any distribution date, prior to
distribution on the Subordinate Certificates, distributions in respect of
interest and principal, subject to funds available
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for such distributions and (ii) if necessary, the right of the holders of the
class A-1 and class AIO certificates to future distributions of amounts that
would otherwise be payable to the holders of the Subordinate Certificates.
In addition, the rights of the holders of mezzanine
certificates with lower numerical class designations will be senior to the
rights of holders of mezzanine certificates with higher numerical class
designations, and the rights of the holders of the mezzanine certificates to
receive distributions in respect of the Mortgage Loans will be senior to the
rights of the holders of the class O certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of more
senior certificates of distributions in respect of interest and principal and to
afford such holders protection against realized losses.
OVERCOLLATERALIZATION PROVISIONS, ALLOCATION OF LOSSES
The trust will initially have an overcollateralization level
of 1.60%, meaning that, ignoring the effect of the pre-funding account, the
initial aggregate certificate principal amount of the class A-1 and mezzanine
certificates equals 98.40% of the initial aggregate principal balance of the
mortgage loans plus the initial deposit to the pre-funding account.
Correspondingly, the trust will pay 98.40% of the par amount for each subsequent
mortgage loan acquired by the trust through the pre-funding feature, thus
maintaining the level of overcollateralization.
The dollar amount of the difference between the aggregate
principal balance of the mortgage loans (plus, during the pre-funding period,
the amount on deposit in the pre-funding account) and the initial aggregate
certificate principal amount of the class A-1 and mezzanine certificates is the
"Overcollateralization Amount". Realized losses on the mortgage loan pool will
be allocated to the Overcollateralization Amount until it is reduced to zero.
The Overcollateralization Amount is represented by the class O certificates,
which will receive distributions of that portion of the Principal Remittance
Amount not required to be distributed to any other class.
The Overcollateralization Amount, if reduced, will not
thereafter be increased through the application of "excess interest", or
otherwise.
Any realized losses on the mortgage loans will be allocated
first, to the Overcollateralization Amount, which is represented by the class O
certificates, second, to the class M-3 certificates, third, to the class M-2
certificates, and fourth, to the class M-1 certificates.
The pooling and servicing agreement does not permit the
allocation of realized losses to the class A-1, class AIO, or class P
certificates. Investors in the class A-1 certificates should note that although
realized losses cannot be allocated to the class A-1 certificates, under certain
loss scenarios there will not be enough principal and interest on the mortgage
loans to pay the class A-1 certificates all interest and principal amounts to
which they are then entitled.
Once realized losses have been allocated to the mezzanine
certificates, such amounts with respect to such certificates will no longer
accrue interest nor will such amounts thereafter be reinstated.
Any allocation of a realized loss to a class of certificates
will be made by reducing that certificate's certificate principal balance by the
amount allocated to that class as of the distribution date in the month
following the calendar month in which the realized loss was incurred.
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DEFINITIONS
An "Allocated Realized Loss Amount" with respect to any class
of the mezzanine certificates and any distribution date is an amount equal to
the sum of any realized loss allocated to that class of certificates on the
distribution date and any Allocated Realized Loss Amount for that class
remaining unpaid from the previous distribution date.
The "Certificate Balance" of any class A-1 certificate or
mezzanine certificate immediately prior to any distribution date will be equal
to the Certificate Balance of that certificate on the Closing Date reduced by
the sum of all amounts actually distributed as principal to that class and, in
the case of a mezzanine certificate, realized losses allocated to that
certificate on all prior distribution dates. The "Certificate Balance" of the
class O certificates as of any date of determination is equal to the
Overcollateralization Amount on that date.
The "Class A-1 Principal Distribution Amount" is an amount
equal to the excess of (x) the Certificate Balance of the class A-1 certificates
immediately prior to that distribution date over (y) the lesser of (A) the
product of (i) 88.00% and (ii) the aggregate principal balance of the mortgage
loans as of the last day of the related due period (after giving effect to
scheduled payments of principal due during the related due period, to the extent
received or advanced, and unscheduled collections of principal received during
the related prepayment period) and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related due period (after giving effect
to scheduled payments of principal due during the related due period, to the
extent received or advanced, and unscheduled collections of principal received
during the related prepayment period) minus $1,150,000.
The "Class AIO Current Interest" as of any distribution date
is equal to the excess of (x) Interest Remittance Formula Amount for that
distribution date less (y) the sum of the administrative fees, the Current
Interest for the class A-1 certificates, the class M-1 certificates, the class
M-2 certificates and the class M-3 certificates, and the Available Funds Cap
Carry-Forward Amounts for each of the offered certificates. The "Current
Interest" on each of the class A-1, class M-1, class M-2 and class M-3
certificates will be calculated for this purpose by determining the available
funds cap rate without regard to any Supplemental Interest Payment.
The "Class AIO Monthly Interest Distributable Amount" means,
for any distribution date, the sum of (1) the Class AIO Unpaid Interest
Shortfall Amount for that distribution date, (2) the Class AIO Current Interest
for that distribution date and (3) the Excess Supplemental Amount for that
distribution date. In the event of a shortfall in the full amount necessary to
pay both the Class AIO Unpaid Interest Shortfall Amount and the Class AIO
Current Interest Amount, the available funds will be applied first to the Class
AIO Unpaid Interest Shortfall Amount and then to the Class AIO Current Interest.
The "Class AIO Pass-Through Rate" means, for any distribution
date, the percentage equivalent of a fraction, the numerator of which is equal
to the Class AIO Current Interest for that distribution date and the denominator
of which is the product of (1) the actual number of days in the related accrual
period, divided by 360 and (2) the aggregate principal balance of the mortgage
loans as of the first day of the preceding due period.
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The "Class AIO Unpaid Interest Shortfall Amount" means (i) for
the first distribution date, zero and (ii) for any distribution date after the
first distribution date, the amount, if any, by which (a) the Class AIO Monthly
Interest Distributable Amount on the immediately preceding distribution date
exceeds (b) the aggregate amount distributed to the holders of the class AIO
certificates on such preceding distribution date, plus interest on that amount,
at the Class AIO Pass-Through Rate for the related accrual period.
The "Class M-1 Principal Distribution Amount" is an amount
equal to the excess of (x) the sum of (i) the Certificate Balance of the class
A-1 certificates (after taking into account the payment of the Class A-1
Principal Distribution Amount on such distribution date) and (ii) the
Certificate Balance of the class M-1 certificates immediately prior to such
distribution date over (y) the lesser of (A) the product of (i) 92.00% and (ii)
the aggregate principal balance of the mortgage loans as of the last day of the
related due period (after giving effect to scheduled payments of principal due
during the related due period, to the extent received or advanced, and
unscheduled collections of principal received during the related prepayment
period) and (B) the aggregate principal balance of the mortgage loans as of the
last day of the related due period (after giving effect to scheduled payments of
principal due during the related due period, to the extent received or advanced,
and unscheduled collections of principal received during the related prepayment
period) minus $1,150,000.
The "Class M-2 Principal Distribution Amount" is an amount
equal to the excess of (x) the sum of (i) the Certificate Balance of the class
A-1 certificates (after taking into account the payment of the Class A-1
Principal Distribution Amount on such distribution date), (ii) the Certificate
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 Balance of the class M-2 certificates immediately prior to that
distribution date over (y) the lesser of (A) the product of (i) 94.40% and (ii)
the aggregate principal balance of the mortgage loans as of the last day of the
related due period (after giving effect to scheduled payments of principal due
during the related due period, to the extent received or advanced, and
unscheduled collections of principal received during the related prepayment
period) and (B) the aggregate principal balance of the mortgage loans as of the
last day of the related due period (after giving effect to scheduled payments of
principal due during the related due period, to the extent received or advanced,
and unscheduled collections of principal received during the related prepayment
period) minus $1,150,000.
The "Class M-3 Principal Distribution Amount" is an amount
equal to the excess of (x) the sum of (i) the Certificate Balance of the class
A-1 certificates (after taking into account the payment of the Class A-1
Principal Distribution Amount on such distribution date), (ii) the Certificate
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 Balance of the class M-2 certificates (after taking into account
the payment of the Class M-2 Principal Distribution Amount on such date) and
(iv) the Certificate Balance of the class M-3 certificates immediately prior to
such distribution date over (y) the lesser of (A) the product of (i) 96.80% and
(ii) the aggregate principal balance of the mortgage loans as of the last day of
the related due period (after giving effect to scheduled payments of principal
due during the related due period, to the extent received or advanced, and
unscheduled collections of principal received during the related prepayment
period) and (B) the aggregate principal balance of the mortgage loans as of the
last day of the related due period (after giving effect to scheduled payments of
principal
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due during the related due period, to the extent received or advanced, and
unscheduled collections of principal received during the related prepayment
period) minus $1,150,000.
The "Class P Monthly Distribution Amount" for a distribution
date is an amount equal to all prepayment premiums received on the mortgage loan
pool during the prior prepayment period.
The "Credit Enhancement Percentage" for any distribution date
is the percentage obtained by dividing (x) the aggregate Certificate Balance of
the Subordinate Certificates by (y) the aggregate principal balance of the
mortgage loans and any remaining funds in the pre-funding account (calculated
for this purpose only after taking into account distributions of principal on
the mortgage loans but prior to distributions of principal on the certificates)
on such distribution date.
The "Crossover Date" means the later to occur of (x) the
distribution date occurring in April 2003 and (y) the first distribution date on
which the Credit Enhancement Percentage (calculated for this purpose only after
taking into account distributions of principal on the mortgage loans but prior
to distributions of principal on the certificates) is greater than or equal to
12.00%.
The "Current Interest" for any distribution date and each
class of offered certificates equals the amount of interest accrued during the
related accrual period at the related pass-through rate on the Certificate
Balance of such class immediately prior to such distribution date, in each case,
reduced by any prepayment interest shortfalls allocated to that class and
shortfalls resulting from the application of the Relief Act (allocated to each
certificate based on its respective entitlements to interest irrespective of any
prepayment interest shortfalls or shortfalls resulting from the application of
the Relief Act for that distribution date).
A mortgage loan is "delinquent" if any monthly payment due on
a due date is not made by the close of business on the next scheduled due date.
A mortgage loan is "30 days delinquent" if such monthly payment has not been
received by the close of business on the corresponding day of the month
immediately succeeding the month in which such monthly payment was due or, if
there was no such corresponding day (e.g., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
delinquent" and "90 days delinquent," etc.
A "due period" with respect to any distribution date is the
period commencing on the second day of the month preceding the month in which
such distribution date occurs and ending on the first day of the month in which
such distribution date occurs.
The "Excess Supplemental Amount" means, for any distribution
date, Cap Payments which were received by trustee and which have not been needed
to fund distributions of Available Funds Cap Carry-Forward Amounts to the
holders of the offered certificates on such distribution date or the prior two
distribution dates.
The "Interest Remittance Amount" for any distribution date is
that portion of the Available Funds for that distribution date allocable to
interest.
The "Interest Remittance Formula Amount" as of any
distribution date is an amount equal to (1) the product of (x) 1/12 of the
weighted average coupon rate of the mortgage loan pool as of the beginning of
the related due period and (y) the aggregate principal balances of the mortgage
loans as
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of the beginning of the related due period minus (2) the aggregate amount of
Relief Act shortfalls and prepayment interest shortfalls for the related
prepayment period.
The "Monthly Interest Distributable Amount" for any
distribution date and class of offered certificates is the sum of (1) the Unpaid
Interest Shortfall Amount for that class and distribution date and (2) the
Current Interest for that class and distribution date. In the event of a
shortfall in the full amount necessary to pay both the Unpaid Interest Shortfall
Amount and the Current Interest for a class, distributions will first be applied
to the Unpaid Interest Shortfall Amount and then to the Current Interest.
The "prepayment period" for any distribution date is the
period commencing on the day after the determination date in the month preceding
the month in which such distribution date falls (or, in the case of the first
distribution date, from the cut-off date) and ending on the determination date
of the calendar month in which such distribution date falls.
The "Principal Remittance Amount" means with respect to any
distribution date, the sum of (i) all scheduled payments of principal collected
or advanced on the mortgage loans by the servicer that were due during the
related due period, (ii) the principal portion of all partial and full principal
prepayments of the mortgage loans applied by the servicer during such prepayment
period, (iii) the principal portion of all related net liquidation proceeds and
insurance proceeds received during such prepayment period, (iv) that portion of
the purchase price, representing principal of any repurchased mortgage loan,
deposited to the collection account during such prepayment period, (v) the
principal portion of any related substitution adjustments deposited in the
collection account during such prepayment period, (vi) in the case of the
distribution date immediately following the end of the funding period, any
amount remaining in the pre-funding account and not used by the trustee to
purchase subsequent mortgage loans and (vii) on the distribution date on which
the trust is to be terminated that portion of the termination price relating to
principal.
A "Trigger Event" is in effect with respect to any
Distribution Date if the three-month rolling average of mortgage loans
delinquent 60 days or more exceeds 12% of the aggregate principal balance at the
end of the due period.
The "Unpaid Interest Shortfall Amount" means (i) for each
class of offered certificates and the first distribution date, zero, and (ii)
with respect to each class of offered certificates and any distribution date
after the first distribution date, the amount, if any, by which (a) the Monthly
Interest Distributable Amount for such class for the immediately preceding
distribution date exceeds (b) the aggregate amount distributed on such class in
respect of interest on such preceding distribution date, plus interest on that
amount to the extent permitted by law, at the pass-through rate for such class
for the related accrual period.
RESTRICTIONS ON TRANSFER OF THE MEZZANINE CERTIFICATES
Because the mezzanine certificates are subordinate, any ERISA
plan (as defined herein) purchasing such mezzanine certificates will be deemed
to have represented that certain conditions have been satisfied in connection
with the purchase. See "ERISA Considerations" herein.
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CERTAIN ADMINISTRATIVE FEES
With respect to each distribution date, the certificate
administrator will be entitled to a fee equal to 1/12 of 0.0125% per annum times
the sum of the aggregate principal balance of the mortgage loans and the
pre-funded amount as of such date. With respect to each distribution date, the
servicer is entitled to retain out of collections its servicing fee, which is
equal to 1/12 of 0.50% per annum times the aggregate principal balance of the
mortgage loans as of such date. The certificate administrator will be
responsible for paying the fee due to the trustee. For any distribution date,
the mortgage insurance premiums, the servicing fee and the certificate
administrator fee with respect to the trust is the "Administrative Fee".
CALCULATION OF ONE-MONTH LIBOR
The certificate administrator will determine the London
interbank offered rate for one-month United States dollar deposits for each
accrual period for the certificates on the second London business day preceding
such accrual period (each such date, an "interest determination date") on the
basis of the offered rates of the reference banks for one-month United States
dollar deposits, as such rates appear on the Telerate Page 3750, as of 11:00
a.m. (London time) on such Interest determination date. If such rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the rates at which deposits in United States dollars are offered by the
reference banks at approximately 11:00 a.m., London time, on that day to prime
banks in the London interbank market for a period equal to the relevant accrual
period (commencing on the first day of such accrual period). The certificate
administrator will request the principal London office of each of the reference
banks to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided as requested, the rate for that day
will be the arithmetic mean of the rates quoted by major banks in New York City,
selected by the certificate administrator , at approximately 11:00 a.m., New
York City time, on that day for loans in United States dollars to leading
European banks for a period equal to the relevant accrual period (commencing on
the first day of such accrual period).
"Telerate Page 3750" means the display page currently so
designated on the Dow Jones Telerate Service (or such other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices) and "reference banks" means leading banks selected by the certificate
administrator and engaged in transactions in European deposits in the
international Eurocurrency market.
The establishment of one-month LIBOR on each Interest
determination date by the certificate administrator and the certificate
administrator's calculation of the rate of interest applicable to the
certificates for the related accrual period shall (in the absence of manifest
error) be final and binding.
ADVANCES
Prior to each distribution date, the servicer is required
under the pooling and servicing agreement to make "advances" (out of its own
funds, or funds held in the collection account for future payment or withdrawal)
with respect to any payments of principal and interest (net of the servicing
fee) which were due on the mortgage loans on the immediately preceding due date
and which are delinquent on the business day next preceding the related
determination date.
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Such advances are required to be made only to the extent they
are deemed by the servicer to be recoverable from related late collections,
insurance proceeds, or liquidation proceeds. The purpose of making such advances
is to maintain a regular cash flow to the certificateholders, rather than to
guarantee or insure against losses. Any failure by the servicer to make an
advance as required under the pooling and servicing agreement will constitute an
event of default thereunder, in which case the successor servicer will be
obligated to make any such advance, in accordance with the terms of the pooling
and servicing agreement.
Advances made from funds held in the collection account may be
made by the servicer from subsequent collections of principal and interest
received on other mortgage loans and deposited into the collection account.
Advances made from the collection account are not limited to subsequent
collections of principal and interest received on the delinquent mortgage loan
with respect to which an advance is made. If on the fourth business day prior to
any distribution date funds in the collection account are less than the amount
required to be paid to the certificateholders on such distribution date, then
the servicer will deposit its own funds into the collection account in the
amount of the lesser of (i) any unreimbursed advances previously made by the
servicer with funds held in the collection account or (ii) the shortfall in the
collection account; but in no event will the servicer deposit into the
collection account an amount that is less than any shortfall in the collection
account attributable to delinquent payments on mortgage loans which the servicer
deems to be recoverable and which has not been covered by an advance from the
servicer's own corporate funds.
All advances will be reimbursable to the servicer on a first
priority basis from late collections, insurance proceeds or liquidation proceeds
from the mortgage loan as to which such unreimbursed advance was made. In
addition, any advances previously made which are deemed by the servicer to be
nonrecoverable from related late collections, insurance proceeds and liquidation
proceeds may be reimbursed to the servicer out of any funds in the collection
account prior to payments on the certificates.
BOOK-ENTRY CERTIFICATES
The offered certificates will be book-entry certificates.
Persons acquiring beneficial ownership interests in the certificates may elect
to hold their certificates through the Depository Trust Company ("DTC") in the
United States, or Clearstream Banking, societe anonyme or Euroclear (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems. Each class of book-entry certificates
will be issued in one or more certificates which equal the aggregate principal
amount of the certificates of each class 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, N.A., will
act as depositary for Clearstream and The Chase Manhattan Bank will act as
depositary for Euroclear. Investors may hold such beneficial interests in the
book-entry certificates in minimum denominations representing Certificate
Balances of $25,000 and in multiples of $1,000 in excess thereof. Except as
described below, no beneficial owner acquiring a book-entry certificate will be
entitled to receive a physical certificate representing such certificate. Unless
and until definitive certificates are issued, it is anticipated that the
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only "certificateholders" of the 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 the participating organizations that
utilize the services of DTC, including securities brokers and dealers, banks and
trust companies and clearing corporations and certain other organizations and
DTC.
A certificate owner's ownership of a book-entry certificate
will be recorded on the records of the brokerage firm, bank, thrift institution
or other financial intermediary 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
interests will in turn be recorded on the records of DTC, if the beneficial
owner's financial intermediary is not a DTC participant, and on the records of
Clearstream or Euroclear, as appropriate). Certificate owners will receive all
payments of principal of, and interest on, the certificates from the trustee
through DTC and DTC participants. While the certificates are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the certificates and is required to receive and transmit payments of
principal of, and interest on, the certificates. Participants and indirect
participants which have indirect access to the DTC system, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly, with whom
certificate owners have accounts with respect to certificates are similarly
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective certificate owners. Accordingly, although certificate
owners will not possess certificates, the rules provide a mechanism by which
certificate owners will receive payments and will be able to transfer their
interest.
Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the certificates, except
under the limited circumstances described below. Unless and until definitive
certificates are issued, certificate owners who are not participants may
transfer ownership of certificates only through participants and indirect
participants by instructing such participants and indirect participants to
transfer certificates, by book-entry transfer, through DTC for the account of
the purchasers of such certificates, which account is maintained with their
respective participants. Under the rules and in accordance with DTC's normal
procedures, transfers of ownership of 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 certificate owners.
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 relating to tax documentation
procedures relating to the certificates, see "Material Federal Income Tax
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Consequences--Foreign Investors" in the prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between participants will occur in accordance with
DTC Rules. Transfers between Clearstream participants and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Clearstream participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant depository; however, such
cross-market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
relevant depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund 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 nominee for another person.
In general, beneficial ownership of book-entry certificates will be subject to
the rules, regulation and procedures governing DTC and DTC participants as in
effect from time to time.
Clearstream is incorporated under the laws of Luxembourg as a
professional depository. Clearstream holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Clearstream participants through electronic book-entry
changes in accounts of Clearstream participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Clearstream participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Clearstream is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies,
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including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York, under contract with
Euroclear Clearance Systems S.C., a Belgian cooperative corporation. All
operations are conducted by Morgan, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear operator,
not the Belgian cooperative. The Belgian cooperative establishes policy for
Euroclear on behalf of Euroclear participants. Euroclear participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve System. As
such, it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the Belgian
Banking commission.
Securities clearance accounts and cash accounts with Morgan
are governed by the terms and conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law.
The terms and conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear operator acts under the
terms and conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Payments on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such 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, beneficiary 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., as nominee
of DTC. Payments 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 depository. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Material Federal Income Tax Consequences--Foreign
Investors" and "--Backup Withholding" in the prospectus. Because DTC can only
act on behalf of financial intermediaries, the ability of a beneficial owner to
pledge book-entry certificates to persons or entities that do not participate in
the depository system, or otherwise take actions in respect of such book-entry
certificate, may be limited due to the lack of physical certificates for such
book-entry certificates. In addition,
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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 issuer will be provided to
Cede & Co., as nominee of DTC, and may be made available by Cede & Co., to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting DTC or the relevant depository, and to the
financial intermediaries 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 permitted to be taken by the
holders of the book-entry certificates under the pooling and servicing agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry certificates are credited, to the extent that such
actions are taken on behalf of financial intermediaries whose holdings include
such book-entry certificates. Clearstream or the Euroclear operator, as the case
may be, will take any other action permitted to be taken by a certificateholder
under the pooling and servicing 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 depository to effect such
actions on its behalf through DTC. DTC may take actions, at the direction of the
related participants, with respect to some certificates which conflict with
actions taken with respect to other 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 issuer advises the trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the book-entry certificates and the issuer or the
trustee is unable to locate a qualified successor or (b) the issuer, at its sole
option, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the certificate administrator, on behalf of the
trustee, will be required to notify all beneficial owners of the occurrence of
such event and the availability through DTC of the definitive certificates. Upon
surrender by DTC of the global note or notes representing the book-entry
certificates and instructions for re-registration, the certificate
administrator, as registrar, will issue definitive certificates, and thereafter
the trustee and the certificate administrator will recognize the holders of such
definitive certificates as certificateholders under the pooling and servicing
agreement.
Although DTC, Clearstream and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the transferor, the depositor, the servicer, the
certificate administrator or the trustee will have any responsibility for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the book-entry certificates held by Cede & Co., as
nominee of DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
S-56
<PAGE>
For additional information regarding DTC and the book-entry
certificates, see Annex I hereto and "The Agreements--Form of the Securities" in
the prospectus.
ASSIGNMENT OF MORTGAGE LOANS
The seller will deliver to the certificate administrator the
mortgage files, which consist of the mortgage notes endorsed by the seller, or
the last holder of record, without recourse to the trustee, the related
mortgages or deeds of trust, all intervening mortgage assignments, if any, and
certain other documents relating to the mortgage loans. The seller will be
required to cause to be prepared and recorded, at its expense and within the
time period specified in the purchase agreement, assignments of the mortgages
from the seller, or the last holder of record, to the trustee.
The certificate administrator will review the mortgage files
delivered to it within 45 days after delivery, and if any document required to
be included in any mortgage file is found to be missing or to be defective in
any material respect and such defect is not cured within 45 days following
notification thereof to the seller, the certificate administrator will require
either that the related mortgage loan be removed from the mortgage pool or that
a mortgage loan conforming to the requirements of the pooling and servicing
agreement be substituted for the related mortgage loan within 90 days.
In connection with the transfer of the mortgage loans pursuant
to the purchase agreement, the seller will make certain representations and
warranties as to the accuracy in all material respects of the information set
forth on a schedule identifying and describing each mortgage loan. In addition,
the seller will make certain other representations and warranties regarding the
mortgage loans, including, for instance, that each mortgage loan, at its
origination, complied in all material respects with applicable state and federal
laws, that each mortgage is a valid first priority lien, that, as of the
applicable cut-off date, no mortgage loan included in the mortgage pool as of
the closing date was more than 89 days past due, that each mortgaged property
consists of a one- to four-family residential property or unit in a condominium
or planned unit development, that the seller had good title to each mortgage
loan prior to such transfer and that the originator was authorized to originate
each mortgage loan. The certificate administrator will be entitled on behalf of
the trustee to enforce remedies for breaches of these representations and
warranties.
If with respect to any mortgage loan (1) a defect in any
document constituting a part of the related mortgage file remains uncured within
the specified period and materially and adversely affects the value of the
mortgage loan or materially and adversely affects the interest of the trustee,
or the certificateholders in that mortgage loan or (2) a breach of any
representation or warranty made by the seller relating to the mortgage loan
occurs and such breach materially and adversely affects the value of the
mortgage loan or materially and adversely affects the interests of the trustee
or the certificateholders in that mortgage loan, then the certificate
administrator will enforce on behalf of the trustee the remedies for such
defects or breaches against the seller by requiring the seller to purchase the
defective mortgage loan from the trust at a price of par plus accrued interest
at the mortgage rate (net of the applicable servicing fee rate). The seller will
also have the option, but not the obligation, to substitute for such defective
mortgage loan a qualified replacement mortgage loan, but only if such
substitution is made within two years after the closing date.
S-57
<PAGE>
The obligation of the seller to cure, purchase or substitute
any defective mortgage loan as described above will constitute the sole remedy
available to certificateholders or the trustee for a defective mortgage loan.
THE PAYING AGENT
The paying agent shall initially be the trustee. The paying
agent shall have the revocable power to withdraw funds from the payment account
for the purpose of making payments to the certificateholders.
OPTIONAL TERMINATION
The mortgage loans may be purchased by the servicer on any
distribution date on or after the distribution date on which the aggregate
principal balance of the mortgage loans is equal to or less than 10% of the sum
of the principal balance of the initial mortgage loans as of their cut-off dates
and the original pre-funded amount. This will result in a redemption of the
certificates. The purchase price for the mortgage loans will be an amount
sufficient to pay 100% of the aggregate outstanding certificate principal
balance of each class of certificates and accrued and unpaid interest thereon at
the related pass-through rate through the date on which the trust is terminated
together with all amounts due and owing to the servicer, the certificate
administrator and the trustee.
MANDATORY PREPAYMENTS ON THE CERTIFICATES
Each class of certificates will be partially prepaid on the
distribution date immediately following the end of the funding period to the
extent that any amount remains on deposit in the pre-funding account on such
distribution date. Although no assurance can be given, it is anticipated that
the principal amount of subsequent mortgage loans sold to the trust and included
in the trust estate will require the application of substantially all of the
original pre-funded amount and that there should be no material amount of
principal prepaid to the certificates from the pre-funding account. However, it
is unlikely that the seller will be able to deliver subsequent mortgage loans
with an aggregate principal balance identical to the original pre-funded amount
for each class of certificates.
INTEREST COVERAGE ACCOUNT
On the closing date, a portion of the sales proceeds of the
certificates will be deposited in an interest coverage account for application
to cover shortfalls in interest attributable to the pre-funding feature during
the funding period. This shortfall will exist during the funding period because
the aggregate certificate principal balance of the certificates, and interest
accrued thereon, during the funding period will be greater than the aggregate
principal balance of the mortgage loans, and interest accrued thereon, during
such period. On the first business day following the termination of the funding
period, funds on deposit in the interest coverage account will be deposited in
the payment account.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the certificates will depend on the
prices paid by the holders of such certificates, the pass-through rate and the
rate and timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
S-58
<PAGE>
mortgage loans and the allocation thereof. Such yield may be adversely affected
by a higher or lower than anticipated rate of principal payments on the mortgage
loans and the amount, if any, distributed from the pre-funding account at the
end of the funding period. The rate of principal payments on such mortgage loans
will in turn be affected by the amortization schedules of the mortgage loans,
the rate and timing of principal prepayments thereon by the mortgagors and
liquidations of defaulted mortgage loans, and purchases of mortgage loans due to
certain breaches of representations and warranties and optional repurchases of
delinquent loans by the servicer. The timing of changes in the rate of
prepayments, liquidations and repurchases of the mortgage loans may, and the
timing of losses will, significantly affect the yield to an investor, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. Since the rate and timing of principal payments on
the mortgage loans will depend on future events and on a variety of factors (as
described more fully herein and in the prospectus under "Yield Considerations"),
no assurance can be given as to such rate or the timing of principal payments on
the certificates.
The mortgage loans generally may be prepaid in full or in part
at any time; however, prepayment may subject the mortgagor to a prepayment
charge. None of the initial mortgage loans are secured by junior liens on the
related mortgage properties. Generally, mortgage loans secured by junior liens
are not viewed by mortgagors as permanent financing. Accordingly, such mortgage
loans may experience a higher rate of prepayment than the first lien mortgage
loans. All of the mortgage loans are assumable under certain circumstances if,
in the sole judgment of the servicer, the prospective purchaser of a mortgaged
property is creditworthy and the security for such mortgage loan is not impaired
by the assumption. All of the mortgage loans contain a customary "due on sale"
provision. The servicer shall enforce any due-on-sale clause contained in any
mortgage note or mortgage, to the extent permitted under applicable law and
governmental regulation. However, if the servicer determines that it is
reasonably likely that any mortgagor will bring, or if any mortgagor does bring,
legal action to declare invalid or otherwise avoid enforcement of a due-on-sale
clause contained in any mortgage note or mortgage, the servicer shall not be
required to enforce the due-on-sale clause or to contest such action. The extent
to which the mortgage loans are assumed by purchasers of the mortgaged
properties rather than prepaid by the related mortgagors in connection with the
sales of the mortgaged properties will affect the weighted average life of the
certificates and may result in a prepayment experience on the mortgage loans
that differs from that on other conventional mortgage loans. Prepayments,
liquidations and purchases of the mortgage loans will result in payments to
holders of the certificates of principal amounts which would otherwise be
distributed over the remaining terms of the mortgage loans. Factors affecting
prepayment (including defaults and liquidations) of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions.
The rate of defaults on the mortgage loans will also affect
the rate and timing of principal payments on the mortgage loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in their
early years. Increases in the monthly payments of the adjustable rate mortgage
loans to an amount in excess of the monthly payment required at the time of
origination may result in a default rate higher than that on level payment
mortgage loans, particularly since the mortgagor under each adjustable rate
mortgage loan was qualified on the basis of the mortgage rate in effect at
origination. The repayment of such adjustable rate mortgage loans will be
dependent on the ability of the mortgagor to
S-59
<PAGE>
make larger monthly payments as the mortgage rate increases. In addition, the
rate of default on mortgage loans which are refinance or limited documentation
mortgage loans, and on mortgage loans with high loan-to-value ratios, may be
higher than for other types of mortgage loans. Furthermore, the rate and timing
of prepayments, defaults and liquidations on the mortgage loans will be affected
by the general economic condition of the region of the country in which the
related mortgaged properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
To the extent that the original pre-funded amount has not been
fully applied to the purchase of subsequent mortgage loans by the issuer by the
end of the funding period, the holders of each class of certificates will
receive on the first distribution date following the termination of the funding
period a prepayment of principal in an amount equal to the lesser of (i) the
amount remaining in the pre-funding account and (ii) the outstanding Certificate
Balance of such class of certificates. Although no assurance can be given, it is
anticipated by the depositor that the principal amount of subsequent mortgage
loans sold to the issuer for inclusion in the trust estate will require the
application of substantially all amounts on deposit in the pre-funding account
and that there will be no material amount of principal prepaid to such
certificateholders. However, it is unlikely that the seller will be able to
deliver subsequent mortgage loans with an aggregate principal balance identical
to the original pre-funded amount.
In addition, the yield to maturity of the certificates will
depend on, among other things, the price paid by the holders of the certificates
and the then applicable pass-through rate. The extent to which the yield to
maturity of a certificate is sensitive to prepayments will depend, in part, upon
the degree to which it is purchased at a discount or premium. In general, if a
certificate is purchased at a premium and principal payments thereon occur at a
rate faster than anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a certificate is purchased at a discount and principal payments
thereon occur at a rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase.
Furthermore, the yield to maturity on the certificates may be
affected by the limitation posed by the available funds cap rate.
Weighted average life refers to the average amount of time
that will elapse from the date of issuance of a security to the date of payment
to the investor of each dollar distributed in reduction of principal of such
security (assuming no losses). The weighted average life of the certificates
will be influenced by, among other things, the rate at which the principal of
the mortgage loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations. Because the amortization schedule of each
adjustable rate mortgage loan will be recalculated semi-annually or annually
after the initial adjustment date for such adjustable rate mortgage loan, any
partial prepayments thereof will not reduce the term to maturity of such
adjustable rate mortgage loan. In addition, an increase in the mortgage rate on
an adjustable rate mortgage loan will result in a larger monthly payment and in
a larger percentage of such monthly payment being allocated to interest and a
smaller percentage being allocated to principal, and conversely, a decrease in
the mortgage rate on the adjustable rate mortgage loan will result in a lower
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<PAGE>
monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.
Prepayments on mortgage loans are commonly measured relative
to a prepayment standard or model. The model used in this prospectus supplement,
the Constant Prepayment Rate model ("CPR"), assumes that the outstanding
principal balance of a pool of mortgage loans prepays each month at a specified
annual rate or CPR. In generating monthly cash flows, this annual rate is
converted to an equivalent monthly rate. With respect to the adjustable rate
mortgage loans, the prepayment model assumes a constant CPR of 30% (such model,
a "prepayment assumption"). With respect to the fixed rate mortgage loans, the
prepayment model assumes a constant CPR of 2.4% in the first month of the life
of the fixed rate mortgage loans and an additional 2.4% per annum in each month
thereafter until the tenth month; beginning in the tenth month and in each month
thereafter, the prepayment model assumes a CPR of 24% (such model, also a
"prepayment assumption"). The levels of CPR used above in defining the
prepayment assumptions represent 100% of the related prepayment assumption. To
assume a CPR percentage in either prepayment model is to assume that the stated
percentage of the outstanding principal balance of the pool would be prepaid
over the course of a year. No representation is made that the mortgage loans
will prepay at the percentages of CPR specified in either prepayment model.
The tables set forth below have been prepared on the basis of
certain assumptions as described below regarding the weighted average
characteristics of the mortgage loans that are expected to be included in the
trust estate as described under "Description of the Mortgage Pool" herein and
the performance thereof. The tables assume, among other things, that: (i) the
mortgage pool consists of mortgage loans with the following characteristics:
S-61
<PAGE>
ARM Loans
<TABLE>
<CAPTION>
Original Remaining Months to
Current Term to Term to Next Rate
Initial or Principal Mortgage Maturity Maturity (in Adjustment Initial
Subsequent Index Balance ($) Rate (%) (in Months) months) Gross Margin Date Periodic Cap
---------- ----- ----------- -------- ----------- ------- ------------ ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 6 month LIBOR 63,454,499.66 10.0335 360 358 5.5836% 22 3.0000%
Initial 6 month LIBOR 8,223,371.05 10.0670 360 358 5.6127% 34 3.0000%
Initial 1 year CMT 113,267.08 8.2400 360 344 3.7500% 20 3.0000%
Initial 1 year CMT 312,704.02 7.6250 360 345 4.2500% 45 3.0000%
Subsequent 6 month LIBOR 49,895,071.61 10.0335 360 360 5.5836% 24 3.0000%
Subsequent 6 month LIBOR 6,466,140.14 10.0670 360 360 5.6127% 36 3.0000%
Subsequent 1 year CMT 89,063.33 8.2400 360 360 3.7500% 36 3.0000%
Subsequent 1 year CMT 245,883.11 7.6250 360 360 4.2500% 60 3.0000%
Ongoing Maximum
Initial or Periodic Mortgage Minimum
Subsequent Index Rate Cap Rate (%) Mortgage Rate(%)
---------- ----- -------- -------- ----------------
Initial 6 month LIBOR 1.0000% 17.0306% 10.0332%
Initial 6 month LIBOR 1.0000% 17.0670% 10.0670%
Initial 1 year CMT 2.0000% 14.2400% 8.2400%
Initial 1 year CMT 3.0000% 13.6250% 7.6250%
Subsequent 6 month LIBOR 1.0000% 17.0306% 10.0332%
Subsequent 6 month LIBOR 1.0000% 17.0670% 10.0670%
Subsequent 1 year CMT 2.0000% 14.2400% 8.2400%
Subsequent 1 year CMT 3.0000% 13.6250% 7.6250%
</TABLE>
S-62
<PAGE>
Fixed-Rate Loans
<TABLE>
<CAPTION>
Original Remaining
Principal Balance Current Mortgage Amortizing Term Amortizing Term Remaining Balloon
Initial or Subsequent ($) Rate (months) (months) Term (months)
- --------------------- ----------------- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Initial 217,097.14 9.1478% 120 118 --
Initial 5,884,056.32 9.7641% 180 178 --
Initial 978,056.62 10.1837% 240 237 --
Initial 42,962.44 9.1250% 300 299 --
Initial 14,559,920.48 10.1646% 360 357 --
Initial 34,498,971.38 10.0567% 360 357 177
Subsequent 173,963.99 9.1478% 120 120 --
Subsequent 4,715,004.17 9.7641% 180 180 --
Subsequent 783,735.03 10.1837% 240 240 --
Subsequent 34,426.60 9.1250% 300 300 --
Subsequent 11,667,136.07 10.1646% 360 360 --
Subsequent 27,644,669.76 10.0567% 360 360 180
</TABLE>
S-63
<PAGE>
(ii) one-month LIBOR, Six-Month LIBOR and One-Year CMT remain
constant at 6.09625%, 6.41125% and 6.200%, respectively; (iii) payments on the
certificates are received, in cash, on the 25th day of each month, commencing in
April 2000; (iv) there are no delinquencies or losses on the mortgage loans, and
scheduled payments on the mortgage loans are timely received on the first day of
each month commencing in April 2000 (July with respect to the subsequent
mortgage loans); (v) there are no repurchases of the mortgage loans; (vi) the
scheduled monthly payment for each mortgage loan is calculated based on its
principal balance, mortgage rate and remaining amortization term such that such
mortgage loan will amortize in amounts sufficient to repay the remaining
principal balance of such mortgage loan by its remaining amortization term;
(vii) the indices remain constant at the rates listed above and the mortgage
rate on each adjustable rate mortgage loan is adjusted on the next adjustment
date (and on subsequent adjustment dates, as necessary) to equal the related
index plus the applicable gross margin, subject to the maximum mortgage rate and
the related periodic rate cap listed above; (viii) with respect to each mortgage
loan (other than the fixed rate mortgage loans), the monthly payment on the
mortgage loan is adjusted on the due date immediately following the next related
adjustment date (and on subsequent adjustment dates, as necessary) to equal a
fully amortizing payment as described in clause (vi) above; (ix) payments on the
mortgage loans earn no reinvestment return; (x) the mortgage insurance premium
is as set forth in the mortgage insurance agreements, the certificate
administrator fee rate is 0.0125% per annum, and the servicing fee rate is 0.50%
per annum; (xi) there are no additional ongoing trust estate expenses payable
out of the trust estate; (xii) the mortgage loans experience no prepayment
charges; (xiii) no miscellaneous servicing fees are passed through to the
certificateholders; and (xiv) the subsequent mortgage loans are acquired on June
25, 2000 with the characteristics set forth in the previous tables, with their
first scheduled payment due on July 1, 2000, resulting in no mandatory
prepayment of the certificates on the June 25, 2000 distribution date; (xv) the
certificates will be purchased on March 31, 2000; (xvi) prepayments on the
mortgage loans represent prepayments in full of individual mortgage loans and
are received on the last day of each month with 30 days' interest thereon
beginning in March (June with respect to the subsequent mortgage loans)
(collectively, the "Modeling Assumptions").
The actual characteristics and performance of the mortgage
loans will differ from the assumptions used in constructing the table set forth
below, which is hypothetical in nature and is provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the mortgage loans will prepay
at a constant level of CPR until maturity or that all of the mortgage loans will
prepay at the same level of CPR or prepayment assumption. Moreover, the diverse
remaining terms to stated maturity of the mortgage loans could produce slower or
faster principal payments than indicated in the table at the various constant
percentages of CPR specified, even if the weighted average remaining term to
stated maturity of the mortgage loans is as assumed. Any difference between such
assumptions and the actual characteristics and performance of the mortgage
loans, or actual prepayment experience, will affect the percentages of initial
Certificate Balance outstanding over time and the weighted average life of the
certificates. Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of the certificates, and sets forth
the percentages of the initial Certificate Balance of the certificates that
would be outstanding after each of the dates shown at various percentages of the
related prepayment assumption.
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<PAGE>
PERCENT OF INITIAL CLASS A-1 CERTIFICATE BALANCE OUTSTANDING (1)(5)
<TABLE>
<CAPTION>
<S> <C>
Prepayment Scenario(2)
--------------------------------------------------------------
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
March 25, 2001 99 88 82 76 70 64
March 25, 2002 99 74 63 53 44 35
March 25, 2003 98 63 49 37 27 18
March 25, 2004 97 53 38 28 19 13
March 25, 2005 96 45 30 20 13 8
March 25, 2006 95 38 24 14 8 5
March 25, 2007 94 33 19 10 6 3
March 25, 2008 92 28 15 8 4 1
March 25, 2009 91 24 12 6 2 1
March 25, 2010 89 20 9 4 1 0
March 25, 2011 88 17 7 3 1 0
March 25, 2012 86 14 6 2 0 0
March 25, 2013 83 12 4 1 0 0
March 25, 2014 81 10 3 1 0 0
March 25, 2015 65 7 2 0 0 0
March 25, 2016 53 4 1 0 0 0
March 25, 2017 51 4 0 0 0 0
March 25, 2018 49 3 0 0 0 0
March 25, 2019 47 2 0 0 0 0
March 25, 2020 45 2 0 0 0 0
March 25, 2021 42 1 0 0 0 0
March 25, 2022 39 1 0 0 0 0
March 25, 2023 36 1 0 0 0 0
March 25, 2024 33 0 0 0 0 0
March 25, 2025 29 0 0 0 0 0
March 25, 2026 24 0 0 0 0 0
March 25, 2027 19 0 0 0 0 0
March 25, 2028 13 0 0 0 0 0
March 25, 2029 7 0 0 0 0 0
March 25, 2030 0 0 0 0 0 0
May 25, 2030 0 0 0 0 0 0
Weighted Average Life in Years(3)(5) 18.94 5.98 4.18 3.15 2.48 2.01
Weighted Average Life in Years(3)(4) 18.87 5.72 3.89 2.90 2.27 1.84
</TABLE>
- ----------------------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i)
multiplying the amount of each distribution of principal on a certificate
by the number of years from the date of issuance of the certificate to the
related distribution date, (ii) adding the results, and (iii) dividing the
sum by the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount. See "Description
of the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
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<PAGE>
PERCENT OF INITIAL CLASS M-1 CERTIFICATE BALANCE OUTSTANDING (1)(5)
<TABLE>
<CAPTION>
<S> <C>
Prepayment Scenario(2)
--------------------------------------------------------------
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
March 25, 2001 100 100 100 100 100 100
March 25, 2002 100 100 100 100 100 100
March 25, 2003 100 100 100 100 100 100
March 25, 2004 100 100 82 59 41 28
March 25, 2005 100 96 65 43 27 17
March 25, 2006 100 82 51 31 18 5
March 25, 2007 100 70 40 22 11 0
March 25, 2008 100 60 32 16 0 0
March 25, 2009 100 51 25 10 0 0
March 25, 2010 100 43 20 1 0 0
March 25, 2011 100 37 15 0 0 0
March 25, 2012 100 31 11 0 0 0
March 25, 2013 100 26 3 0 0 0
March 25, 2014 100 22 0 0 0 0
March 25, 2015 100 15 0 0 0 0
March 25, 2016 100 4 0 0 0 0
March 25, 2017 100 0 0 0 0 0
March 25, 2018 100 0 0 0 0 0
March 25, 2019 100 0 0 0 0 0
March 25, 2020 95 0 0 0 0 0
March 25, 2021 90 0 0 0 0 0
March 25, 2022 84 0 0 0 0 0
March 25, 2023 77 0 0 0 0 0
March 25, 2024 70 0 0 0 0 0
March 25, 2025 61 0 0 0 0 0
March 25, 2026 52 0 0 0 0 0
March 25, 2027 41 0 0 0 0 0
March 25, 2028 29 0 0 0 0 0
March 25, 2029 15 0 0 0 0 0
September 25, 2029 0 0 0 0 0 0
Weighted Average Life in Years(3)(5) 25.64 9.86 6.97 5.25 4.35 3.88
Weighted Average Life in Years(3)(4) 25.53 9.70 6.57 4.95 4.11 3.69
</TABLE>
- ---------------------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i)
multiplying the amount of each distribution of principal on a certificate
by the number of years from the date of issuance of the certificate to the
related distribution date, (ii) adding the results, and (iii) dividing the
sum by the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount. See "Description
of the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
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<PAGE>
PERCENT OF INITIAL CLASS M-2 CERTIFICATE BALANCE OUTSTANDING (1)(5)
<TABLE>
<CAPTION>
<S> <C>
Prepayment Scenario(2)
--------------------------------------------------------------
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
March 25, 2001 100 100 100 100 100 100
March 25, 2002 100 100 100 100 100 100
March 25, 2003 100 100 100 100 100 100
March 25, 2004 100 100 82 59 41 28
March 25, 2005 100 96 65 43 27 14
March 25, 2006 100 82 51 31 18 0
March 25, 2007 100 70 40 22 0 0
March 25, 2008 100 60 32 12 0 0
March 25, 2009 100 51 25 0 0 0
March 25, 2010 100 43 20 0 0 0
March 25, 2011 100 37 10 0 0 0
March 25, 2012 100 31 0 0 0 0
March 25, 2013 100 26 0 0 0 0
March 25, 2014 100 22 0 0 0 0
March 25, 2015 100 7 0 0 0 0
March 25, 2016 100 0 0 0 0 0
March 25, 2017 100 0 0 0 0 0
March 25, 2018 100 0 0 0 0 0
March 25, 2019 100 0 0 0 0 0
March 25, 2020 95 0 0 0 0 0
March 25, 2021 90 0 0 0 0 0
March 25, 2022 84 0 0 0 0 0
March 25, 2023 77 0 0 0 0 0
March 25, 2024 70 0 0 0 0 0
March 25, 2025 61 0 0 0 0 0
March 25, 2026 52 0 0 0 0 0
March 25, 2027 41 0 0 0 0 0
March 25, 2028 29 0 0 0 0 0
March 25, 2029 9 0 0 0 0 0
June 25, 2029 0 0 0 0 0 0
Weighted Average Life in Years(3)(5) 25.60 9.77 6.77 5.10 4.22 3.74
Weighted Average Life in Years(3)(4) 25.53 9.70 6.57 4.94 4.09 3.63
</TABLE>
- ---------------------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i)
multiplying the amount of each distribution of principal on a certificate
by the number of years from the date of issuance of the certificate to the
related distribution date, (ii) adding the results, and (iii) dividing the
sum by the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount. See "Description
of the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
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PERCENT OF INITIAL CLASS M-3 CERTIFICATE BALANCE OUTSTANDING (1)(5)
<TABLE>
<CAPTION>
<S> <C>
Prepayment Scenario(2)
--------------------------------------------------------------
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
March 25, 2001 100 100 100 100 100 100
March 25, 2002 100 100 100 100 100 100
March 25, 2003 100 100 100 100 100 100
March 25, 2004 100 100 82 59 41 23
March 25, 2005 100 96 65 43 22 0
March 25, 2006 100 82 51 31 0 0
March 25, 2007 100 70 40 11 0 0
March 25, 2008 100 60 32 0 0 0
March 25, 2009 100 51 17 0 0 0
March 25, 2010 100 43 4 0 0 0
March 25, 2011 100 37 0 0 0 0
March 25, 2012 100 31 0 0 0 0
March 25, 2013 100 19 0 0 0 0
March 25, 2014 100 9 0 0 0 0
March 25, 2015 100 0 0 0 0 0
March 25, 2016 100 0 0 0 0 0
March 25, 2017 100 0 0 0 0 0
March 25, 2018 100 0 0 0 0 0
March 25, 2019 100 0 0 0 0 0
March 25, 2020 95 0 0 0 0 0
March 25, 2021 90 0 0 0 0 0
March 25, 2022 84 0 0 0 0 0
March 25, 2023 77 0 0 0 0 0
March 25, 2024 70 0 0 0 0 0
March 25, 2025 61 0 0 0 0 0
March 25, 2026 52 0 0 0 0 0
March 25, 2027 41 0 0 0 0 0
March 25, 2028 26 0 0 0 0 0
January 25, 2029 0 0 0 0 0 0
Weighted Average Life in Years(3)(5) 25.48 9.49 6.43 4.84 3.99 3.54
Weighted Average Life in Years(3)(4) 25.47 9.49 6.42 4.83 3.98 3.53
</TABLE>
- -------------------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i)
multiplying the amount of each distribution of principal on a certificate
by the number of years from the date of issuance of the certificate to the
related distribution date, (ii) adding the results, and (iii) dividing the
sum by the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount. See "Description
of the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
These tables have been prepared based on the assumptions
described in the second paragraph preceding these tables (including the
assumptions regarding the characteristics and
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performance of the mortgage loans which differ from the actual characteristics
and performance thereof) and should be read in conjunction therewith.
THE POOLING AND SERVICING AGREEMENT
The following summary describes certain terms of the pooling
and servicing agreement. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
pooling and servicing agreement.
SERVICING
NovaStar Mortgage, Inc., will act as servicer for the mortgage
loans pursuant to the Pooling and Servicing Agreement. For a description of the
servicer's operations, see "The Seller" herein. The servicer's servicing
portfolio currently includes only subprime residential mortgage loans.
FORECLOSURE AND DELINQUENCY EXPERIENCE WITH SUBPRIME MORTGAGE LOANS
The following table summarizes the delinquency and foreclosure
experience, respectively, as of the date indicated, of the subprime mortgage
loans serviced by the servicer. The information should not be considered as a
basis for assessing the likelihood, amount or severity of delinquencies or
foreclosures on the mortgage loans securing the certificates.
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DELINQUENCY AND FORECLOSURE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31, 1998 December 31, 1997
--------------------------- ---------------------------- ---------------------
Principal Principal Principal
Balance(1) Ratio Balance(1) Ratio Balance(1) Ratio
------------- ----- ------------- ----- ---------------------
Subprime Mortgage Loan Portfolio $ 894,572 $ 1,179,966 $ 559,732
Delinquency Percentage(2)
30-59 Days 22,927 2.56% 25,787 2.19% 6,668 1.19%
60-89 Days 10,666 1.19% 13,149 1.11% 4,573 0.82%
90+ Days 54,968 6.14% 39,481 3.35% 10,099 1.80%
--------------- ---- ----------- ---- --------- ----
Total $ 88,560 9.90% $ 78,417 6.65% $ 21,339 3.81%
=============== ==== =========== ==== ========= ====
Foreclosure Rate(3) $ 31,976 3.57% $ 26,542 2.25% $ 11,498 2.05%
REO $ 24,594 2.75% $ 14,352 1.22% $ 270 0.05%
Loss Rate(4) $ 17,615 1.97% $ 2,630 0.22% $ 95 0.02%
</TABLE>
- --------------------
(1) Numbers in thousands.
(2) The period of delinquency is based on the number of days that payments are
contractually past due.
(3) "Foreclosure Rate" is the dollar amount of the mortgage loans in the process
of foreclosure as a percentage of the total principal balance of the mortgage
loans outstanding as of the date indicated.
(4) "Loss Rate" is the dollar amount of losses as a percentage of the total
principal balance of the mortgage loans outstanding as of the date indicated.
Losses are actual losses incurred on liquidated properties and shortfall payoffs
for each respective period. Losses on liquidated properties are calculated as
net sales proceeds less book value (exclusive of loan purchase premium or
discount). Shortfall payoffs are calculated as the difference between principal
payoff amount and unpaid principal at the time of payoff.
There can be no assurance that the delinquency experience of
the mortgage loans securing the certificates will correspond to the delinquency
and foreclosure experience of the servicing portfolio of the servicer set forth
in the foregoing table. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the date presented, whereas the
aggregate delinquency and foreclosure experience on the mortgage loans securing
the certificates will depend on the results obtained over the life of the
certificates. The servicer's servicing portfolio may include subprime mortgage
loans underwritten pursuant to guidelines not necessarily representative of
those applicable to the mortgage loans securing the certificates. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the servicer. In addition,
adverse economic conditions may affect the timely payment by mortgagors of
scheduled payments of principal and interest on mortgage loans and, accordingly,
the actual rates of delinquencies and foreclosures with respect to mortgage
loans.
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SERVICING AND OTHER COMPENSATION
With respect to each mortgage loan and each distribution date,
the servicer will be entitled to a servicing fee equal to 1/12 of the servicing
fee rate times the principal balance of such mortgage loan as of such date. The
servicing fee for each mortgage loan is payable out of the interest payments on
such mortgage loan. The servicing fee rate in respect of each mortgage loan will
be equal to 0.50% per annum of the outstanding principal balance of such
mortgage loan. The servicer will not be entitled to any additional servicing
compensation (other than late payment charges) such as prepayment penalties and
any such amount, to the extent received by the servicer, will be included in
available funds.
With respect to any distribution date, any prepayment interest
shortfalls during the preceding calendar month will be covered by the servicer,
but only to the extent such prepayment interest shortfalls do not exceed an
amount equal to the total servicing fee payable to the servicer with respect to
such distribution date. These payments are referred to as "compensating
interest". The "prepayment interest shortfall" for any distribution date is
equal to the aggregate shortfall, if any, in collections of interest resulting
from mortgagor prepayments in full or in part on the mortgage loans during the
preceding calendar month. Such shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as such prepayments in part
are applied to reduce the outstanding principal balance of the related mortgage
loans as of the due date in the month of prepayment. No assurance can be given
that compensating interest will be sufficient to cover prepayment interest
shortfalls for any distribution date.
SALE OF CONVERTED MORTGAGE LOANS
The initial ARM loans include loans that are convertible,
subject to certain conditions, from an adjustable-rate loan to a fixed-rate loan
at the option of the mortgagor. Approximately 40.09% of the initial ARM mortgage
loans are, and up to 100% of the subsequent mortgage loans may be, convertible
mortgage loans. The convertible mortgage loans generally give the mortgagor the
option on an interest rate change date (which is generally the anniversary of
the loan), after an initial period (typically 2 or 3 years), to convert the loan
from a variable-rate to a fixed-rate loan, provided that the conditions set
forth below are met. Conversion fees are payable to and retained by the
servicer.
The following is a summary of the conversion features of the
initial convertible mortgage loans. The 2/28 Six-Month LIBOR mortgage loans
permit the mortgagor to convert on the first through sixth interest rate change
dates. The 3/27 Six-Month LIBOR mortgage loans permit the mortgagor to convert
on the first through fourth interest rate change dates. The Six-Month LIBOR
mortgage loans permit the mortgagor to convert on the fourth through tenth
interest rate change dates. The One-Year CMT mortgage loans permit the mortgagor
to convert on the second through fifth interest rate change dates.
In order to convert a convertible mortgage loan, the mortgagor
must satisfy all of the following conditions: (a) the mortgagor must give notice
of conversion to the servicer during the period in which conversion is allowed,
(b) the mortgagor must not be in default under the mortgage of the date of such
notice and must not have been delinquent by thirty days or more in making any
payment due during the twelve-month period immediately preceding such notice,
(c) the mortgagor must pay a conversion fee, (d) the mortgagor must supply the
information and pay any fees required for the servicer to complete an
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updated credit review, (e) the mortgagor must occupy the mortgaged property, (f)
if requested by the servicer, the mortgagor must provide and pay for an updated
appraisal of the mortgaged property acceptable to the servicer, (g) the
mortgagor must complete, execute and deliver any and all documents required by
the servicer to effect the conversion, (h) the value of the mortgaged property
must not have declined below a certain level since the date of the mortgage, and
(i) the mortgagor must meet the servicer's property value and credit
underwriting standards in effect at the time of conversion. Furthermore, with
respect to some of the convertible mortgage loans, the mortgagor may not be
allowed to convert the mortgage loan if the servicer, in its sole discretion,
believes the interest rate on the converted mortgage loan will be below market
interest rates then in effect for similar loans. If all of the foregoing
conditions are met, the servicer will convert a variable-rate convertible
mortgage loan into a fixed-rate converted mortgage loan not to exceed 600 basis
points over the FNMA rate for thirty-year fixed rate loans.
NovaStar Capital will enter into the converted loan purchase
agreement, dated as of March 1, 2000, among the servicer, the issuer, the
certificate administrator, the trustee, and the converted loan purchaser. Within
30 days after the conversion of a convertible mortgage loan from a variable-rate
to a fixed-rate mortgage loan, the issuer is obligated to sell and the converted
loan purchaser is obligated to purchase the converted mortgage, for a purchase
price equal to the then outstanding principal balance of the converted mortgage
loan, plus accrued and unpaid interest. The cash proceeds of such sale must be
deposited in the Collection Account and used on the next distribution date to
pay principal and interest due on the related class of certificates. Mandatory
sale of converted mortgage loans will have the same effect as prepayments of
mortgage loans, and will result in prepayments of principal of the related class
of certificates.
The obligations of the converted loan purchaser under the
converted loan purchase agreement will be guaranteed by NovaStar Financial. The
servicer, however, will not be obligated to purchase any converted mortgage
loan.
PURCHASE OF DELINQUENT MORTGAGE LOANS
The servicer has the right, but not the obligation, to
purchase mortgage loans from the issuer which are 90 days or more delinquent at
a price equal to 100% of the outstanding principal balance thereof, plus accrued
interest.
SERVICING DEFAULTS
The following events constitute servicing defaults:
(i) any failure by the servicer to make any deposit required
to be made under the pooling and servicing agreement, which continues unremedied
for a period of three business days after written notice has been given; or
(ii) failure on the part of the servicer duly to observe or
perform in any material respect any other covenants or agreements of the
servicer set forth in the pooling and servicing agreement, which failure, in
each case, materially and adversely affects the interests of certificateholders
or the breach of any representation or warranty of the Servicer in the pooling
and servicing agreement which materially
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and adversely affects the interests of the certificateholders, and which in
either case continues unremedied for a period of 30 days after the date on which
written notice has been given; or
(iii) the entry against the servicer of an order for the
appointment of a trustee in any insolvency or similar proceeding, and the
continuance of this order in effect for a period of 60 consecutive days; or
(iv) the servicer shall voluntarily go into liquidation,
consent to the appointment of a conservator or similar person in any insolvency
or similar proceeding relating to the servicer or all or substantially all of
its property; or the servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations.
So long as a servicing default shall not have been remedied
within the applicable grace period, with respect to a failure to make a required
advance, if such advance is not made by 5:00 P.M., New York time, on the
business day immediately following the date the servicer was required to make
such advance, the trustee shall terminate the servicer.
In the case of all other servicing defaults, the trustee
shall, at the direction of the majority holders, by notice then given in writing
to the servicer, terminate the servicer. Upon the termination of the servicer,
the certificate administrator, or another successor servicer, shall assume the
duties of a successor servicer.
Notice, as required above, may be given (i) to the servicer by
the trustee or the certificate administrator or (ii) to the servicer, the
trustee and the certificate administrator by the holders of certificates
evidencing at least 51% of the voting rights.
If the certificate administrator is unwilling or is legally
unable to act as successor servicer, the certificate administrator shall appoint
or petition a court of competent jurisdiction to appoint a successor servicer
satisfying the requirements set forth in the pooling and servicing agreement.
Pending appointment of a successor to the servicer, unless the certificate
administrator is prohibited by law from so acting, the certificate administrator
shall act as successor servicer.
The majority holders may waive any events permitting removal
of the servicer, although the majority holders may not waive a default in making
a required distribution on a certificate without the consent of the holder of
such certificate.
The "majority holders" are holders of certificates evidencing
at least 51% of the voting rights. Voting rights are allocated as follows:
o the class A-1 certificates and the mezzanine
certificates will have 96% of the voting rights
(allocated in proportion to the respective then
outstanding certificate balances)
o each of class AIO, class O, class P and class R will
have 1% of the voting rights
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o when none of the class A-1, class AIO, mezzanine, class
O or class P certificates are outstanding, 100% of the
voting rights will be allocated among holders of the
class R certificates.
LIMITATION ON SUITS
No certificateholder will have any right to institute any
proceedings with respect to the pooling and servicing agreement unless
o such certificateholder has previously given written
notice to the trustee of a continuing event of default;
o certificateholders representing not less than 51% of the
Certificate Balances of the certificates have made
written request to the trustee to institute proceedings
in respect of such event of default in its own name as
the trustee;
o such certificateholders have offered to the trustee
reasonable indemnity satisfactory to it against the
costs, expenses and liabilities to be incurred in
compliance with such request;
o for 60 days after its receipt of such notice of, request
and offer of indemnity the trustee have failed to
institute any such proceedings; and
o no direction inconsistent with such written request has
been given to the trustee during such 60-day period by
the certificateholders representing more than 50% of the
Certificate Balances of the certificates.
THE CERTIFICATE ADMINISTRATOR AND THE TRUSTEE
The certificate administrator or the trustee also may be
removed at any time by the Majority Certificateholders. The certificate
administrator or the trustee shall be removed if the certificate administrator
or the trustee ceases to be eligible to continue as such under the pooling and
servicing agreement or if the certificate administrator or the trustee becomes
incapable of acting, bankrupt, insolvent or if a receiver or public officer
takes charge of the certificate administrator or the trustee or its property.
Any resignation or removal of the certificate administrator or the trustee and
appointment of a successor certificate administrator or the trustee, as
applicable, will not become effective until acceptance of the appointment by the
successor certificate administrator or trustee. The trustee may terminate the
certificate administrator at any time for failure to perform its obligations
under the pooling and servicing agreement or related agreements provided it or
an acceptable successor certificate administrator assumes the obligations of the
certificate administrator.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain material federal income
tax consequences of the purchase, ownership and disposition of the certificates
is to be considered only in connection with "Material Federal Income Tax
Consequences" in the accompanying prospectus. The discussion in this
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prospectus supplement and in the accompanying 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 accompanying prospectus does not purport
to deal with all federal tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
certificates.
An election will be made to treat the trust other than the
supplemental interest account as one or more REMICs for federal income tax
purposes. Dewey Ballantine, LLP, special tax counsel, will deliver its opinion
that, assuming compliance with the Pooling and Servicing Agreement, the trust
other than the supplemental interest account will be treated as one or more
REMICs for federal income tax purposes. The class R certificates will be
designated as the sole "residual interest" in the REMIC. The class R
certificates are '"REMIC Residual Certificates" for purposes of the Prospectus.
The owners of the offered certificates that include the rights
to receive Supplemental Interest Amounts will be treated for tax purposes as
owning two separate investments:
o the offered certificates without the right to receive
Supplemental Interest Amounts ("REMIC Regular
Interests") and
o the right to receive the Supplemental Interest Amounts.
The owners of such 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 first
investment will be the issue price of the offered certificates for calculating
accruals of original issue discount ("OID"). The offered certificates, other
than the class AIO certificates, may be issued with OID. The class AIO
certificates will be issued with OID. See "Material Federal Income Tax
Consequences--Discount and Premium" in the prospectus. The prepayment assumption
for calculating original issue discount is 100% of the Prepayment Assumption.
See "Prepayment and Yield Considerations" herein.
The REMIC Regular Interests possess certain special tax
attributes by virtue of the REMIC provisions of the Code. See "Material Federal
Income Tax Consequences - REMIC Securities" in the prospectus.
If an offered certificate is sold or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale and such holder's adjusted basis in the certificate. See "Material
Federal Income Tax Consequences--REMIC Securities--Sale or Exchange of
Securities" in the prospectus.
For a discussion of backup withholding and taxation of foreign
investors in the certificates, see "Material Federal Income Tax
Consequences--Backup Withholding" and "--Foreign Investors--Grantor Trust, REMIC
Regular and Debt Securities" in the prospectus.
The REMIC Regular Interests generally will be treated as debt
instruments for federal income tax purposes. Beneficial owners, or registered
holders, in the case of definitive certificates, of the REMIC Regular Interests
will be required to report income on such certificates in accordance with the
accrual method of accounting.
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<PAGE>
SUPPLEMENTAL INTEREST AMOUNTS
While the proper federal income tax treatment of the right to
receive Supplemental Interest Amounts is not clear, tax counsel believes that
the right to receive Supplemental Interest Amounts should be treated as a
notional principal contract. The trust intends to treat the right to receive
Supplemental Interest Amounts 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 Supplemental Interest Amounts will be
periodic payments. Income with respect to periodic payments under a notional
principal contract for a taxable year should constitute ordinary income. The
purchase price allocated to the right to receive the Supplemental Interest
Amounts 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
Supplemental Interest Amounts is possible, including treatment of the right to
receive Supplemental Interest Amounts 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 Supplemental Interest Amounts would differ if
the right to receive Supplemental Interest Amounts 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 will
treat the right to receive Supplemental Interest Amounts as a notional principal
contract, the servicer will not attempt to satisfy the tax reporting
requirements that would apply under these alternative characterizations of the
right to receive Supplemental Interest Amounts. Investors that are 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 right to receive Supplemental Interest Amounts.
The right to receive the Supplemental Interest Amounts will
not constitute a REAL ESTATE ASSET within the meaning of section 856(c)(5)(B) if
held by a real estate investment trust; a QUALIFIED MORTGAGE within the meaning
of section 860G(a)(3) or a PERMITTED INVESTMENT within the meaning of section
860G(a)(5) if held by a REMIC; or assets described in section 7701(a)(19)(C)(xi)
if held by a thrift. Moreover, other special rules may apply to some categories
of investors, including dealers in securities and dealers in notional principal
contracts.
If the servicer, acting directly or through a permitted
designee, exercises its right to an optional termination, the Supplemental
Interest Amount might not be paid in full.
ERISA CONSIDERATIONS
Investors may wish to review the material set forth in this
section together with the information in the section "ERISA CONSIDERATIONS" in
the prospectus.
A fiduciary of any pension, profit sharing and other employee
benefit plans subject to ERISA, or any other person investing PLAN ASSETS of any
such plan, including an insurance company investing through its general or
separate accounts, may wish to review with its legal advisors whether the
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purchase or holding of class A-1 certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or section 4975 of the code.
The Department of Labor has issued to the underwriters
individual prohibited transaction exemptions which, as described under the
section "ERISA CONSIDERATIONS--CERTIFICATES" in the prospectus, provide
exemptive relief for certain transactions relating to investments in
pass-through certificates issued by trusts which hold obligations such as the
mortgage loans. The underwriter's exemptions will not apply until the expiration
of the pre-funding period. Accordingly, until such time, class A-1 certificates
may not be purchased with plan assets. Before purchasing a class A-1 certificate
following the expiration of the pre-funding period based on the underwriters'
exemptions, a fiduciary of a plan should itself confirm (1) that such
certificate constitutes a CERTIFICATE for purposes of the underwriters'
exemptions and (2) that the conditions and other requirements set forth in the
underwriters' exemptions would be satisfied.
Any person purchasing a class A-1 certificate and the right to
receive Supplemental Interest Amounts will have acquired, for purposes of ERISA
and for federal income tax purposes, the class A-1 certificate without the right
to receive the Supplemental Interest Amounts, together with the right to receive
the Supplemental Interest Amounts. The underwriters' exemptions do not apply to
the acquisition, holding or resale of the right to receive the Supplemental
Interest Amounts. Accordingly, the acquisition of the right to receive the
Supplemental Interest Amounts by a plan could result in a prohibited transaction
unless another administrative exemption to ERISA's prohibited transaction rules
is applicable. One or more alternative exemptions may be available with respect
to the initial purchase, holding and resale of the right to receive the
Supplemental Interest Amounts, including, but not limited to:
o Prohibited Transaction Class Exemption 91-38, regarding
investments by bank collective investment funds;
o Prohibited Transaction Class Exemption 90-1, regarding
investments by insurance company pooled separate
accounts;
o Prohibited Transaction Class Exemption 84-14, regarding
transactions negotiated by qualified professional asset
managers;
o Prohibited Transaction Class Exemption 96-23, regarding
transactions negotiated by in-house asset managers;
o Prohibited Transaction Class Exemption 75-1, Part II,
regarding principal transactions by broker-dealers; or
o Prohibited Transaction Class Exemption 95-60, regarding
investments by insurance company general accounts.
The mezzanine certificates and the class AIO certificates may
not be purchased with plan assets.
Any plan fiduciary considering the purchase of class A-1
certificates may wish to consult with its counsel as to the potential
applicability of ERISA, the Internal Revenue Code, the underwriters' exemptions
and, other administrative exemptions prior to making an investment in the Class
A-1
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Certificates and the right to receive Supplement Interest Amounts. Moreover,
each plan fiduciary may wish to determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the class
A certificates is appropriate for the plan, taking into account the overall
investment policy of the plan and the composition of the plan's investment
portfolio.
The sale of the class A-1 certificates to a plan is in no
respect a representation by us that this investment meets all relevant legal
requirements with respect to investments by plans generally or by any particular
plan or that this investment is appropriate for plans generally or any
particular plan.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an
underwriting agreement, dated March 31, 2000, between First Union Securities,
Inc. and the depositor, the underwriter has agreed to purchase and the depositor
has agreed to sell to the underwriter the underwritten certificates, consisting
of the class A-1, class M-1, class M-2 and class M-3 certificates. The class AIO
certificates are not being underwritten by the underwriter. It is expected that
delivery of the underwritten certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, Clearstream S.A. and the
Euroclear System, on or about March 31, 2000, against payment therefor in
immediately available funds.
The underwritten certificates will be purchased from the
depositor by the underwriter and will be offered by the underwriter from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The proceeds to the depositor from the sale
of the underwritten certificates are expected to be approximately $225,595,776,
before the deduction of expenses. The underwriter may effect such transactions
by selling the underwritten certificates to or through dealers, and such dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the underwriter. In connection with the sale of the
underwritten certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting compensation. The
underwriter and any dealers that participate with the underwriter in the
distribution of the underwritten certificates may be deemed to be underwriters
and any profit on the resale of the underwritten certificates purchased by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
The underwriting agreement provides that the depositor will
indemnify the underwriter, and that under limited circumstances, the underwriter
will indemnify the depositor, against certain civil liabilities under the
Securities Act of 1933, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the
offered certificates will develop or, if it does develop, that it will continue
or provide the certificateholders with sufficient liquidity of investment. The
primary source of information available to investors concerning the offered
certificates will be the monthly statements discussed in the prospectus under
"Description of the Certificates--Reports to Certificateholders," which will
include information as to the outstanding principal balance (or notional
balance) of the offered certificates. There can be no assurance that any
additional information regarding the offered certificates will be available
through any other source. In
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addition, the depositor is not aware of any source through which price
information about the offered certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the offered
certificates may adversely affect the liquidity of the offered certificates,
even if a secondary market for the offered certificates becomes available.
The underwriter and the depositor are affiliates of the
certificate administrator.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the certificates will be
passed upon for the seller, the servicer and the transferor by Stinson, Mag &
Fizzell, P.C., Kansas City, Missouri, and for the depositor and the underwriter
by Dewey Ballantine LLP, New York, New York.
RATINGS
It is a condition to the issuance of the offered certificates
that the class A-1 certificates be rated "Aaa" by Moody's Investors Service,
Inc. and "AAA" by Standard and Poor's Corporation, that the class AIO
certificates be rated "Aaa" by Moody's and "AAAr" by S&P, that the class M-1
certificates be rated "Aa2" by Moody's and "AA" by S&P, that the class M-2
certificates be rated "A2" by Moody's and "A" by S&P and that the class M-3
certificates be rated "Baa2" by Moody's and "BBB" by S&P.
S&P's ratings on mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of payments required under
the pooling and servicing agreement. S&P's ratings take into consideration the
credit quality of the mortgage pool, structural and legal aspects associated
with the certificates, and the extent to which the payment stream in the
mortgage pool is adequate to make payments required under the certificates.
S&P's rating on the certificates does not, however, constitute a statement
regarding frequency of prepayments on the mortgages. See "Certain Yield and
Prepayment Considerations" herein. The ratings issued by S&P on payment of
principal and interest do not cover the payment of any prepayment interest
shortfalls, any Relief Act shortfalls or the carry-forward amount.
The rating process of Moody's addresses the structural and
legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. The ratings assigned to the certificates do not
represent any assessment of the likelihood or rate of principal prepayments. The
ratings do not address the possibility that certificateholders might suffer a
lower than anticipated yield. The ratings do not address the likelihood that
certificateholders will be paid the carry-forward amount. The ratings also do
not address the ability of the converted loan purchaser to purchase the
converted mortgage loans.
The depositor has not requested a rating on the certificates
by any rating agency other than S&P and Moody's. However, there can be no
assurance as to whether any other rating agency will rate the certificates, or,
if it does, what rating would be assigned by any such other rating agency. A
rating on the certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the certificates by S&P and Moody's.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating
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should be evaluated independently of any other security rating. In the event
that the ratings initially assigned to the certificates are subsequently lowered
for any reason, no person or entity is obligated to provide any additional
support or credit enhancement with respect to the certificates.
LEGAL INVESTMENT
The class A-1, class AIO and the class M-1 certificates will
constitute "mortgage related securities" for the purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they are rated
in at least the second highest rating category by one or more nationally
recognized statistical rating agencies, and, as such, are legal investments for
certain entities to the extent provided in SMMEA. SMMEA provides, however, that
states could override its provision on legal investment and restrict or
condition investment in mortgage related securities by taking statutory action
on or prior to October 3, 1991.
We make no representations as to the proper characterization
of the certificates for legal investment or other purposes, or as to the ability
of particular investors to purchase the certificates under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the certificates. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent the certificates constitute a
legal investment or are subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
NovaStar Home Equity Loan Asset-Backed Certificates, Series 2000-1, will be
available only in book-entry form. Investors in the global certificates may hold
such global certificates through any of The Depository Trust Company,
Clearstream or Euroclear. The global certificates will be tradable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors global certificates
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 Eurocertificate practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding global
certificates through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations and prior collateralized mortgage
certificate issues.
Secondary cross-market trading between Clearstream or
Euroclear and DTC participants holding global certificates will be effected on a
delivery-against-payment basis through the respective depositories of
Clearstream and Euroclear (in such capacity) and as DTC participants.
Non-U.S. holders (as described below) of global certificates
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 certificates will be held in book-entry form by DTC
in the name of Cede & Co. as nominee of DTC. Investors' interests in the global
certificates 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 certificates through
DTC will follow the settlement practices applicable to other collateralized
mortgage certificate issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their global certificates through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional Eurocertificates, except that there will be no
temporary global security and no "lock-up" or restricted period. global
certificates will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
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SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading
between DTC participants will be settled using the procedures applicable to
prior collateralized mortgage certificate 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
Eurocertificates in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR
PURCHASER. When global certificates 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 certificates against
payment. Payment will include interest accrued on the global certificates from
and including the last coupon distribution date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year is assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the respective Depositary
of the DTC participant's account against delivery of the global certificates.
After settlement has been completed, the global certificates will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Clearstream participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the global
certificates 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 certificates 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 certificates would incur overdraft charges for
one day, assuming they cleared the overdraft when the global certificates were
credited to their accounts. However, interest on the global certificates would
accrue from the value date. Therefore, in many cases the investment income on
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the global certificates 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
certificates to the respective European depository for the benefit of
Clearstream participants or Euroclear participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
participants a cross-market transaction will settle no differently than a trade
between two DTC participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream participants
and Euroclear participants may employ their customary procedures for
transactions in which global certificates 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 certificates to
the DTC participant's account against payment. Payment will include interest
accrued on the global certificates from and including the last coupon payment to
and excluding the settlement date on the basis of the actual number of days in
such accrual period and a year is assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the 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.
Finally, day traders that use Clearstream or Euroclear and
that purchase global certificates 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 certificates in the U.S. from a DTC
participant no later than one day prior to settlement, which would give the
global certificates 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.
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CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
The IRS has issued new withholding regulations (the
"withholding regulations"), which make certain modifications to withholding,
backup withholding and information reporting rules. The withholding regulations
attempt to unify certification requirements and modify certain reliance
standards. The withholding regulations will generally be effective for payments
made after December 31, 2000, although taxpayers may begin compliance with the
withholding regulations immediately. This summary does not deal with all aspects
of U.S. federal income tax withholding that may be relevant to foreign holders
of the securities as well as the application of the withholding regulations.
Prospective investors are urged to consult their own tax advisors for specific
advice regarding their holding and disposing of the securities.
A beneficial owner of the global certificates 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. Under the existing rules,
beneficial certificate owners of global securities that are Non-U.S. Persons (as
defined below) can obtain a complete exemption from the withholding tax by
filing a signed Form W-8 (Certificate of Foreign Status). Under the withholding
regulations, a non-U.S. person may claim beneficial owner status by filing Form
W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding. The old Form W-8 is valid until the earlier of (i) three years
beginning on the date that the form is signed, or (ii) December 31, 2001. The
new Form W-8BEN is valid for a period of three years beginning on the date that
the form is signed. If the information shown on Form W-8 or Form W-8BEN changes,
a new Form W-8 or Form W-8BEN must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED
INCOME. Under the existing rules, a Non-U.S. Person (as defined below),
including a non-U.S. corporation or bank with a U.S. branch, for which the
interest income is effectively connected with its conduct of a trade or business
in the United States, can obtain an exemption from the withholding tax by filing
Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). Under the
withholding regulations, a non-U.S. person may claim an exemption from U.S.
withholding on income effectively connected with the conduct of a trade or
business in the United States by filing Form W-8ECI, Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States. The old Form 4224
is valid until the earlier of (i) one year beginning on the date that the form
is signed, or (ii) December 31, 2001. The new Form W-8ECI is valid for a period
of three years beginning on the date that the form is signed.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN
TREATY COUNTRIES. Under the existing rules, non-U.S. Persons residing in a
country that has a tax treaty with the United States can
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obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Under the withholding
regulations, a non-U.S. person may claim treaty benefits by filing Form W-8BEN,
Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding. The old Form 1001 is valid until the earlier of (i) three years
beginning on the date that the form is signed, or (ii) December 31, 2001. The
new Form W-8BEN is valid for a period of three years beginning on the date that
the form is signed.
EXEMPTION FOR U.S. PERSONS. U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. Under the
existing rules, the beneficial owner of a global security or his agent files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). The withholding regulations revise the procedures that
withholding agents and payees must follow to comply with, or to establish an
exemption from, withholding for payments made after December 31, 2001. Each
foreign holder of securities should consult its own tax advisor regarding
compliance with these procedures under the withholding regulations.
A "U.S. Person" is:
(i) a citizen or resident of the United States;
(ii) a corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof;
(iii) an estate that is subject to U.S. federal income tax
regardless of the source of its income; or
(iv) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United States
person has the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S.
Person.
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NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2000-1
NOVASTAR MORTGAGE, INC.
SELLER AND SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
DEPOSITOR
$226,320,000
ASSET-BACKED CERTIFICATES,
SERIES 2000-1
------------------
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>
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
Summary of Prospectus..........................................................1
Risk Factors...................................................................3
The Sponsor....................................................................6
Use of Proceeds................................................................6
Description of the Securities..................................................6
Payments of Interest.......................................................7
Payments of Principal......................................................7
Final Scheduled Distribution Date..........................................7
Optional Redemption, Purchase or Termination...............................8
Mandatory Termination; Auction Sale........................................8
Defeasance.................................................................8
Weighted Average Life of the Securities....................................8
Form of Securities.........................................................9
The Trust Funds...............................................................11
The Mortgage Loans........................................................12
The Contracts.............................................................15
Private Securities........................................................16
Accounts..................................................................18
Collection and Distribution Accounts......................................18
Pre-Funding Account.......................................................18
Credit Enhancement............................................................19
Subordinate Securities....................................................19
Insurance.................................................................19
Reserve Funds.............................................................20
Minimum Principal Payment Agreement.......................................20
Deposit Agreement.........................................................21
Derivative Contracts......................................................21
Servicing.....................................................................21
Collection Procedures; Escrow Accounts....................................21
Deposits to and Withdrawals from the Collection Account...................21
Advances and Limitations Thereon..........................................23
Maintenance of Insurance Policies and other Servicing Procedures..........23
Realization upon Defaulted Mortgage Loans.................................24
Enforcement of Due-On-Sale Clauses........................................25
Servicing Compensation and Payment of Expenses............................25
Evidence as to Compliance.................................................26
Matters Regarding the Servicer............................................26
The Agreements................................................................27
Assignment of Primary Assets..............................................27
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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
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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.
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Distributions on the Securities
Owners of securities will be entitled to receive payments in the manner
described in the accompanying prospectus supplement, which will specify:
o whether distributions will be made monthly, quarterly, semi-annually or
at other intervals and dates,
o the amount allocable to payments of principal and interest on any
distribution date, and
o whether distributions will be made on a pro rata, random lot, or other
basis.
Credit Enhancement
A series of securities, or classes within a series, may have the benefit of
one or more types of credit enhancement, including:
o the use of excess interest to cover losses and to create
over-collateralization,
o the subordination of distributions on the lower classes to the
distributions on more senior classes,
o the allocation of losses on the underlying loans to the lower classes,
and
o the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees and letters of credit.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
Redemption or Repurchase of Securities
One or more classes of securities may be redeemed or repurchased in whole
or in part at the times described in the prospectus supplement and at a price at
least equal to the amount necessary to pay all principal and interest on the
redeemed classes.
Legal Investment
The accompanying prospectus supplement will state whether or not the
securities will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984.
ERISA Limitations
Employee benefit plans should carefully review with their own legal
advisors whether the purchase or holding of the securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Internal
Revenue Code.
Federal Income Tax Consequences
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
o interests in a trust treated as a grantor trust,
o "regular interests" or "residual interests" in a trust treated as one
or more "real estate mortgage investment conduits",
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership, or
o "regular interests", "high-yield interests" or "ownership interests" in
a trust treated as one or more "financial asset securitization
investment trusts".
Ratings
The securities offered by this prospectus and the accompanying prospectus
supplement will be rated at the time of issuance in one of the four highest
rating categories by at least one statistical rating organization.
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<PAGE>
Risk Factors
You should consider the following risk factors prior to any purchase of
any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
Your investment in any security may be an illiquid investment; you should be
prepared to hold your security to maturity.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriters may establish a secondary market in the securities,
although no underwriter will be obligated to do so. We neither expect
to list the securities on any securities exchange nor to have the
securities quoted in the automated quotation system of a registered
securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain
definitive physical securities.
The assets of the trust fund will be limited and, if the assets become
insufficient to service the securities, losses may result.
The securities will be payable solely from the assets of the trust
fund. Neither the sponsor nor any other person will be obligated to
make payments to the security holders, except to the extent of any
credit enhancement as specifically provided in the prospectus
supplement. Consequently, security holders must rely solely upon
payments from the trust fund for the payment of principal and interest
on the securities.
As a result of prepayment on the loans or early redemption of the securities,
you could be fully paid significantly earlier than would otherwise be the case,
which may adversely affect the yield to maturity on your securities.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments
on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of
the issuer, and will not be available to fund distributions owing to
you. We cannot predict the rate of prepayments of the loans, which is
influenced by a wide variety of economic, social and other factors,
including prevailing mortgage market interest rates, the availability
of alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the level
of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings, sales of
mortgaged properties subject to "due-on-sale" provisions and
liquidations due to default, as well as the receipt of proceeds from
insurance policies. In addition, repurchases or purchases from the
issuer of loans or the payment of substitution adjustments will have
the same effect on the securities as a prepayment of the loans.
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One or more classes of securities of any series may be subject to
optional or mandatory redemption or auction sale in whole or in part,
on or after a specified date, or on or after the time when the
aggregate outstanding principal amount of the underlying loans or the
securities is less than a specified amount. You will bear the risk of
reinvesting unscheduled distributions resulting from redemption.
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you
will be able to reinvest these prepayments at a yield equaling or
exceeding the yield on your securities.
Credit enhancement, even if provided, will in any event be limited in both
amount and scope of coverage, and may not be sufficient to cover all losses or
risks on your investment.
Credit enhancement may be provided in limited amounts to cover some,
but not all, types of losses on the underlying loans and, in most
cases, will reduce over time in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only very limited coverage
as to some types of losses, and may provide no coverage as to other
types of losses. Generally, credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of
prepayments, which is one of the principal risks of your investment.
The amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and any other
information will be described in the accompanying prospectus
supplement.
Property values may decline, leading to higher losses on the loans.
An investment in the securities, which are backed by residential real
estate loans, may be affected by a decline in real estate values. A
decline could be caused by a general decline in the real estate market,
the borrower's failure to maintain the property or a natural disaster,
among other things. If property values were to decline, the rates of
delinquencies and foreclosures may rise, thereby increasing the
likelihood of loss. If these losses are not covered by any credit
enhancement, you will bear all risk of these losses and will have to
look primarily to the value of the mortgaged properties for recovery of
the outstanding principal and unpaid interest on the defaulted loans.
Foreclosure of mortgaged properties involves delays and expense and could cause
losses on the loans.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt
of the foreclosure proceeds could occur. Foreclosures are regulated by
state statutes, rules and judicial decisions and are subject to many of
the delays and expenses of other lawsuits, sometimes requiring several
years to complete. The servicer will be entitled to reimburse itself
for any expenses it has paid in attempting to recover amounts due on
the liquidated loans, including payments to prior lienholders, accrued
fees of the servicer, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses, which will reduce the
amount of the net recovery by the trust.
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Environmental conditions on the mortgaged property may give rise to liability
for the issuer.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some states, contamination of a mortgaged property may give
rise to a lien on the mortgaged property to assure the costs of
clean-up. In several states, this type of lien has priority over the
lien of an existing mortgage or owner's interest against the property.
In addition, under the laws of some states and under CERCLA, a lender
may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by a prior
owner. A lender also will increase its risk of environmental liability
upon the foreclosure of the mortgaged property, since the lender may
then become the legal owner of the property.
State and federal credit protection laws may limit collection of principal and
interest on the loans.
Residential mortgage lending is highly regulated at both the federal
and state levels and violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the
amounts due on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the issuer, as
the owner of the loan, to damages and administrative enforcement. The
occurrence of any of the foregoing could cause losses on your
securities.
The Soldiers' and Sailors' Civil Relief Act may limit the ability to collect on
the loans.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military
service after the origination of his or her loan, including a mortgagor
who is a member of the National Guard or is in reserve status at the
time of the origination of the loan and is later called to active duty.
These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the
mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. The implementation of the Soldiers' and
Sailors' Civil Relief Act could have an adverse effect, for an
indeterminate period of time, on the ability of the servicer to collect
full amounts of interest on these loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose
on loans during the mortgagor's period of active duty status. Thus, in
the event that these loans go into default, there may be delays and
losses occasioned by the inability to realize upon the mortgaged
property in a timely fashion.
Ratings are not recommendations; the ratings assigned to your securities may be
lowered or withdrawn.
Each series of securities will be rated in one of the four highest
rating categories by the rating agency. Any rating would be based on,
among other things, the adequacy of the value of the assets and any
credit enhancement. A rating is not a recommendation to purchase, hold
or sell securities, because as it does not address market price or
suitability for a particular investor.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement. Any rating which is assigned may not remain in effect for
any given period of time or may be lowered or withdrawn
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entirely by the rating agencies if, in their judgment, circumstances in
the future so warrant. Ratings may also be lowered or withdrawn because
of an adverse change in the financial or other condition of a provider
of credit enhancement or a change in the rating of a credit enhancement
provider's long term debt.
ERISA may restrict the acquisition, ownership and disposition of securities.
Generally, ERISA applies to investments made by benefit plans and
transactions involving the assets of benefit plans. Due to the
complexity of regulations that govern benefit plans, prospective
investors that are subject to ERISA are urged to consult their own
counsel regarding consequences under ERISA of acquisition, ownership
and disposition of securities.
The Sponsor
The sponsor, Residential Asset Funding Corporation, was incorporated in
the State of North Carolina. in December 1997, and is a wholly-owned subsidiary
of First Union National Bank, a national banking association with its
headquarters in Charlotte, North Carolina. The sponsor's principal executive
offices are located at One First Union Center, 301 S. College Street, Charlotte,
North Carolina 28288-0630. Its telephone number is (704) 373-6611.
Use of Proceeds
The net proceeds from the sale of each series of securities will be
applied to one or more of the following purposes: to acquire the primary assets,
to repay indebtedness which has been incurred to obtain funds to acquire the
primary assets, to establish any reserve funds described in the prospectus
supplement and to pay costs of structuring and issuing the securities, including
the costs of obtaining credit enhancement, if any. The acquisition of the
primary assets for a series may be effected by an exchange of securities with
the seller of the primary assets. The seller may agree to reimburse the sponsor
for fees and expenses of the sponsor incurred in connection with the offering of
the securities.
Description of the Securities
The sponsor may offer from time to time the securities, which may be
asset-backed notes or certificates, in one or more series.
The certificates of a series will evidence undivided interests in
assets deposited into a trust fund. The notes of a series will represent
indebtedness secured by the trust fund. A series may consist of both notes and
certificates.
Each series of securities will consist of one or more classes of
securities, one or more of which may be compound interest securities, variable
interest securities, pac securities, zero coupon securities, principal only
securities, interest only securities or participating securities. A series may
also include one or more classes of subordinate securities.
If a series includes multiple classes, the amount, percentage and
timing of distributions of principal, interest or both to each class may vary
and one or more classes' right to distributions of principal, interest or both
may be subordinated to other classes. The primary assets and other assets
comprising the trust fund may be divided into one or more groups and one or more
classes may evidence beneficial ownership of or be secured by the corresponding
group.
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The trustee, or a paying agent on its behalf, will make payments of
principal of and interest on the securities. Interest on and principal of the
securities of a series will be payable on each distribution date at the times,
at the rates, in the amounts and in the order of priority described in the
prospectus supplement. Payments will be made by check mailed to holders of
record at their addresses appearing on the security register. Payments may be
made, however, by wire transfer, at the expense of the holder requesting payment
by wire transfer, in circumstances described in the prospectus supplement. Final
payments of principal in retirement of each security will be made only upon
presentation and surrender of the security at the office of the trustee
specified in the prospectus supplement. The trustee will mail notice of the
final payment on a security to the holder of the security before the
distribution date on which the trustee expects to make the final principal
payment.
Payments of Interest
The interest-bearing securities of each class will bear interest from
the date and at the rate per annum specified, or calculated in the method
described in, the prospectus supplement. The rate of interest on securities of a
series may be variable or may change with changes in the annual percentage rates
of the loans and/or as prepayments occur on the loans. Principal-only securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the prospectus supplement.
In the event interest accrues during the calendar month preceding a distribution
date, the effective yield to holders will be reduced from the yield that would
otherwise be obtainable if interest payable on the securities were to accrue
through the day immediately preceding the distribution date.
Payments of Principal
On each distribution date for a series, principal payments will be made
to the holders of the securities of the series on which principal is then
payable, as described in the prospectus supplement. Principal payments will be
allocated among the classes of a series in the manner, at the times and in the
priority described in the prospectus supplement.
The rate of principal payments of each class may depend principally
upon the rate of payment, including prepayments, on the primary assets. A rate
of prepayment lower or higher than anticipated will affect the yield on the
securities of a series in the manner described under "--Weighted Average Life of
the Securities." Under limited circumstances, a series of securities may be
subject to termination or redemption. See " --Optional Redemption, Purchase or
Termination" below.
Final Scheduled Distribution Date
The final scheduled distribution date on each class of securities is
the date no later than which the principal balance is expected to be reduced to
zero, calculated on the basis of the assumptions described in the prospectus
supplement. The final scheduled distribution date will be specified in the
prospectus supplement. Since payments on the primary assets will be used to make
distributions in reduction of the outstanding principal amount of the
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date.
Furthermore, as a result of delinquencies, defaults and liquidations of
the primary assets in the trust fund, the actual final distribution date of any
certificate may occur later than its final scheduled distribution date. No
assurance can be given as to the actual prepayment experience of a series. See
"--Weighted Average Life of the Securities" below.
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Optional Redemption, Purchase or Termination
One or more classes of securities of any series may be subject to
optional redemption or repurchase, in whole or in part, on any distribution date
by the seller, servicer or credit enhancer or an affiliate thereof. Redemption
or repurchase may occur on or after a specified date, or on or after the time as
the aggregate outstanding principal amount of the securities or primary assets,
is less than a percentage not to exceed 20% of the initial aggregate principal
balance of the securities or primary assets. The redemption, purchase or
repurchase price may not be less than an amount necessary to pay all principal
and interest on the securities outstanding. If we have made a REMIC election,
the trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under section 860F of the Internal Revenue Code. The
risk of reinvesting unscheduled distributions resulting form prepayments of the
securities will be borne by the holders. Neither the trust nor the holders will
have any continuing liability under an optional redemption or repurchase.
Mandatory Termination; Auction Sale
The trustee, the servicer or the seller may be required to effect early
retirement of a series of securities by auction sale. Within a period following
the failure of the holder of the optional termination right to exercise its
right, the required party shall solicit bids for the purchase of all primary
assets remaining in the trust. In the event that satisfactory bids are received,
the net sale proceeds will be distributed to holders in the same order of
priority as collections on the loans. A satisfactory bid will not be less than
an amount necessary to pay all principal and interest on the notes. If
satisfactory bids are not received, the required party shall decline to sell the
loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the loans. The sale and consequent
termination of the trust must constitute a "qualified liquidation" of each
REMIC.
Defeasance
The indenture may provide that a trust fund may be discharged through
defeasance. In a defeasance, a party will deposit with the trustee money and/or
direct obligations of or obligations guaranteed by the United States of America
which will provide money in an amount sufficient to pay each installment of
interest and, on the final scheduled distribution date, principal on the notes.
In the event of any defeasance and discharge of notes, note holders would be
able to look only to the deposited money and/or direct obligations for payment
of principal and interest, if any, on their notes until maturity.
Weighted Average Life of the Securities
"Weighted average life" refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. The weighted average life of the
securities of a class will be influenced by the rate at which the amount
financed under primary assets included in the trust fund for a series is paid.
Repayment may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement will describe the
prepayment standard or model, if any, used and may contain tables setting forth
the projected weighted average life of each class of securities and the
percentage of the original principal amount of each class of securities that
would be outstanding on specified distribution dates based on the assumptions
stated in the prospectus supplement, including assumptions that prepayments on
the mortgage loans or underlying loans relating to the private securities,
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as applicable, included in the trust fund are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans will
conform to any level of any prepayment standard or model specified in the
prospectus supplement. The rate of principal prepayments on pools of loans may
be influenced by a variety of factors, including job related factors such as
transfers, layoffs or promotions and personal factors such as divorce,
disability or prolonged illness. Economic conditions, either generally or within
a particular geographic area or industry, also may affect the rate of principal
prepayments. Demographic and social factors may influence the rate of principal
prepayments in that some borrowers have greater financial flexibility to move or
refinance than do other borrowers. The deductibility of mortgage interest
payments, servicing decisions and other factors also affect the rate of
principal prepayments. As a result, there can be no assurance as to the rate or
timing of principal prepayments of the mortgage loans or underlying loans either
from time to time or over the lives of the loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans, the loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by the loans. In this
regard, it should be noted that the loans may have different interest rates. In
addition, the weighted average life of the securities may be affected by the
varying maturities of the loans. If any loans have actual terms-to-stated
maturity of less than those assumed in calculating the final scheduled
distribution date of the securities, one or more classes of the series may be
fully paid prior to their respective final scheduled distribution date, even in
the absence of prepayments.
Form of Securities
The securities in each series will either be issued as physical
certificates or in book-entry form. Physical certificates in fully registered
form will be transferable and exchangeable at the corporate trust office of the
registrar of the securities named in the prospectus supplement. No service
charge will be made for any registration of exchange or transfer of securities,
but the trustee may require payment of a sum sufficient to cover any tax or
other government charge.
Securities issued in book-entry form will be registered in the name of
Cede & Co., the nominee of the Depository Trust Company. DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered under
the provisions of section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participating organizations and facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to brokers, dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Under a book-entry format, holders that are not participants or
indirect participants but desire to purchase, sell or otherwise transfer
ownership of the securities registered in the name of Cede & Co., as nominee of
DTC, may do so only through participants and indirect participants. In addition,
the holders will receive all distributions of principal of and interest on the
securities from the trustee through DTC and its participants. Under a book-entry
format, holders will receive payments after each distribution date because,
while payments are required to be forwarded to Cede & Co., as nominee for DTC,
on each
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distribution date, DTC will forward payments to its participants, which
thereafter will be required to forward payments to indirect participants or
holders. Unless and until physical securities are issued, it is anticipated that
the only holder will be Cede & Co., as nominee of DTC, and that the beneficial
holders of securities will not be recognized by the trustee as holders under the
agreements. The beneficial holders will only be permitted to exercise the rights
of holders under the agreements indirectly through DTC and its participants who
in turn will exercise their rights through DTC.
DTC is required to make book-entry transfers of securities among
participants and is required to receive and transmit payments of principal of
and interest on the securities. Participants and indirect participants with
which holders have securities accounts similarly are required to make book-entry
transfers and receive and transmit payments on behalf of their respective
holders. Accordingly, although holders will not process securities, the rules
provide a mechanism by which holders will receive distributions and will be able
to transfer their interests.
Unless and until physical certificates are issued, holders who are not
participants may transfer ownership of securities only through participants by
instructing participants to transfer securities, by book-entry transfer, through
DTC for the account of the purchasers of securities, which account is maintained
with their respective participants. In accordance with DTC's normal procedures,
transfers of ownership of securities will be executed through DTC and the
accounts of the respective participants at DTC will be debited and credited.
Similarly, the respective participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing holders.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a holder to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise act as the owner of the securities may be limited due to the lack of a
physical certificate.
DTC in general advises that it will take any action permitted to be
taken by a holder under an agreement only at the direction of one or more
participants to whose account with DTC the securities are credited.
Additionally, DTC in general advises that it will take actions on behalf of
specified percentages of the holders only at the direction of participants whose
holdings include current principal amounts of outstanding securities that
satisfy the specified percentages. DTC may take conflicting actions with respect
to other current principal amounts of outstanding securities to the extent that
actions are taken on behalf of participants whose holdings include current
principal amounts of outstanding securities.
Any securities initially registered as physical certificates in the
name of Cede & Co., as nominee of DTC, will be issued in fully registered,
certificated form to holders or their nominees, rather than to DTC or its
nominee only under the events specified in the agreements and described in the
prospectus supplement. Upon the occurrence of any of the events specified in the
agreements and the prospectus supplement, DTC will be required to notify all
participants of the availability through DTC of physical certificates. Upon
surrender by DTC of the securities representing the securities and instruction
for re-registration, the trustee will take the securities in the form of
physical certificates, and thereafter the trustee will recognize the holders of
physical certificates as holders. Thereafter, payments of principal of and
interest on the securities will be made by the trustee directly to holders. The
final distribution of any security, whether physical certificates or securities
registered in the name of Cede & Co., however, will be made only upon
presentation and surrender of the securities on the final distribution date at
the office or agency specified in the notice of final payment to holders.
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The Trust Funds
Each trust fund will include assets originated or acquired by the
seller or sellers specified in the prospectus supplement composed of:
o primary assets, which may include one or more pools of (1)
mortgage loans that are secured by mortgages or deeds of trust on
residential properties, (2) manufactured housing conditional sale
contracts and installment agreements that are secured by
manufactured homes, and (3) securities backed or secured by
loans,
o all monies due on the loans net, if and as provided in the
prospectus supplement, of amounts payable to the servicer of the
loans,
o funds on deposit in any pre-funding and capitalized interest
accounts,
o reserve funds, letters of credit, surety bonds, insurance
policies or other forms of credit support,
o any mortgaged property acquired by foreclosure or deed in lieu of
foreclosure or repossession,
o any manufactured home acquired by repossession and
o any amount on deposit in the collection account or distribution
account.
The mortgage loans will be secured by mortgages and deeds of trust or
other similar security instruments creating a lien on a mortgaged property,
which may be subordinated to one or more senior liens on the mortgaged property.
The contracts will be secured by security interests taken in the manufactured
homes.
A maximum of 5%, by initial principal balance, of the aggregate primary
assets that are included in a trust fund at the closing date will deviate from
the characteristics that are described in the prospectus supplement.
The securities will be non-recourse obligations secured by the trust
fund. Holders of a series of notes may only proceed against the collateral
securing the notes in the case of a default and may not proceed against any
assets of the sponsor or the trust fund not pledged to secure the notes.
The primary assets for a series will be acquired by the trust fund from
the seller, or may be acquired in the open market or in privately negotiated
transactions. Loans relating to a series will be serviced by the servicer, which
may be the seller, specified in the prospectus supplement, under a servicing
agreement between the trust fund and servicer.
"Agreement" means, as to a series of certificates, the pooling and
servicing agreement or trust agreement, and as to a series of notes, the
indenture and the servicing agreement, as the context requires.
A trust fund relating to a series of securities may be a business trust
formed under the laws of the state specified in the prospectus supplement.
Prior to the initial offering of a series of securities, the trust fund
will have no assets or liabilities. We do not expect any trust fund to engage in
any activities other than acquiring, managing and holding the trust assets and
the proceeds thereof, issuing securities and making distributions thereon. No
trust fund will have any significant source of capital other than its assets and
any credit enhancement.
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Primary assets included in the trust fund for a series may consist of
any combination of mortgage loans, contracts and private securities. Some of the
loans may be delinquent, although the loans that are delinquent as of the
cut-off date will not exceed 10% of the initial aggregate principal balance of
the primary assets for that series. The following is a brief description of the
loans we expect to be include as trust property.
The Mortgage Loans
Mortgage Loans. The primary assets for a series may consist, in whole
or in part, of mortgage loans secured by mortgages on one- to four-family
residential housing, including condominium units and cooperative dwellings which
may be subordinated to other mortgages on the same mortgaged property. The
mortgage loans may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
prospectus supplement.
The mortgage loans may be either "closed-end" loans, which do not
permit the borrower to obtain the proceeds of future advances, or "open-end"
loans structured as lines of credit, which permit the borrower, subject to a
maximum dollar amount, to obtain more than one advance of proceeds. The mortgage
loans will be secured by first, second or more junior liens on fee simple or
leasehold interests in one- to four-family residential properties. The principal
and interest on the mortgage loans included in the trust for a series of
securities will be payable either on the first day of each month or on different
scheduled days throughout each month, and the interest will be calculated either
on a simple interest, actuarial method or "Rule of 78s" method. When a full
principal prepayment is paid on a mortgage loan during a month, the mortgagor is
generally charged interest only on the days of the month actually elapsed up to
the date of prepayment, at a daily interest rate that is applied to the
principal amount of the mortgage loan so prepaid.
Payment Terms. The payment terms of the mortgage loans to be included
in a trust for a series will be described in the prospectus supplement and may
include any of the following features of combinations thereof or other features
described in the prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a
period of time or under specified circumstances and is followed
by an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from and adjustable rate to a
fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a
combination of limitations. Accrued interest may be deferred and
added to the principal of a mortgage loan for periods and under
circumstances specified in the prospectus supplement. Mortgage
loans may provide for the payment of interest at a rate lower
than the specified loan rate for a period of time of for the life
of the mortgage loan, and the amount of any difference may be
contributed from funds supplied by the seller of the mortgaged
property or another source.
o Principal may be payable on a level debt service basis to fully
amortize the mortgage loan over its term, may be calculated on
the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on an
interest rate that is different from the loan rate or may not be
amortized during all or a portion of the original term. Payment
of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred
and added to the principal balance of the mortgage loan.
o Monthly payments of principal and interest may be fixed for the
life of the mortgage loan, may increase over a specified period
of time or may change from period to
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period. Mortgage loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
o Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the mortgage loan or may
decline over time, and may be prohibited for the life of the
mortgage loan or for specified periods. Some mortgage loans may
permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in
connection with any subsequent prepayment. Other mortgage loans
may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The mortgage
loans may include "due on sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in
connection with the sale or transfer of the mortgaged property.
Other mortgage loans may be assumable by persons meeting the then
applicable underwriting standards of the seller.
Amortization of the Mortgage Loans. The mortgage loans will provide for
payments that are allocated to principal and interest according to either the
actuarial method, the simple interest method or the "Rule of 78s" method. The
prospectus supplement will state whether any of the mortgage loans will provide
for deferred interest or negative amortization.
An actuarial mortgage loan provides for payments in level monthly
installments except, in the case of a balloon loan, the final payment,
consisting of interest equal to one-twelfth of the applicable loan rate times
the unpaid principal balance, with the remainder of the payment applied to
principal.
A simple interest mortgage loan provides for the amortization of the
amount financed under the mortgage loan over a series of equal monthly payments
except, in the case of a balloon loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the mortgage loan being multiplied by the
stated loan rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on the mortgage loan. As payments are received under
a simple interest mortgage loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a simple interest mortgage loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if the payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest mortgage
loan is made on or prior to its scheduled due date, the principal balance of the
mortgage loan will amortize in the manner described in the preceding paragraph.
However, if the borrower consistently makes scheduled payments after the
scheduled due date, the mortgage loan will amortize more slowly than scheduled.
If a simple interest mortgage loan is prepaid, the borrower is required to pay
interest only to the date of prepayment.
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Some mortgage loans may be insured under the Federal Housing Authority
Title I credit insurance program created under sections 1 and 2(a) of the
National Housing Act of 1934. Under the Title I program, the Federal Housing
Authority is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. The Title I program operates as a coinsurance
program in which the Federal Housing Authority insures up to 90% of specified
losses incurred on an individual insured loan, including the unpaid principal
balance of the loan, but only to the extent of the insurance coverage available
in the lender's Federal Housing Authority insurance coverage reserve account.
The owner of the loan bears the uninsured loss on each loan.
The mortgaged properties will include single family property, which is
one-to four-family residential housing, including condominium units and
cooperative dwellings. The mortgaged properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each single family property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least equal to the term
of the mortgage. Attached dwellings may include owner-occupied structures where
each borrower owns the land upon which the unit is built, with the remaining
adjacent land owned in common or dwelling units subject to a proprietary lease
or occupancy agreement in a cooperatively owned apartment building.
The prospectus supplement will specify whether or not mortgages on
cooperative dwellings consist of a lien on the shares issued by the cooperative
dwelling and the proprietary lease or occupancy agreement relating to the
cooperative dwelling.
The aggregate principal balance of mortgage loans secured by mortgaged
properties that are owner-occupied will be disclosed in the prospectus
supplement. The sole basis for a representation that a given percentage of the
mortgage loans are secured by single family property that is owner-occupied will
be either (1) the making of a representation by the mortgagor at origination of
the mortgage loan either that the underlying mortgaged property will be used by
the mortgagor for a period of at least six months every year or that the
mortgagor intends to use the mortgaged property as a primary residence, or (2) a
finding that the address of the underlying mortgaged property is the mortgagor's
mailing address as reflected in the servicer's records. To the extent specified
in the prospectus supplement, the mortgaged properties may include non-owner
occupied investment properties and vacation and second homes.
The initial combined loan-to-value ratio of a mortgage loan is computed
in the manner described in the prospectus supplement, taking into account the
amounts of any senior loans.
Additional Information. The selection criteria for the mortgage loans,
including loan-to-value ratios, original terms to maturity and delinquency
information, will be specified in the prospectus supplement.
The trust fund may include mortgage loans that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity.
The trust fund may include mortgage loans that do not have a specified stated
maturity.
The prospectus supplement for a series for which the primary assets
include mortgage loans will specify, to the extent relevant and to the extent
the information is reasonably available to the sponsor and the sponsor
reasonably believes the information to be reliable:
o the aggregate unpaid principal balance;
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o the range and weighted average loan rate, and, in the case of
adjustable rate loans, the range and weighted average of the
current loan rates and the lifetime rate caps, if any;
o the range and average outstanding principal balance;
o the weighted average original and remaining term-to-stated
maturity and the range of original and remaining terms-to-stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios
or loan-to-value ratios;
o the percentage of mortgage loans that accrue interest at
adjustable or fixed interest rates;
o the geographic distribution of the mortgaged properties;
o the percentage of mortgage loans that are secured by single
family mortgaged properties, shares relating to cooperative
dwellings, condominium units, investment property and vacation or
second homes;
o the lien priority;
o year of origination; and
o the delinquency status, including the duration and history of
delinquencies and the percentage of delinquent mortgage loans.
The prospectus supplement will also specify any other limitations on
the types or characteristics of mortgage loans for a series.
The Contracts
Contracts. Each pool of contracts in a trust fund will consist of
conventional manufactured housing installment sales contracts and installment
loan agreements originated by a manufactured housing dealer in the ordinary
course of business and purchased by the seller. Each contract will be secured by
manufactured homes, each of which will be located in any of the fifty states or
the District of Columbia. The contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate. The seller of the
contracts may retain a portion of the interest payments, called a "fixed
retained yield." If the seller retains a fixed retained yield, the trust will be
entitled to payments on the contracts after payment of the fixed retained yield.
Manufactured homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home may be lower than the principal amount
outstanding under the contract.
Additional Information. The prospectus supplement for a series for
which the primary assets include contracts will specify, to the extent relevant
and to the extent the information is reasonably available to the sponsor and the
sponsor reasonably believes the information to be reliable:
o the initial aggregate principal balance;
o the range of original terms to maturity;
o the weighted average remaining term to stated maturity;
o the earliest and latest origination dates;
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o the range of contract rates and net contract rates;
o the weighted average net contract rate;
o the geographic distribution of manufactured homes;
o the percentage of any contracts which are secured by manufactured
homes which have become permanently affixed to real estate;
o the percentage of the contracts representing the refinancing of
existing indebtedness;
o the range of loan-to-value ratios and
o the highest outstanding principal balance at origination of any
contract.
The contracts in a trust fund will generally have monthly payments due
on the first of each month and will be fully-amortizing contracts. Contracts may
have due dates which occur on a date other than the first of each month. The
contract pools may include adjustable rate contracts that provide for payment
adjustments to be made less frequently than adjustments in the contract rates.
Each adjustment in the contract rate which is not made at the time of a
corresponding adjustment in payments, and which adjusted amount of interest is
not paid currently on a voluntary basis by the obligor, will result in a change
in the rate of amortization of the contract. Moreover, payment adjustments on
the contracts may be subject to limitations, as specified in the prospectus
supplement, which may also affect the rate of amortization on the contract. As a
result, the amount of interest accrued in any month may equal or exceed the
scheduled monthly payment on the contract. In any such month, no principal would
be payable on the contract, and if the accrued interest exceeded the scheduled
monthly payment, the excess interest due would become "deferred interest that is
added to the principal balance of the contract. Deferred interest will bear
interest at the contract rate until paid. If the limitations prevent the
payments from being sufficient to amortize fully the contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on the stated maturity date.
Private Securities
Primary assets for a series may consist, in whole or in part, of
"private securities" which include pass-through certificates representing
beneficial interests in underlying loans of the type that would otherwise be
eligible to be loans or collateralized obligations secured by underlying loans.
Private securities may have previously been offered to the public and not
purchased as part of the original distribution or may be acquired in a private
transaction. Although individual underlying loans may be insured or guaranteed
by the United States or an agency or instrumentality thereof, they need not be,
and private securities themselves will not be so insured or guaranteed.
Private securities will have been issued under a pooling and servicing
agreement, a trust agreement or similar agreement. The seller/servicer of the
underlying loans will have entered into the underlying agreement with the
underlying trustee. The underlying trustee or its agent, or a custodian, will
possess the underlying loans. Underlying loans will be serviced by a servicer
directly or by one or more sub-servicers who may be subject to the supervision
of the underlying servicer.
The sponsor of the private securities will be a financial institution
or other entity engaged generally in the business of lending; a public agency or
instrumentality of a state, local or federal government; or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling loans to trusts, and selling beneficial
interests in trusts. The underlying sponsor may be an affiliate of the sponsor.
The obligations of the underlying sponsor will generally be limited to
representations and warranties as to the assets conveyed by it to the trust.
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Additionally, although the underlying loans may be guaranteed by an agency or
instrumentality of the United States, the private securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the private
securities on the dates specified in the prospectus supplement. The private
securities may be entitled to receive nominal or no principal distributions or
nominal or no interest distributions. Principal and interest distributions will
be made on the private securities by the underlying trustee or the underlying
servicer. The underlying sponsor or the underlying servicer may have the right
to repurchase the underlying loans after a specified date or under other
circumstances specified in the prospectus supplement.
The underlying loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Underlying loans will be secured by mortgages on mortgaged
properties.
Credit Support Relating to Private Securities. Credit support in the
form of reserve funds, subordination of other private securities issued under
the underlying agreement, guarantees, letters of credit, cash collateral
accounts, insurance policies or other types of credit support may be provided
with respect to the underlying loans or with respect to the private securities
themselves. The type, characteristics and amount of credit support will be a
function of characteristics of the underlying loans and other factors and will
have been established for the private securities on the basis of requirements of
the rating agency that rated the private securities.
Additional Information. The prospectus supplement for a series for
which the primary assets include private securities will specify, to the extent
relevant and to the extent the information is reasonably available to the
sponsor and the sponsor reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type;
o the maximum original term-to-stated maturity;
o the weighted average term-to-stated maturity;
o the pass-through or certificate rate or ranges thereof;
o the underlying sponsor, the underlying servicer and the
underlying trustee;
o characteristics of credit support relating to the underlying
loans or to the private securities;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity
of the private securities;
o the terms on which underlying loans may be substituted for those
originally underlying the private securities;
and, as to the underlying loans, the following:
o the payment features, including whether the underlying loans are
fixed rate or adjustable rate and whether they provide for fixed
level payments or other payment features;
o the approximate aggregate principal balance, if known, of the
underlying loans insured or guaranteed by a governmental entity;
o the servicing fee or range of servicing fees;
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o the minimum and maximum stated maturities at origination;
o the lien priority; and
o the delinquency status and year of origination.
Accounts
Each trust fund will include one or more accounts. Each account will
either be an account maintained at a depository institution, the long-term
unsecured debt obligations of which are satisfactory to each rating agency or an
account the deposits in which are insured to the maximum extent available by the
Federal Deposit Insurance Corporation or which are secured in a manner meeting
requirements established by each rating agency.
The trustee may invest the funds in the accounts in eligible
investments maturing, with exceptions, not later than the day preceding the date
funds are due to be distributed. Eligible investments include, among other
investments, obligations of the United States and agencies thereof, federal
funds, certificates of deposit, commercial paper, demand and time deposits and
banker's acceptances, repurchase agreements of United States government
securities and guaranteed investment contracts, in each case, acceptable to the
rating agencies rating the securities.
Collection and Distribution Accounts
A separate collection account will be established in the name of the
trustee for receipt of all amounts received from the primary assets. Amounts on
deposit in the collection account and amounts available from any credit
enhancement will be deposited in a distribution account, which will also be
established in the name of the trustee, for distribution to the holders.
Pre-Funding Account
A trust fund may include a "pre-funding account." On the closing date,
the "pre-funded amount," which is a portion of the proceeds of the sale of the
securities of a series, will be deposited in the pre-funding account and may be
used to acquire additional primary assets during a specified "pre-funding
period." If any pre-funded amount remains on deposit in the pre-funding account
at the end of the pre-funding period, it will be applied in the manner specified
in the prospectus supplement to prepay the notes and/or the certificates of the
applicable series.
If a pre-funding account is established:
o the pre-funding period will not exceed 1 year from the closing
date,
o the additional primary assets to be acquired during the
pre-funding period will be subject to the same representations
and warranties and satisfy the same eligibility requirements as
the primary assets included in the trust fund on the closing
date, subject to the exceptions stated in the prospectus
supplement,
o the pre-funding amount will not exceed 50% of the principal
amount of the securities issued and
o prior to the investment of the pre-funded amount in additional
primary assets, the pre-funded amount will be invested in one or
more eligible investments.
If a pre-funding account is established, a "capitalized interest
account" may be established and maintained with the trustee. On the closing
date, funds will be deposited in the capitalized interest
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account and used to fund any shortfall in the interest accrued on the securities
and fees or expenses during the pre-funding period. Any amounts on deposit in
the capitalized interest account at the end of the pre-funding period that are
not necessary to fund any shortfall will be distributed to the person specified
in the prospectus supplement.
If a trust fund includes a pre-funding account and the principal
balance of additional primary assets delivered to the trust fund during the
pre-funding period is less than the original pre-funded amount, the
securityholders will receive a prepayment of principal to the extent described
in the prospectus supplement. Any principal prepayment may adversely affect the
yield to maturity of the applicable securities. Since prevailing interest rates
are subject to fluctuation, there can be no assurance that investors will be
able to reinvest a prepayment at yields equaling or exceeding the yields on the
securities. It is possible that the yield on any reinvestment will be lower, and
may be significantly lower, than the yield on the securities.
Credit Enhancement
The sponsor may obtain credit enhancement, which may include an
irrevocable letter of credit, surety bond or insurance policy, issue subordinate
securities or obtain any other form of credit enhancement or combination thereof
in favor of the trustee on behalf of the holders of a series or designated
classes of a series from an institution or by other means. The credit
enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions described in the prospectus supplement. Credit enhancement for a
series may include one or more of the following forms, or another form specified
in the prospectus supplement. Credit enhancement may be structured so as to
protect against losses relating to more than one trust fund.
Subordinate Securities
Credit enhancement for a series may consist of one or more classes of
subordinate securities. The rights of holders of subordinate securities to
receive distributions on any distribution date will be subordinate in right and
priority to the rights of holders of senior securities of the series.
Insurance
Credit enhancement for a series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets.
Pool Insurance Policy. The pool insurance policy will cover, subject to
the limitations described in a prospectus supplement, losses resulting from
defaults, but will not cover the portion of the principal balance of any loan
that is required to be covered by any primary mortgage insurance policy.
Special Hazard Insurance Policy. A special hazard insurance policy
typically provides that, where there has been damage to mortgaged property
securing a defaulted or foreclosed mortgage loan or the manufactured home
underlying a contract, title to which has been acquired by the insured, and to
the extent the damage is not covered by the standard hazard insurance policy or
any flood insurance policy, or in connection with partial loss resulting from
the application of the coinsurance clause in a standard hazard insurance policy,
the special hazard insurer will pay the lesser of (1) the cost of repair or
replacement of the mortgaged property or manufactured home or (2) upon transfer
of the mortgaged property or manufactured home to the special hazard insurer,
the unpaid principal balance of the loan at the time of foreclosure, plus
accrued interest to the date of claim settlement and expenses incurred by the
servicer. If the unpaid principal balance plus accrued interest and expenses is
paid by the special hazard insurer, the amount of further coverage under the
special hazard insurance policy will be correspondingly
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reduced, less any net proceeds from the sale of the mortgaged property or
manufactured home. Any amount paid as the cost of repair of a mortgaged property
or manufactured home will reduce coverage by the amount paid. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, governmental actions, errors in design, faulty workmanship or
materials, except under specified circumstances, nuclear reaction, if the
mortgaged property is in a federally designated flood area, flood, chemical
contamination and related other risks.
Restoration of the mortgaged property or replacement of the
manufactured home with the proceeds described under (1) above is expected to
satisfy the condition under any pool insurance policy that the mortgaged
property be restored or manufactured home replaced before a claim under the pool
insurance policy may be validly presented with respect to the defaulted loan.
The payment described under (2) above will render unnecessary presentation of a
claim for the loan under any pool insurance policy. Therefore, so long as a pool
insurance policy remains in effect, the payment by the special hazard insurer of
the cost of repair or of the unpaid principal balance of the loan plus accrued
interest and expenses will not affect the total insurance proceeds paid to
security holders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the mortgaged property or
manufactured home at an amount less than the then-outstanding principal balance
of the loan. The amount of the secured debt could be reduced to the assigned
value, and the holder of the loan thus would become an unsecured creditor to the
extent the outstanding principal balance of the loan exceeds the assigned value.
In addition, other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Legal Aspects of the Loans." The sponsor may obtain
a bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the federal bankruptcy code. The
bankruptcy bond will cover losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal and interest on a loan or a reduction
by a bankruptcy court of the principal amount of a loan and will cover unpaid
interest on the amount of the principal reduction from the date of the filing of
a bankruptcy petition.
Reserve Funds
The sponsor may deposit into one or more funds to be established with
the trustee as part of the trust fund or for the benefit of any credit enhancer,
cash, a letter or letters of credit, cash collateral accounts, eligible
investments, or other instruments meeting the criteria of the rating agency
rating any series. In the alternative or in addition to an initial deposit, a
reserve fund may be funded over time through application of all or a portion of
the excess cash flow from the primary assets, to the extent described in the
prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee
to make payments on the securities of a series, to pay expenses, to reimburse
any credit enhancer or for any other purpose.
The trustee will invest amounts deposited in a reserve fund in eligible
investments.
Minimum Principal Payment Agreement
The sponsor may enter into a minimum principal payment agreement with
an entity specified in the prospectus supplement. The entity would provide
payments on the securities of a series in the event that aggregate scheduled
principal payments and/or prepayments on the primary assets are not sufficient
to make payments on the securities.
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Deposit Agreement
The sponsor and the trustee for a series may enter into a deposit
agreement with the entity specified in the prospectus supplement. The purpose of
a deposit agreement is to accumulate available cash for investment so that it,
together with income thereon, can be applied to future distributions on one or
more classes of securities.
Derivative Contracts
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivative contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
Servicing
The following summaries describe material provisions in the servicing
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to and qualified by reference to the provisions of
the servicing agreements and the prospectus supplements. Where particular
provisions or terms used in the servicing agreements are referred to, the actual
provisions are incorporated by reference as part of the summaries.
Collection Procedures; Escrow Accounts
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
servicing agreement and any credit enhancement, follow the collection procedures
that it follows with respect to comparable loans held in its own portfolio. The
servicer may, in its discretion, waive any assumption fee, late payment charge,
or other charge on a loan and to the extent provided in the servicing agreement
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the dates on which the scheduled payments are due on the loan.
The servicer, to the extent permitted by law and required by the
underlying loan documents, will establish and maintain escrow or impound
accounts with respect to loans in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. Withdrawals from the escrow accounts are to be made to effect
timely payment of taxes, assessments and mortgage and hazard insurance, to
refund to obligors amounts determined to be overages, to pay interest to
obligors on balances in the escrow account to the extent required by law, to
repair or otherwise protect the mortgaged property or manufactured home and to
clear and terminate the escrow account. The servicer will be responsible for the
administration of the escrow accounts and generally will make advances to the
escrow accounts when a deficiency exists.
Deposits to and Withdrawals from the Collection Account
The funds held in the collection account may be invested, pending
remittance to the trustee, in eligible investments. The servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the collection account.
The servicer will deposit into the collection account on the business
day following the closing date any amounts representing scheduled payments due
after the cut-off date but received by the servicer on or before the closing
date. Thereafter, the servicer will, within two business days after receipt, the
deposit into the collection account the following:
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o All payments on account of principal, including prepayments, on
the primary assets;
o All payments on account of interest on the primary assets after
deducting, if permitted by the servicing agreement, the servicing
fee;
o All amounts received by the servicer in connection with the
liquidation of primary assets or property acquired in respect
thereof, whether through foreclosure sale, repossession or
otherwise, including payments in connection with the primary
assets received from the obligor, other than liquidation
proceeds, which are amounts required to be paid or refunded to
the obligor under the terms of the applicable loan documents or
otherwise under law, exclusive of, if permitted by the servicing
agreement, the servicing fee;
o All proceeds under any title insurance, hazard insurance or other
insurance policy covering any primary asset, other than proceeds
to be applied to the restoration or repair of the mortgaged
property or manufactured home or released to the obligor;
o All amounts from any reserve fund;
o All advances made by the servicer; and
o All repurchase prices of any primary assets repurchased by the
sponsor, the servicer or the seller.
The servicer may be permitted, from time to time, to make withdrawals
from the collection account for each series for the following purposes:
o to reimburse itself for advances made by it; the servicer's right
to reimburse itself is limited to amounts received from
particular loans, including, for this purpose, liquidation
proceeds and amounts representing proceeds of insurance policies
covering the mortgaged property or manufactured home, which
represent late recoveries of scheduled payments respecting which
any advance was made;
o to the extent provided in the servicing agreement, to reimburse
itself for any advances that the servicer determines in good
faith it will be unable to recover from late recoveries or
proceeds from the particular loan;
o to reimburse itself from liquidation proceeds for liquidation
expenses and for amounts expended by it in good faith in
connection with the restoration of damaged mortgaged property or
manufactured home and, in the event deposited in the collection
account and not previously withheld, and to the extent that
liquidation proceeds after reimbursement exceed the outstanding
principal balance of the loan, together with accrued and unpaid
interest thereon to the due date for the loan next succeeding the
date of its receipt of liquidation proceeds, to pay to itself out
of the excess the amount of any unpaid servicing fee and any
assumption fees, late payment charges, or other charges on the
loan;
o in the event it has elected not to pay itself the servicing fee
out of the interest component of any scheduled payment, late
payment or other recovery with respect to a particular loan prior
to the deposit of the scheduled payment, late payment or recovery
into the collection account, to pay to itself the servicing fee,
as adjusted under the servicing agreement, from any scheduled
payment, late payment or other recovery, to the extent permitted
by the servicing agreement;
o to reimburse itself for expenses incurred by and recoverable by
or reimbursable to it;
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o to pay to the applicable person with respect to each "REO
property," a primary asset or mortgaged property acquired through
or in lieu of foreclosure acquired in respect thereof that has
been repurchased or removed from the trust fund by the sponsor,
the servicer or the seller, all amounts received thereon and not
distributed as of the date on which the repurchase price was
determined;
o to make payments to the trustee for deposit into the distribution
account, if any, or for remittance to the holders in the amounts
and in the manner provided for in the servicing agreement; and
o to clear and terminate the collection account.
In addition, the servicer may withdraw at any time from the collection
account any amount inadvertently deposited in the collection account.
Advances and Limitations Thereon
The prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. The servicer will be obligated to make advances, and the obligation
may be limited in amount, or may not be activated until a portion of a specified
reserve fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the prospectus supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the servicer
out of amounts received on particular loans which represent late recoveries of
principal or interest, proceeds of insurance policies or liquidation proceeds
respecting which any advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, proceeds of insurance
policies, or liquidation proceeds from the loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account, as the case may be, or from a specified reserve fund as applicable, to
the extent specified in the prospectus supplement.
Maintenance of Insurance Policies and other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. The prospectus supplement
will specify the extent to which the servicer will be required to maintain or to
cause the obligor on each loan to maintain a standard hazard insurance policy
providing coverage of the standard form of fire insurance with extended coverage
for other hazards as is customary in the state in which the mortgaged property
or manufactured home is located. The standard hazard insurance policies will
provide for coverage at least equal to the applicable state standard form of
fire insurance policy with extended coverage for property of the type securing
the loans. In general, the standard form of fire and extended coverage policy
will cover physical damage to or destruction of, the mortgaged property or
manufactured home caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard insurance policies
relating to the loans will be underwritten by different hazard insurers and will
cover mortgaged properties and manufactured homes located in various states, the
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most policies typically will not cover any physical damage resulting
from war, revolution, governmental actions, floods and other water-related
causes, earth movement, including earthquakes, landslides and mudflows, nuclear
reaction, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in some cases, vandalism. The foregoing list is merely indicative of common
kinds of uninsured risks and is not intended to be all-inclusive. Uninsured
risks not covered by a special hazard insurance policy or other form of credit
enhancement will adversely affect distributions to holders. When a mortgaged
property securing a mortgage loan is located in a flood area identified by the
Department of Housing and Urban
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Development under the Flood Disaster Protection Act of 1973, the servicer will
be required to cause flood insurance to be maintained with respect to the
mortgaged property, to the extent available.
The standard hazard insurance policies covering mortgaged properties
securing mortgage loans or manufactured home securing a contract typically will
contain a "coinsurance" clause which, in effect, will require the insured at all
times to carry hazard insurance of a specified percentage, generally 80% to 90%,
of the full replacement value of the mortgaged property or manufactured home,
including the improvements on any mortgaged property or manufactured home, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, the clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(1) the actual cash value, which is the replacement cost less physical
depreciation, of the mortgaged property or manufactured home, including the
improvements, if any, damaged or destroyed or (2) the proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the mortgaged property
or manufactured home and improvements. Since the amount of hazard insurance to
be maintained on the improvements securing the mortgage loans and manufactured
homes declines as the principal balances owing thereon decrease, and since the
value of the mortgaged properties or manufactured home will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected mortgaged property or manufactured home.
Generally, coverage will be in an amount at least equal to the greater
of (1) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (2) the outstanding principal balance of the loan.
The servicer may also maintain on REO property that secured a defaulted mortgage
loan and that has been acquired upon foreclosure, deed in lieu of foreclosure,
or repossession, a standard hazard insurance policy in an amount that is at
least equal to the maximum insurable value of the REO property. No earthquake or
other additional insurance will be required of any obligor or will be maintained
on REO property, other than under any applicable laws and regulations as shall
at any time be in force and shall require additional insurance.
In the event that the servicer obtains and maintains a blanket policy
insuring against hazard losses on all of the loans, written by an insurer then
acceptable to each rating agency which assigns a rating to the series, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each loan or REO property.
This blanket policy may contain a deductible clause, in which case the servicer
will be required, in the event that there has been a loss that would have been
covered by the policy absent the deductible clause, to deposit in the collection
account the amount not otherwise payable under the blanket policy because of the
application of the deductible clause.
Realization upon Defaulted Mortgage Loans
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the mortgaged
properties or the manufactured homes as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with a foreclosure, repossession or other conversion,
the servicer will follow the practices and procedures that it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the servicer will not be required
to expend its own funds in connection with any foreclosure or repossession or
towards the restoration of the mortgaged property or manufactured home unless it
determines that (1) the restoration, repossession or foreclosure will increase
the liquidation proceeds available to the holders after reimbursement to itself
for its expenses and (2) its expenses will be recoverable either through
liquidation proceeds or the proceeds of insurance. In the case of a trust fund
for which a REMIC election has been
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made, the servicer will be required to liquidate any mortgaged property acquired
through foreclosure within two years after the acquisition of the mortgaged
property. While the holder of a mortgaged property acquired through foreclosure
can often maximize its recovery by providing financing to a new purchaser, the
trust fund, if applicable, will have no ability to do so and neither the
servicer nor the sponsor will be required to do so.
The servicer may arrange with the obligor on a defaulted loan a
modification of the loan. Modifications may only be entered into if they meet
the underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meet the other conditions in the servicing
agreement.
Enforcement of Due-On-Sale Clauses
When any mortgaged property is about to be conveyed by the obligor, the
servicer may, to the extent it has knowledge of the prospective conveyance and
prior to the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the mortgage loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that the clause is not enforceable
under applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the mortgaged property has been or is about to be conveyed,
under which the assuming person becomes liable under the mortgage loan and under
which the original obligor is released from liability and the assuming person is
substituted as the obligor and becomes liable under the mortgage loan. Any fee
collected in connection with an assumption will be retained by the servicer as
additional servicing compensation. The terms of a mortgage loan may not be
changed in connection with an assumption.
Servicing Compensation and Payment of Expenses
The servicer will be entitled to a periodic servicing fee as servicing
compensation in an amount to be determined as specified in the prospectus
supplement. The servicing fee may be fixed or variable, as specified in the
prospectus supplement. In addition, the servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of mortgaged property in
connection with defaulted mortgage loans or manufactured homes in connection
with a defaulted contract, as will be further specified in the prospectus
supplement,.
The servicer may pay expenses incurred in connection with the servicing
of the mortgage loans, including, without limitation, the payment of the fees
and expenses of the trustee and independent accountants, payment of insurance
policy premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to holders.
When an obligor makes a principal prepayment in full between due dates
on the loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the prospectus supplement in order that one or more classes of the holders of a
series will not be adversely affected by any resulting shortfall in interest,
the amount of the servicing fee may be reduced to the extent necessary to
include in the servicer's remittance to the trustee for deposit into the
distribution account an amount equal to one month's interest on the loan, less
the servicing fee. If the aggregate amount of shortfalls in a month exceeds the
servicing fee for a month, a shortfall to holders may occur.
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The servicer will be entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted loans. The holders will
suffer no loss by reason of reimbursement of expenses if expenses are covered
under insurance policies or from excess liquidation proceeds. If claims are
either not made or paid under the applicable insurance policies or if coverage
thereunder has been exhausted, the holders will suffer a loss to the extent that
liquidation proceeds, after reimbursement of the servicer's expenses, are less
than the outstanding principal balance of and unpaid interest on the loan which
would be distributable to holders. In addition, the servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted loan, prior to the rights of the holders to
receive any proceeds of insurance policies, liquidation proceeds or amounts
derived from other credit enhancement. The servicer is generally also entitled
to reimbursement from the collection account for advances.
The prospectus supplement will describe the priority of the servicer's
right, which is typically senior in priority, to receive funds from the
collection account for a series, whether as the servicing fee or other
compensation, or for the reimbursement of advances, expenses or otherwise, with
respect to the rights of the holders.
Evidence as to Compliance
Each year, a firm of independent public accountants will furnish a
statement to the trustee to the effect that it has examined documents and
records relating to the servicing of the loans by the servicer and that, on the
basis of its examination, it is of the opinion that the servicing has been
conducted in compliance with the servicing agreement, except for any exceptions
that it believes to be immaterial and any other exceptions identified in the
statement.
The servicer for each series will also provide to the trustee an annual
statement to the effect that the servicer has fulfilled its obligations under
the servicing agreement throughout the preceding calendar year.
Matters Regarding the Servicer
The servicer for each series will be identified in the prospectus
supplement. The servicer may be an affiliate of the sponsor and may have other
business relationships with the sponsor and its affiliates.
If an event of default occurs under a servicing agreement, the servicer
may be replaced by the trustee or a successor servicer. These events of default
and the rights of the trustee upon a default under the servicing agreement will
be substantially similar to those described under "The Agreements-- Events of
Default; Rights Upon Events of Default-- Servicing Agreement."
The servicing agreement will specify the circumstances under which the
servicer may assign its rights and delegate its duties and obligations
thereunder for each series, which generally will require that the successor
servicer accepting the assignment or delegation:
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than a minimum amount;
o would not cause the securities to be qualified, downgraded or
withdrawn and
o executes and delivers to the trustee an agreement under which it
assumes the obligations to act as servicer.
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No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the servicing
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the above criteria. However, the assigning servicer will remain liable
for the servicing obligations under the servicing agreement. Any entity into
which the servicer is merged or consolidated or any successor corporation
resulting from any merger, conversion or consolidation will succeed to the
servicer's obligations under the servicing agreement provided that the successor
or surviving entity meets the above requirements for a successor servicer.
The servicer, and its directors, officers, employees and agents, will
not be responsible for any action taken or for failing to take any action in
good faith under the servicing agreement, or for errors in judgment. However,
neither the servicer nor its directors, officers, employees and agents will be
protected against any breach of warranty or representations or the failure to
perform its obligations in compliance with the specified standard of care, or
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of their duties or by reason of reckless
disregard of their obligations and duties. Each servicing agreement will further
provide that the servicer and any director, officer, employee or agent of the
servicer is entitled to indemnification from the trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the servicing agreement or the securities, other than
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
servicer is not under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its servicing responsibilities under the
servicing agreement which, in its opinion, may involve it in any expense or
liability. The servicer may, in its discretion, undertake any action which it
may deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties thereto and the interests of the holders
thereunder. In that event, the servicer may be entitled to be reimbursed for the
legal expenses and costs of the action out of the collection account.
The Agreements
The following summaries describe the material provisions of the
agreements. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements.
Where particular provisions or terms used in the agreements are referred to, the
provisions or terms are as specified in the agreements.
Assignment of Primary Assets
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the trust fund all right, title and interest of
the seller in the primary assets and other property to be transferred to the
trust fund for a series. The assignment will include all principal and interest
due on or with respect to the primary assets after the cut-off date specified in
the prospectus supplement, except for any interests in the trust fund retained
by the seller, the sponsor or its affiliate. The trustee will, concurrently with
the assignment, execute and deliver the securities.
Assignment of Mortgage Loans. The seller will, as to each mortgage
loan, deliver or cause to be delivered to the trustee, or, as specified in the
prospectus supplement a custodian on behalf of the trustee, the mortgage note
endorsed without recourse to the order of the trustee or in blank, the original
mortgage with evidence of recording indicated thereon, except for any mortgage
not returned from the public recording office, in which case a copy of the
mortgage will be delivered, together with a certificate that the original
mortgage was delivered to the recording office, and an assignment of the
mortgage in
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recordable form. The trustee or the custodian will hold these documents in trust
for the benefit of these holders.
The seller will cause assignments to the trustee of the mortgages to be
recorded in the appropriate public office for real property records, except in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required. If the seller does not cause assignments to be recorded, the
agreement may require the seller to repurchase from the trustee the affected
mortgage loans, at the price described below with respect to repurchases by
reason of defective documentation. The enforcement of the repurchase obligation
constitutes the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
Assignment of Contracts. The seller will transfer physical possession
of the contracts to the trustee or a designated custodian or may retain
possession of the contracts as custodian for the trustee. In addition, the
seller will make an appropriate filing of a financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
Unless otherwise specified in the prospectus supplement, the contracts will not
be stamped or marked otherwise to reflect their assignment from the sponsor to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of assignment, the trustee's interest in contracts could be defeated.
Assignment of Private Securities. The sponsor will cause private
securities to be registered in the name of the trustee or its nominee or
correspondent. The trustee, or its nominee or correspondent, will have
possession of any certificated private securities. See "The Trust Funds--Private
Securities."
Each loan will be identified in a schedule appearing as an exhibit to
the agreements. The schedule will specify with respect to each loan: the
original principal amount and unpaid principal balance as of the cut-off date;
the current interest rate; the current scheduled payment of principal and
interest; the maturity date, if any; if the loan is an adjustable rate loan, the
lifetime rate cap, if any, and the current index.
Repurchase and Substitution of Non-Conforming Primary Assets. If any
document required to be in the file relating to the primary assets is found by
the trustee within a specified period to be defective in any material respect
and the seller does not cure the defect within a specified period, the seller
will repurchase the affected primary asset.
The seller may, rather than repurchase the primary asset as described
above, remove the primary asset from the trust fund and substitute in its place
one or more other qualifying substitute primary assets. However, (1) with
respect to a trust fund for which no REMIC election is made, the substitution
must be effected within 120 days of the date of initial issuance of the
securities and (2) with respect to a trust fund for which a REMIC election is
made, after a specified time period, the trustee must have received a
satisfactory opinion of counsel that the substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax.
Any substitute primary asset will have, on the date of substitution,
(1) an outstanding principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the outstanding principal
balance of the deleted primary asset, (2) an interest rate not less than the
interest rate of the deleted primary asset, (3) a remaining term-to-stated
maturity not greater than that of the deleted primary asset, and will comply
with all of the representations and warranties in the applicable agreement as of
the date of substitution.
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The above-described cure, repurchase or substitution obligations
constitute the sole remedies available to the holders or the trustee for a
material defect in a document for a primary asset.
The seller will make representations and warranties with respect to
primary assets for a series. If the seller cannot cure a breach of the
representations and warranties in all material respects within the specified
time period after notification by the trustee of the breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the seller is obligated to repurchase the affected primary asset or, if
provided in the prospectus supplement, provide a substitute primary asset,
subject to the same conditions and limitations on purchases and substitutions as
described above.
No security holder, solely by virtue of the holder's status as a
holder, will have any right under the applicable agreement for a series to
institute any proceeding with respect to that agreement, unless the holder
previously has given to the trustee for the series written notice of default and
unless the majority holders have made written request upon the trustee to
institute a proceeding and have offered to the trustee reasonable indemnity, and
the trustee has failed to do so within a specified period.
Reports to Holders
The trustee or other entity specified in the prospectus supplement will
prepare and forward to each holder on each distribution date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to the security holders and
the outstanding principal balance of the securities following the
distribution;
o the amount of interest distributed to the security holders and
the current interest on the securities;
o the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with
respect to the securities or (c) any current shortfall in amounts
to be distributed as accrued interest to security holders;
o the amounts of (a) any overdue payments of scheduled principal
included in the distribution, (b) any remaining overdue principal
amounts with respect to the securities, (c) any current shortfall
in receipt of scheduled principal payments on the primary assets
or (d) any realized losses or liquidation proceeds to be
allocated as reductions in the outstanding principal balances of
the securities;
o the amount received from credit enhancement, and the remaining
amount available under any credit enhancement;
o the amount of any payment delinquencies on the primary assets;
and
o the book value of any primary assets or mortgaged properties
acquired through or in lieu of foreclosure acquired by the trust
fund.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish to each holder of record at any time
during the calendar year the information specified in the agreements to enable
holders to prepare their tax returns. Information in the distribution date and
annual statements provided to the holders will not have been examined and
reported upon by an independent public accountant. However, the servicer will
provide to the trustee a report by independent public accountants with respect
to the servicing of the mortgage loans. See "Servicing --Evidence as to
Compliance."
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A series of securities or one or more classes of the series may be
issued in book-entry form. In that event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward reports only to the entity
or its nominee which is the registered holder of the global certificate which
evidences the book-entry securities. Beneficial owners will receive reports from
the participants and indirect participants of the applicable book-entry system
in accordance with their practices and procedures.
Events of Default; Rights upon Event of Default
Servicing Agreement. Events of default under each servicing agreement
generally include:
o any failure by the servicer to deposit any required amounts in
the collection account, which failure continues unremedied for a
specified period after the giving of written notice of the
failure to the servicer,
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
applicable servicing agreement which continues unremedied for the
number of days specified in the prospectus supplement after the
giving of written notice of the failure to the servicer by the
trustee, or to the servicer and the trustee by the holders of the
series evidencing not less than a specified percentage of the
aggregate voting rights of the securities for that series, and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by the
servicer indicating its insolvency, reorganization or inability
to pay its obligations.
The servicing agreement will specify the circumstances under which the
trustee of the holders of securities may remove the servicer upon the occurrence
and continuance of an event of default thereunder relating to the servicing of
loans, other than its right to recovery of other expenses and amounts advanced
under the terms of the servicing agreement which rights the servicer will retain
under all circumstances, whereupon the trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the servicing
agreement and will be entitled to reasonable servicing compensation not to
exceed the applicable servicing fee, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise as provided in
the servicing agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the prospectus supplement to act as successor servicer under the provisions of
the applicable servicing agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
and the other servicing compensation.
During the continuance of any event of default of a servicer, the
trustee will have the right to protect and enforce the rights of the holders,
and the majority holders may direct the time, method and place of conducting any
proceeding for exercising any trust power. However, the trustee will not be
under any obligation to pursue any remedy or to exercise any trusts or powers
unless the holders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the trustee.
The trustee may decline to follow any direction if the trustee determines that
the action or proceeding so directed may not lawfully be taken or would involve
it in personal liability or be unjustly prejudicial to the nonassenting holders.
Indenture. Events of default under the indenture for each series of
notes may include:
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o a default in the payment of any principal or interest on any
note, which continues for a specified period of time;
o failure to perform any other covenant of the issuer in the
indenture which continues for a specified period of time after
notice is given;
o any representation or warranty made by the issuer in the
indenture having been incorrect in a material respect as of the
time made, and the breach is not cured within a specified period
of time after notice is given; or
o events of bankruptcy, insolvency, receivership or liquidation of
the issuer.
If an event of default with respect to the notes of any series at the
time outstanding occurs and is continuing, either the trustee or the holders of
a majority of the outstanding notes may declare the notes to be due and payable
immediately. The declaration may, under some circumstances, be rescinded and
annulled by the majority holders.
If, following an event of default with respect to any series of notes,
the notes have been declared due and payable, the trustee may, in its
discretion, notwithstanding the acceleration, elect to maintain possession of
the collateral and to continue to apply distributions as if there had been no
acceleration if the collateral continues to provide sufficient funds for the
payment of principal and interest on the notes as they would have otherwise
become due. In addition, the trustee may not sell or otherwise liquidate the
collateral following an event of default other than a default in the payment of
any principal or interest on any note of the series for a specified period,
unless the all of the holders consent to the sale, the proceeds of the sale are
sufficient to pay in full the principal and interest due on the notes or the
trustee determines that the collateral would not be sufficient on an ongoing
basis to make all payments on the notes as those payments would have become due,
and the trustee obtains the consent of the holders of a specified amount of the
notes.
In the event that the trustee liquidates the collateral in connection
with an event of default involving a payment default, the trustee will have a
prior lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, upon the occurrence of an event of default, the amount available for
distribution to the holders may be less than would otherwise be the case.
If the principal of the notes of a series is declared due and payable,
the holders of any notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount thereof less
the amount of the discount which is unamortized.
If an event of default shall occur and be continuing, the trustee will
not be obligated to exercise any rights or powers under the indenture at the
request of the holders, unless the holders provide security satisfactory to the
trustee against the expenses and liabilities which might be incurred by it. The
majority holders shall have the right to direct the time, method and place of
conducting any proceeding for any remedy or exercising any power conferred on
the trustee with respect to the notes. The majority holders may waive the
default, except a default in the payment of principal or interest or a default
caused by a breach of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the affected note holders.
The Trustee
The prospectus supplement will identify the trustee for the series. The
trustee may have normal banking relationships with the sponsor or the servicer.
In addition, for the purpose of meeting the legal requirements of local
jurisdictions, the trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the trust fund relating to a series of
securities. In the event of an appointment,
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all rights, powers, duties and obligations conferred or imposed upon the trustee
will be conferred or imposed upon the trustee and each separate trustee or
co-trustee jointly, or, in any jurisdiction in which the trustee shall be
incompetent or unqualified to perform as trustee, singly upon the separate
trustee or co-trustee who will exercise and perform solely at the direction of
the trustee. The trustee may also appoint agents to perform any of the
responsibilities of the trustee, which agents will have any or all of the
rights, powers, duties and obligations of the trustee conferred on them by
appointment; although the trustee will continue to be responsible for its duties
and obligations under the agreement.
Duties of the Trustee
The trustee will not make any representations as to the validity or
sufficiency of the agreements, the securities or of any primary asset or
documents. If no event of default as defined in the agreement has occurred, the
trustee is required to perform only those duties specifically required of it
under the agreement. Upon receipt of the various certificates, statements,
reports or other instruments furnished to it, the trustee is required to examine
them to determine whether they are in the form required by the agreements.
However, the trustee will not be responsible for the accuracy or content of any
of the documents furnished to it by the holders or the servicer under the
agreement.
The trustee may be held liable for its negligent action or failure to
act, or for its misconduct. The trustee will not be liable, however, with
respect to any action taken, suffered or omitted to be taken by it in good faith
in accordance with the direction of the holders in an event of default. The
trustee is not required to expend its own funds or incur any financial liability
in the performance of its duties, or in the exercise of any of its rights or
powers, if repayment of those funds or adequate indemnity against risk is not
reasonably assured to it.
Resignation of Trustee
The trustee may, upon written notice to the sponsor, resign at any
time, in which event the sponsor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted the appointment within 30 days after the giving of a notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. The trustee may also be
removed at any time (1) if the trustee ceases to be eligible to continue as a
trustee under the agreement, (2) if the trustee becomes insolvent or (3) by the
majority holders. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
Amendment of Agreement
Each agreement may be amended by the parties to the agreement, without
notice to or consent of the holders, to correct any ambiguity or any defective
provisions, to supplement any provision, or to comply with any requirements
imposed by the Internal Revenue Code. Any amendment will not adversely affect in
any material respect the interests of any holders.
Each agreement may also be amended by the parties with the consent of a
specified percentage of the holders, for the purpose of adding, changing or
eliminating any provision of the agreement. No amendment may reduce or delay the
payments on any security without the consent of the holder of the security.
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Voting Rights
The prospectus supplement will state the method of determining
allocation of voting rights with respect to a series.
List of Holders
No agreement will provide for the holding of any annual or other
meeting of holders.
REMIC Administrator
For any series with respect to which a REMIC election is made,
preparation of reports and other administrative duties with respect to the trust
fund may be performed by a REMIC administrator, who may be an affiliate of the
sponsor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The pooling and
servicing agreement or trust agreement for a series will terminate upon the
distribution to holders of all amounts payable to them after the final payment
or liquidation of the primary assets and the disposition of all foreclosure
property or the sale by the trustee of the primary assets. For a description of
the ways in which securities may be retired early, see "Description of the
Securities--Optional Redemption, Purchase or Termination" and "--Mandatory
Termination; Auction Sale."
For each series, the servicer or the trustee, as applicable, will give
written notice of termination of the agreement to each holder, and the final
distribution will be made only upon surrender and cancellation of the securities
at an office or agency specified in the notice of termination.
Indenture. The indenture will be discharged with respect to a series of
notes upon the delivery to the trustee for cancellation of all the notes or,
with limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the notes of the series. See "Description of the
Securities--Defeasance."
Legal Aspects of Loans
The following discussion contains summaries of legal aspects of loans,
which are general in nature. Because these legal aspects are to a degree
governed by state law, the summaries do not purport to be complete, reflect the
laws of any particular state, nor encompass the laws of all states in which the
properties securing the mortgage loans are situated.
Mortgage Loans
The mortgage loans will be represented by a note and an accompanying
mortgage. The borrower is personally liable to repay the indebtedness evidenced
by the mortgage loan under the note. The mortgage creates a lien on the related
mortgaged property to secure the indebtedness.
Enforcement of the Note. Under the note, the borrower is personally
liable to repay the indebtedness evidenced by the mortgage loan. In some states,
the lender on a note secured by a lien on real property has the option of
bringing a personal action against the borrower on the debt without first
exhausting the security; however, in some of these states the lender, following
judgment on a personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with
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respect to the related property security. Consequently, the practical effect of
the election requirement, in those states permitting the election, is that
lenders will usually proceed against the property first rather than bringing a
personal action against the borrower on the note.
Some states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sales of the real property.
In the case of a mortgage loan secured by a property owned by a trust where the
mortgage note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which a deficiency judgment may
be executed. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, in other states, statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure to the excess of the
outstanding debt over the fair value of the property at the time of the public
sale. The purpose of these statutes is generally to prevent a beneficiary or
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default on a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the loan and final judgment of foreclosure had
been entered in state court, provided no sale of the residence had yet occurred,
prior to the filing of the debtor's petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a loan default by paying
arrearages over a number of years.
Court with federal bankruptcy jurisdiction also have indicated that the
terms of a loan secured by property of the debtor may be modified. These courts
have allowed modifications that include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Some states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lender have
been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, courts have limited the right of the lender to foreclose if the
default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
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Tax liens arising under the Internal Revenue Code may provide priority
over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of loans by numerous federal and some state
consumer protection laws. These laws include, by example, the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes and state laws, such as the California Fair Debt Collection Practices
Act. These laws and regulations impose specific statutory liabilities upon
lenders who originate loans and fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the loans.
Security Interests -- Real Estate Mortgages. The mortgage loans for a
series will be secured by either mortgages or deeds of trust or deeds to secure
debt depending upon the prevailing practice in the state in which the mortgaged
property subject to a mortgage loan is located. The filing of a mortgage, deed
of trust or deed to secure debt creates a lien or title interest upon the real
property covered by the instrument and represents the security for the repayment
of an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments or other charges imposed
under governmental police powers and may also be subject to other liens under
the laws of the jurisdiction in which the mortgaged property is located.
Priority with respect to the instruments depends on their terms, the knowledge
of the parties to the mortgage and generally on the order of recording with the
applicable state, county or municipal office. There are two parties to a
mortgage, the mortgagor, who is the borrower/property owner or the land trustee,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the mortgaged property
is held by a land trustee under a land trust agreement of which the
borrower/property owner is the beneficiary; at origination of a mortgage loan,
the borrower executes a separate undertaking to make payments on the mortgage
note. A deed of trust transaction normally has three parties: The trustor, who
is the borrower/property owner; the beneficiary, who is the lender; and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
mortgaged property, irrevocably until the debt is paid, in trust, generally with
a power of sale, to the trustee to secure payment of the obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
Foreclosure on Mortgages. Foreclosure of a mortgage is generally
accomplished by judicial action. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming and expensive. After the completion of a
judicial foreclosure proceeding, the court may issue a judgment of foreclosure
and appoint a receiver or other officer to conduct the sale of the mortgaged
property. In some states, mortgages may also be foreclosed by advertisement,
under a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the mortgaged property upon any default by the
borrower under the terms of the note or deed of trust. In some states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a
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notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. In addition, some
state laws require that a copy of the notice of sale be posted on the mortgaged
property and sent to all parties having an interest of record in the mortgaged
property. The trustor, borrower, or any person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the mortgaged property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct warranting a court of equity to refuse
affirmative relief to the mortgagee. A court of equity may relieve the mortgagor
from an entirely technical default where that default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year, or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law, of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty third party purchasers have in
determining the exact status of title and because the physical condition of the
mortgaged property may have deteriorated during the foreclosure proceedings, it
is uncommon for a third party to purchase the mortgaged property at a
foreclosure sale. Rather, it is common for the lender to purchase the mortgaged
property from the trustee or referee for an amount which may be equal to the
unpaid principal amount of the mortgage note secured by the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure, in which
event the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where that judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making repairs at its own
expense as are necessary to render the mortgaged property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the mortgaged property.
Depending upon market conditions, the ultimate proceeds of the sale of the
mortgaged property may not equal the lender's investment in the mortgaged
property. Any loss may be reduced by the receipt of any mortgage guaranty
insurance proceeds.
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Rights of Redemption. In some states, after sale under a deed of trust
or foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the mortgaged property
from the foreclosure sale. The right of redemption should be distinguished from
the equity of redemption, which is a non-statutory right that must be exercised
prior to the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged property. The exercise of a right of redemption would
defeat the title of any purchaser at a foreclosure sale, or of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently the practical effect of a right of redemption is to force the
lender to retain the mortgaged property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
mortgaged property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages. The mortgage loans
comprising or underlying the primary assets included in the trust fund for a
series will be secured by mortgages or deeds of trust which may be second or
more junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the trust fund, and therefore the holders, as mortgagee
under a junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the mortgaged property
securing the mortgage loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the mortgaged property in foreclosure litigation
and, possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure the
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in any order as the mortgagee may determine. Thus, in the event
improvements on the mortgaged property are damaged or destroyed by fire or other
casualty, or in the event the mortgaged property is taken by condemnation, the
mortgagee or beneficiary under underlying senior mortgages will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages. Proceeds in excess of
the amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the mortgaged property and, when due,
all encumbrances, charges and liens on the mortgaged property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
mortgaged property, to maintain and repair the mortgaged property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the mortgaged property or the rights of the
mortgagee under the mortgage. Upon a failure of the mortgagor to perform any of
these obligations, the mortgagee is sometimes given the right to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by the mortgagee become part of the indebtedness secured by the
mortgage.
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Due-On-Sale Clauses in Mortgage Loans. Due-on-sale clauses permit the
lender to accelerate the maturity of the loan if the borrower sells or
transfers, whether voluntarily or involuntarily, all or part of the real
mortgaged property securing the loan without the lender's prior written consent.
The enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases, typically involving single family
residential mortgage transactions, their enforceability has been limited or
denied. In any event, the Garn-St. Germain Depository Institutions Act of 1982
preempts state law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, with
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of the clauses with respect to loans that were (1) originated
or assumed during the "window period" under the Garn-St. Germain Act which ended
in all cases not later than October 15, 1982, and (2) originated by lenders
other than national banks, federal savings institutions and federal credit
unions. The Federal Home Loan Mortgage Corporation has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states, Arizona, Michigan, Minnesota, New Mexico and Utah,
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses in window period loans. Also,
the Garn-St. Germain Act does "encourage" lenders to permit assumption of loans
at the original rate of interest or at some other rate less than the average of
the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable if resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees. Forms of notes,
mortgages and deeds of trust used by lenders may contain provisions obligating
the borrower to pay a late charge if payments are not timely made, and in some
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In some states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
Equitable Limitations on Remedies. In connection with lenders' attempts
to realize upon their security, courts have invoked general equitable
principles. The equitable principles are generally designed to relieve the
borrower from the legal effect of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to realize upon his security if the
default under the security agreement is not monetary, such as the borrower's
failure to adequately maintain the mortgaged property or the borrower's
execution of secondary financing affecting the mortgaged property. Finally, some
courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in cases involving
the sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family loans may be prepaid in full or in part
without penalty. The regulations of the Office of Thrift Supervision prohibit
the imposition of a prepayment penalty or equivalent fee for or in connection
with the acceleration of a loan by exercise of a due-on-sale clause. A
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mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
loans having higher mortgage rates, may increase the likelihood of refinancing
or other early retirements of the loans.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980, provides
that state usury limitations shall not apply to specified types of residential
first loans originated by specified lenders after March 31, 1980. Similar
federal statutes were in effect with respect to loans made during the first
three months of 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. Title V
authorizes any state to reimpose interest rate limits by adopting, before April
1, 1983, a state law, or by certifying that the voters of a state have voted in
favor of any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on loans covered by Title V.
Security Interests in Personal Property and Fixtures. A portion of each
mortgaged property may consist of property which is "personal property" or a
"fixture" under local state law. This will most commonly occur when the proceeds
of the related mortgage loan were applied to property improvements, although any
mortgaged property may have some personal property components. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods. Those purchase money security interests are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the personal property must generally be perfected by a timely fixture filing. In
general, a security interest does not exist in ordinary building material
incorporated into an improvement on land. Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
their characterization, upon incorporation of the materials into the related
property, will not be secured by a purchase money security interest in the
personal property being financed.
Enforcement of Security Interest in Personal Property. So long as the
personal property has not become subject to the real estate law, a creditor can
repossess the property securing a contract by voluntary surrender, by
"self-help" repossession that is peaceful or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on the state, prior to commencement of
any repossession. Most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting the sale. Most states also require that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
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Contracts
As a result of the assignment of the contracts to the trustee, the
trust fund will succeed collectively to all of the rights and will assume the
obligations of the obligee under the contracts. Each contract evidences both the
obligor's obligation to repay the loan, and the grant of a security interest in
the manufactured home. Aspects of both features of the contracts are described
more fully below.
The contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the manufactured homes
initially were registered. The Uniform Commercial Code treats the sale of
chattel paper in a manner similar to perfection of a security interest in
chattel paper. The seller will transfer physical possession of the contracts to
the trustee or a designated custodian or may retain possession of the contracts
as custodian for the trustee. In addition, the seller will make an appropriate
filing of a financing statement in the appropriate states to give notice of the
trustee's ownership of the contracts. Unless otherwise specified in the
prospectus supplement, the contracts will not be stamped or marked otherwise to
reflect their assignment from the sponsor to the trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
trustee's interest in contracts could be defeated.
Security Interests in the Manufactured Homes
The manufactured homes securing the contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection is
governed by the Uniform Commercial Code. The servicer may effect the notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the servicer fails, due to clerical errors, to effect
the notation or delivery, or files the security interest under the wrong law,
the trustee may not have a first priority security interest in the manufactured
home securing a contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the Uniform Commercial Code or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the
Uniform Commercial Code, and the notation of the security interest on the
certificate of title or the filing of a financing statement will be effective to
maintain the priority of the security interest in the manufactured home. If,
however, a manufactured home is permanently attached to its site, other parties
could obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the issuer. With
respect to a series of securities and if so described in the prospectus
supplement, the servicer may be required to perfect a security interest in the
manufactured home under applicable real estate laws. The servicer will represent
that at the date of the initial issuance of the related securities it has
obtained a perfected first priority security interest by proper notation or
delivery of the required documents and fees with respect to substantially all of
the manufactured homes securing the contracts.
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The sponsor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the holders. Neither the sponsor nor
the trustee will amend the certificates of title to identify the trustee or the
trust fund as the new secured party, and neither the sponsor nor the servicer
will deliver the securities of title to the trustee or note thereon the interest
of the trustee. Accordingly, the servicer, or the seller, continues to be named
as the secured party on the certificate of title relating to the manufactured
homes. In many states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the sponsor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, the assignment of the security interest in the
manufactured home might not be effective or perfected or that, in the absence of
notation or delivery to the trustee, the assignment of the security interest in
the manufactured home might not be effective against creditors of the servicer
(or the seller) or a trustee in bankruptcy of the servicer, or the seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the servicer, or
the seller, on the certificate of title or delivery of the required documents
and fees will be sufficient to protect the holders against the rights of
subsequent purchasers of a manufactured home or subsequent lenders who take a
security interest in the manufactured home. If there are any manufactured homes
as to which the security interest assigned to the trustee is not perfected, that
security interest would be subordinate to, among others, subsequent purchasers
for value of manufactured homes and holders of perfected security interests.
There also exists a risk in not identifying the trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the holders could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which that manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and thereafter
until the owner re-registers the manufactured home in the state. If the owner
were to relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the trustee must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states which provide for notation of lien, the servicer would
receive notice of surrender if the security interest in the manufactured home is
noted on the certificate of title. Accordingly, the trustee would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing conditional sales
contracts, the servicer takes steps to effect the re-perfection upon receipt of
notice of registration or information from the obligor as to relocation.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the trustee, or its custodian, must
surrender possession of the certificate of title or the servicer will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the servicing
agreement, the servicer is obligated to take steps as are necessary to maintain
perfection of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest. The seller will represent that it has no knowledge
of any liens with respect to any manufactured home securing payment on any
contract. However, those liens could arise at any time during the term of a
contract. No notice will be given to the trustee or holders in the event that a
lien arises.
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Enforcement of Security Interests in Manufactured Homes
The servicer on behalf of the trustee, to the extent required by the
related servicing agreement, may take action to enforce the trustee's security
interest with respect to contracts in default by repossession and resale of the
manufactured homes securing the defaulted contracts. So long as the manufactured
home has not become subject to the real estate law, a creditor can repossess a
manufactured home securing a contract by voluntary surrender, by "self-help"
repossession that is peaceful or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The Uniform Commercial Code and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit so that the debtor may redeem at or before the
resale. In the event of the repossession and resale of a manufactured home, the
trustee would be entitled to be paid out of the sale proceeds before those
proceeds could be applied to the payment of the claims of unsecured creditors or
the holders of subsequently perfected security interests or, thereafter, to the
debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing that debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
Consumer Protection Laws
The so-called "holder-in-due-course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction,
and related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of contract to all claims and defenses which the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to asset the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against the obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination of the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to.
In the case of a transfer of a manufactured home after which the
servicer desires to accelerate the maturity of the related contract, the
servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Depository Institutions Act of
1982 generally
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preempts state laws prohibiting enforcement of "due-on-sale" clauses applicable
to the manufactured homes, with some exemptions and conditions. Consequently, in
some states the servicer may be prohibited from enforcing a "due-on-sale" clause
in the contracts.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on specified kinds of manufactured housing. The contracts would be covered if
they satisfy specified conditions, among other things, governing the terms of
any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The seller will represent that all of the contracts comply with applicable usury
law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including components of manufactured housing such as
plywood flooring and wall paneling. Some of these lawsuits were brought against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. sponsor is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
The holder of any contract secured by a manufactured home with respect
to which a formaldehyde claim has been successfully asserted may be liable to
the obligor for the amount paid by the obligor on the related contract and may
be unable to collect amounts still due under the contract. The successful
assertion of that claim constitutes a breach of a representation or warranty of
the person specified in the prospectus supplement, and the holders would suffer
a loss only to the extent that (1) the person breached its obligation to
repurchase the contract in the event an obligor is successful in asserting the
claim, and (2) the person, the servicer or the trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the holders
against the manufacturer or other persons who were directly liable to the
plaintiff for the damages. Typical products liability insurance policies held by
manufacturers and component suppliers of manufactured homes may not cover
liabilities arising from formaldehyde in manufactured housing, with the result
that recoveries from those manufacturers, suppliers or other persons may be
limited to their corporate assets without the benefit of insurance.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service, (1) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (2) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on those obligations entered into prior to
military service for the duration of military service and (3) may have the
maturity of the obligations incurred prior to military service extended, the
payments lowered and the payment
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schedule readjusted for a period of time after the completion of military
service. However, the benefits of (1), (2), or (3) above are subject to
challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with the obligations is not materially impaired by military
service, the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a mortgage loan included in a trust
fund for a series is relieved under the Soldiers' and Sailors' Civil Relief Act
of 1940, none of the trust fund, the servicer, the sponsor nor the trustee will
be required to advance the amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the holders of the securities of that
series.
Material Federal Income Tax Consequences
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors are urged to consult their own tax advisors
in determining the particular federal, state and local consequences to them of
the purchase, ownership and disposition of the securities. References in this
section to "sections" and the "code" refer to the Internal Revenue Code of 1986.
The following discussion addresses securities of five general types:
o securities representing interests in a grantor trust which the
sponsor will covenant not to elect to have treated as a REMIC or
a FASIT;
o securities representing interests in a trust, or a portion
thereof, which the sponsor will covenant to elect to have treated
as a REMIC under sections 860A through 860G;
o securities that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans;
o securities representing interests in a trust that is intended to
be treated as a partnership under the code; and
o securities representing interests in a trust, or portion thereof,
which the Company will covenant to elect to have treated as a
FASIT under sections 860H through 860L.
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election (or elections) will be made for the related
trust and, if a REMIC or FASIT election is to be made, will identify all
"regular interests" and "residual interests" in the REMIC or all "regular
interests," "high-yield interests" or the "ownership interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the code that
require the recognition of gain upon the "constructive sale of an appreciated
financial position." A constructive sale of an appreciated financial position
occurs if a taxpayer enters into transactions with respect to a financial
instrument that have the effect of substantially eliminating the taxpayer's risk
of loss and opportunity for gain with respect to the financial instrument. These
provisions apply only to classes of securities that do not have a principal
balance.
Grantor Trust Securities
With respect to each series of grantor trust securities, Dewey
Ballantine LLP, special tax counsel to the sponsor, will deliver its opinion to
the sponsor that the related grantor trust will be classified as a
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grantor trust and not as a partnership or an association taxable as a
corporation. The opinion shall be attached on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the Securities and Exchange Commission
as a post-effective amendment to the prospectus. Accordingly, each beneficial
owner of a grantor trust security will generally be treated as the owner of an
interest in the loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
loans constituting the related grantor trust, together with interest thereon at
a pass-through rate, will be referred to as a "grantor trust fractional interest
security." A grantor trust security representing ownership of all or a portion
of the difference between interest paid on the loans constituting the related
grantor trust and interest paid to the beneficial owners of grantor trust
fractional interest securities issued with respect to the grantor trust will be
referred to as a "grantor trust strip security."
Taxation of Beneficial Owners of Grantor Trust Securities
Beneficial owners of grantor trust fractional interest securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding grantor trust strip securities) and,
subject to the limitations described below, will be entitled to deduct their
shares of any reasonable servicing fees and other expenses. If a beneficial
owner acquires a grantor trust fractional interest security for an amount that
differs from its outstanding principal amount, the amount includible in income
on a grantor trust fractional interest security may differ from the amount of
interest distributable thereon. See "Discount and Premium," below. Individuals
holding a grantor trust fractional interest security directly or through
pass-through entities will be allowed a deduction for reasonable servicing fees
and expenses only to the extent that the aggregate of the beneficial owner's
miscellaneous itemized deductions exceeds 2% of the beneficial owner's adjusted
gross income. Further, beneficial owners (other than corporations) subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining alternative minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as "stripped coupons" under section 1286.
Accordingly, that beneficial owner will be required to treat the excess of the
total amount of payments on the security over the amount paid for the security
as original issue discount and to include the discount in income as it accrues
over the life of the security. See "--Discount and Premium," below.
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued as
part of the same series of securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of that security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues (regardless of the beneficial owner's method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying loans and (ii) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security.
Sales of Grantor Trust Securities
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Any gain or loss recognized on the sale of a grantor trust security
(equal to the difference between the amount realized on the sale and the
adjusted basis of the grantor trust security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c). The adjusted basis of a
grantor trust security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest security with each distribution a statement setting forth
the amount of the distribution allocable to principal on the underlying loans
and to interest thereon at the related interest rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master servicer, the trustee will furnish to each beneficial
owner during the year any customary factual information that the Master servicer
deems necessary or desirable to enable beneficial owners of grantor trust
securities to prepare their tax returns and will furnish comparable information
to the Internal Revenue Service (the "IRS") as and when required to do so by
law.
REMIC Securities
If provided in a prospectus supplement, an election will be made to
treat a trust as a REMIC. With respect to each series of securities for which
that election is made, Dewey Ballantine LLP, special tax counsel to the sponsor,
will deliver its opinion to the sponsor that, assuming compliance with the
pooling and servicing agreement, the trust will be treated as a REMIC for
federal income tax purposes. A trust for which a REMIC election is made will be
referred to in this prospectus as a "REMIC trust." The securities of each class
will be designated as "regular interests" in the REMIC trust except that a
separate class will be designated as the "residual interest" in the REMIC trust.
The prospectus supplement for each series of securities will state whether
securities of each class will constitute a REMIC regular security or a REMIC
residual security. The opinion shall be attached on Form 8-K to be filed with
the securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the securities and Exchange Commission
as a post-effective amendment to the prospectus.
A REMIC trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
mortgage loans in a REMIC trust will be taxable to the beneficial owners of the
securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
securities. While material provisions of the REMIC regulations are discussed
below, investors should consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
Special Tax Attributes
REMIC regular securities and REMIC residual securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) and "real estate assets" within the meaning of section
856(c)(5)(A). If at any time during a calendar year less than 95% of the assets
of a REMIC trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3)) then the portion of the
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REMIC regular securities and REMIC residual securities that are qualifying
assets under those sections during the calendar year may be limited to the
portion of the assets of the REMIC trust that are qualified mortgages.
Similarly, income on the REMIC regular securities and REMIC residual securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) , subject to the same
limitation as described in the preceding sentence. For purposes of applying this
limitation, a REMIC trust should be treated as owning the assets represented by
the qualified mortgages. The assets of the trust fund will include, in addition
to the mortgage loans, payments on the mortgage loans held pending distribution
on the REMIC regular securities and REMIC residual securities and any
reinvestment income thereon. REMIC regular securities and REMIC residual
securities held by a financial institution to which section 585, 586 or 593
applies will be treated as evidences of indebtedness for purposes of section
582(c)(1). REMIC regular securities will also be qualified mortgages with
respect to other REMICs.
Taxation of Beneficial Owners of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC regular securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC trust on the settlement date and not as
ownership interests in the REMIC trust or its assets. Beneficial owners of REMIC
regular securities that otherwise report income under a cash method of
accounting will be required to report income with respect to those securities
under an accrual method. For additional tax consequences relating to REMIC
regular securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Taxation of Beneficial Owners of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner of a
REMIC residual security for a REMIC trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC trust for each
day during a calendar quarter that the beneficial owner owned the REMIC residual
security. For this purpose, the daily portion shall be determined by allocating
to each day in the calendar quarter its ratable portion of the taxable income or
net loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the beneficial owners of residual securities (on that day) in
accordance with their percentage interests on that day. Any amount included in
the gross income or allowed as a loss of any beneficial owner of a residual
security by virtue of this paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC residual security
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual security may have received
full payment of the stated interest and principal on its REMIC residual
security.
The trustee will provide to beneficial owners of REMIC residual
securities of each series of securities (i) any information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the securities of the series that may be required under the code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC trust. The
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) ) on the REMIC regular securities (but not
the REMIC
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residual securities), even though REMIC regular securities are for non-tax
purposes evidences of beneficial ownership rather than indebtedness of a REMIC
trust. Second, market discount or premium equal to the difference between the
total stated principal balances of the qualified mortgages and the basis to the
REMIC trust generally will be included in income (in the case of discount) or
deductible (in the case of premium) by the REMIC trust as it accrues under a
constant yield method, taking into account the "prepayment assumption" (as
defined in the prospectus supplement, see "--Discount and Premium--Original
Issue Discount," below). The basis to a REMIC trust in the qualified mortgages
is the aggregate of the issue prices of all the REMIC regular securities and
REMIC residual securities in the REMIC trust on the settlement date. If,
however, a substantial amount of a class of REMIC regular securities or REMIC
residual securities has not been sold to the public, then the fair market value
of all the REMIC regular securities or REMIC residual securities in that class
as of the date of the prospectus supplement should be substituted for the issue
price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2). Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 will not
be applied at the REMIC trust level to any servicing and guaranty fees. (See,
however, "--Pass-Through of Servicing and Guaranty Fees to Individuals" below.)
In addition, under the REMIC regulations, any expenses that are incurred in
connection with the formation of a REMIC trust and the issuance of the REMIC
regular securities and REMIC residual securities are not treated as expenses of
the REMIC trust for which a deduction is allowed. If the deductions allowed to a
REMIC trust exceed its gross income for a calendar quarter, the excess will be a
net loss for the REMIC trust for that calendar quarter. The REMIC regulations
also provide that any gain or loss to a REMIC trust from the disposition of any
asset, including a qualified mortgage or "permitted investment" (as defined in
section 860G(a)(5) ) will be treated as ordinary gain or loss.
A beneficial owner of a REMIC residual security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC trust at a discount, some or all of the
REMIC regular securities are issued at a discount, and the discount included as
a result of a prepayment on a mortgage loan that is used to pay principal on the
REMIC regular securities exceeds the REMIC trust's deduction for unaccrued
original issue discount relating to the REMIC regular securities. Taxable income
may also be greater in earlier years because interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
regular securities, may increase over time as the earlier classes of REMIC
regular securities are paid, whereas interest income with respect to any given
mortgage loan expressed as a percentage of the outstanding principal amount of
that mortgage loan, will remain constant over time.
Basis Rules and Distributions. A beneficial owner of a REMIC residual
security has an initial basis in its security equal to the amount paid for that
REMIC residual security. That basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account with respect to the REMIC residual security. A
distribution on a REMIC residual security to a beneficial owner is not included
in gross income to the extent it does not exceed the beneficial owner's basis in
the REMIC residual security (adjusted as described above) and, to the extent it
exceeds the adjusted basis of the REMIC residual security, shall be treated as
gain from the sale of the REMIC residual security.
A beneficial owner of a REMIC residual security is not allowed to take
into account any net loss for any calendar quarter to the extent that the net
loss exceeds the beneficial owner's adjusted basis in its REMIC residual
security as of the close of the calendar quarter (determined without regard to
the net
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loss). Any loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC residual security.
Excess Inclusions. Any excess inclusions with respect to a REMIC
residual security are subject to special tax rules. With respect to a beneficial
owner of a REMIC residual security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during a quarter that
the REMIC residual security was held by the beneficial owner. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC residual
security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to the REMIC
residual security before the beginning of that quarter. The issue price of a
REMIC residual security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC residual
securities was sold. The federal long-term rate is a blend of current yields on
treasury securities having a maturity of more than nine years, computed and
published monthly by the IRS.
In general, beneficial owners of REMIC residual securities with excess
inclusion income cannot offset that income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income (as defined in section 511 ), an excess inclusion of a beneficial owner
is treated as unrelated business taxable income. With respect to variable
contracts (within the meaning of section 817 ), a life insurance company cannot
adjust its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC regulations indicate that if a beneficial owner of a
REMIC residual security is a member of an affiliated group filing a consolidated
income tax return, the taxable income of the affiliated group cannot be less
than the sum of the excess inclusions attributable to all residual interests in
REMICs held by members of the affiliated group. For a discussion of the effect
of excess inclusions on foreign investors that own REMIC residual securities,
see "--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC regulations, future
regulations may contain this rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no similar rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC residual securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to REMIC
residual securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) , excluding any
net capital gain) will be allocated among the shareholders of that trust in
proportion to the dividends received by the shareholders from the trust, and any
amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual security as if held directly by the shareholder. Similar rules
will apply in the case of regulated investment companies, common trust funds and
cooperatives that hold a REMIC residual security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A
beneficial owner of a REMIC residual security who is an individual will be
required to include in income a share of any servicing and guaranty fees. A
deduction for these fees will be allowed to a beneficial owner only to the
extent that
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those fees, along with some of the beneficial owner's other miscellaneous
itemized deductions exceed 2% of the beneficial owner's adjusted gross income.
In addition, a beneficial owner of a REMIC residual security may not be able to
deduct any portion of the fees in computing a beneficial owner's alternative
minimum tax liability. A beneficial owner's share of the fees will generally be
determined by (i) allocating the amount of the expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter, and (ii)
allocating the daily amount among the beneficial owners in proportion to their
respective holdings on that day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
under specified exceptions, the receipt of investment income from a source other
than a mortgage loan or other permitted investments, the receipt of compensation
for services, or the disposition of an asset purchased with the payments on the
qualified mortgages for temporary investment pending distribution on the regular
and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the settlement date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a
beneficial owner of a residual interest, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years, with
a possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
Except as provided below, if a REMIC regular residual security is sold,
the seller will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the security. The adjusted
basis of a REMIC regular security generally will equal the cost of that security
to the seller, increased by any original issue discount or market discount
included in the seller's gross income with respect to the security and reduced
by distributions on that security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income with respect to the security. See
"--Discount and Premium." The adjusted basis of a REMIC residual security is
determined as described above under "--Taxation of Beneficial Owners of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) , any gain or loss will be capital
gain or loss, provided the security is held as a "capital asset" (generally,
property held for investment) within the meaning of section 1221.
Gain from the sale of a REMIC regular security that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the income of the beneficial owner of a REMIC regular security had
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income accrued at a rate equal to 110% of the "applicable federal rate"
(generally, an average of current yields on treasury securities) as of the date
of purchase over (ii) the amount actually includible in the beneficial owner's
income. In addition, gain recognized on a sale by a beneficial owner of a REMIC
regular security who purchased the security at a market discount would also be
taxable as ordinary income in an amount not exceeding the portion of the
discount that accrued during the period a security was held by the beneficial
owner, reduced by any market discount includible in income under the rules
described below under "--Discount and Premium."
If a beneficial owner of a REMIC residual security sells its REMIC
residual security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC residual security, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) ) comparable to a residual
interest in a REMIC. That disallowed loss would be allowed upon the sale of the
other residual interest (or comparable interest) if the rule referred to in the
preceding sentence does not apply to that sale. While this rule may be modified
by treasury regulations, no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC residual security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, cooperatives, and nominees) that owns a REMIC residual security
if the pass-through entity has a disqualified organization as a record-holder.
For purposes of the preceding sentence, a transfer includes any transfer of
record or beneficial ownership, whether by purchase, by default under a secured
lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless the organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in the
entity are not held by disqualified organizations and (ii) information necessary
for the application of the REMIC tax will be made available. Restrictions on the
transfer of a REMIC residual security and other provisions that are intended to
meet this requirement are described in the pooling and servicing agreement, and
will be discussed more fully in the prospectus supplement relating to the
offering of any REMIC residual security. In addition, a pass-through entity
(including a nominee) that holds a REMIC residual security may be subject to
additional taxes if a disqualified organization is a record-holder of an
interest in that entity. A transferor of a REMIC residual security (or an agent
of a transferee of a REMIC residual security, as the case may be) will be
relieved of that tax liability if (i) the transferee furnishes to the transferor
(or the transferee's agent) an affidavit that the transferee is not a
disqualified organization, and (ii) the transferor (or the transferee's agent)
does not have actual knowledge that the affidavit is false at the time of the
transfer. Similarly, no tax will be imposed on a pass-through entity for a
period with respect to an interest in that entity is owned by a disqualified
organization if (i) the record-holder of the interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during that period, the pass-through entity has no actual knowledge that
the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the code that will
apply to an "electing large partnership." If an electing large partnership holds
a residual certificate, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e). An exception to this tax,
otherwise available to a pass-through entity
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that is furnished with affidavits by record holders of interests in the entity
and that does not know the affidavits are false, is not available to an electing
large partnership.
Under the REMIC regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--grantor
trust securities and REMIC regular securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC residual security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC residual security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to that security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when the
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC residual security, determined as of the date
the security is transferred and based on events that have occurred as of that
date and on the prepayment assumption. See "--Discount and Premium" and
"--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes representations to the transferor in the affidavit relating to
disqualified organizations discussed above. Transferors of a REMIC residual
security should consult with their own tax advisors for further information
regarding the transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions , each REMIC trust will be treated as a partnership
and the beneficial owners of REMIC residual securities will be treated as
partners. The trustee will prepare, sign and file federal income tax returns for
each REMIC trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the trustee will
furnish to each beneficial owner that received a distribution during that year a
statement setting forth the portions of any distributions that constitute
interest distributions, original issue discount, and any other information
required by treasury regulations and, with respect to beneficial owners of REMIC
residual securities in a REMIC trust, information necessary to compute the daily
portions of the taxable income (or net loss) of the REMIC trust for each day
during the year. The trustee will also act as the tax matters partner for each
REMIC trust, either in its capacity as a beneficial owner of a REMIC residual
security or in a fiduciary capacity. Each beneficial owner of a REMIC residual
security, by the acceptance of its REMIC residual security, agrees that the
trustee will act as its fiduciary in the performance of any duties required of
it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC residual security is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC trust level.
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Termination
In general, no special tax consequences will apply to a beneficial
owner of a REMIC regular security upon the termination of a REMIC trust by
virtue of the final payment or liquidation of the last mortgage loan remaining
in the trust fund. If a beneficial owner of a REMIC residual security's adjusted
basis in its REMIC residual security at the time the termination occurs exceeds
the amount of cash distributed to the beneficial owner in liquidation of its
interest, although the matter is not entirely free from doubt, it would appear
that the beneficial owner of the REMIC residual security is entitled to a loss
equal to the amount of that excess.
Debt Securities
With respect to each series of debt securities, Dewey Ballantine LLP,
special tax counsel to the sponsor, will deliver its opinion to the sponsor that
the securities will be classified as debt secured by the related loans.
Consequently, the debt securities will not be treated as ownership interests in
the loans or the trust. Beneficial owners will be required to report income
received with respect to the debt securities in accordance with their normal
method of accounting. For additional tax consequences relating to debt
securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, debt securities will
not possess these special tax attributes. Investors to whom these attributes are
important should consult their own tax advisors regarding investment in debt
securities.
Sale or Exchange
If a beneficial owner of a debt security sells or exchanges the
security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the security. The adjusted basis in the security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
security and reduced by the payments previously received on the security, other
than payments of qualified stated interest, and by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for financial institutions subject to section 582(c) ,
any gain or loss on the sale or exchange of a debt security recognized by an
investor who holds the security as a capital asset (within the meaning of
section 1221 ), will be capital gain or loss and will be long-term or short-term
depending on whether the security has been held for more than one year.
Partnership Interests
With respect to each series of partnership interests, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that the trust will be treated as a partnership and not an association taxable
as a corporation for federal income tax purposes. The opinion shall be attached
on Form 8-K to be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the securities or filed with the
Securities and Exchange Commission as a post-effective amendment to the
prospectus. Accordingly, each beneficial owner of a partnership interest will
generally be treated as the owner of an interest in the loans.
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Special Tax Attributes
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, partnership interests
will not possess these special tax attributes. Investors to whom these
attributes are important should consult their own tax advisors regarding
investment in partnership interests.
Taxation of Beneficial Owners of Partnership Interests
If the trust is treated as a partnership for federal income tax
purposes, the trust will not be subject to federal income tax. Instead, each
beneficial owner of a partnership interest will be required to separately take
into account an allocable share of income, gains, losses, deductions, credits
and other tax items of the trust. These partnership allocations are made in
accordance with the code, treasury regulations and the partnership agreement
(here, the trust agreement and related documents).
The trust's assets will be the assets of the partnership. The trust's
income will consist primarily of interest and finance charges earned on the
underlying mortgage loans. The trust's deductions will consist primarily of
interest accruing with respect to any indebtedness issued by the trust,
servicing and other fees, and losses or deductions upon collection or
disposition of the trust's assets.
The trust could have an obligation to make payments of withholding tax
on behalf of a beneficial owner of a partnership interest. (See "Backup
Withholding" and "Foreign Investors" below).
Substantially all of the taxable income allocated to a beneficial owner
of a partnership interest that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to the
holder under the code.
Under section 708 , the trust will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in the
trust are sold or exchanged within a 12-month period. Under the final
regulations issued on May 9, 1997 if such a termination occurs, the trust is
deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or
exchange of partnership interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the partnership interests
sold. A beneficial owner of a partnership interest's tax basis in a partnership
interest will generally equal the beneficial owner's cost increased by the
beneficial owner's share of trust income (includible in income) and decreased by
any distributions received with respect to the partnership interest. In
addition, both the tax basis in the partnership interest and the amount realized
on a sale of a partnership interest would take into account the beneficial
owner's share of any indebtedness of the trust. A beneficial owner acquiring
partnership interests at different prices may be required to maintain a single
aggregate adjusted tax basis in the partnership interest, and upon sale or other
disposition of some of the partnership interests, allocate a portion of the
aggregate tax basis to the partnership interests sold (rather than maintaining a
separate tax basis in each partnership interest for purposes of computing gain
or loss on a sale of that partnership interest).
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Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under section 754.
Partnership Reporting Matters
The Owner trustee is required to (i) keep complete and accurate books
of the trust, (ii) file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the trust and (iii) report each beneficial
owner of a partnership interest's allocable share of items of trust income and
expense to beneficial owners and the IRS on Schedule K-1. The trust will provide
the Schedule K-1 information to nominees that fail to provide the trust with the
information statement described below and those nominees will be required to
forward the information to the beneficial owners of the partnership interests.
Generally, beneficial owners of a partnership interests must file tax returns
that are consistent with the information return filed by the trust or be subject
to penalties unless the beneficial owner of a partnership interest notifies the
IRS of all the inconsistencies.
Under section 6031 , any person that holds partnership interests as a
nominee at any time during a calendar year is required to furnish the trust with
a statement containing information on the nominee, the beneficial owners and the
partnership interests so held. Required information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity or a
foreign government, and international organization, or any wholly owned agency
or instrumentality of either of the foregoing, and (z) information on
partnership interests that were held, bought or sold on behalf of the person
throughout the year. In addition, brokers and financial institutions that hold
partnership interests through a nominee are required to furnish directly to the
trust information as to themselves and their ownership of partnership interests.
A clearing agency registered under section 17A of the Securities Exchange Act of
1934 is not required to furnish any such information statement to the trust.
Nominees, brokers and financial institutions that fail to provide the trust with
the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a partnership interests, and a beneficial owner of a
partnership interest may be precluded from separately litigating a proposed
adjustment to the items of the trust. An adjustment could also result in an
audit of the beneficial owner of a partnership interest's returns and
adjustments of items note related to the income and losses of the trust.
FASIT Securities
If provided in a prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of section 860L(a). With respect
to each series of securities for which an election is made, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that, assuming compliance with the pooling and servicing agreement, the trust
will be treated as a FASIT
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for federal income tax purposes. A trust for which a FASIT election is made will
be referred to in this prospectus as a "FASIT trust." The securities of each
class will be designated as "regular interests" or "high-yield regular
interests" in the FASIT trust except that one separate class will be designated
as the "ownership interest" in the FASIT trust. The prospectus supplement for
each series of securities will state whether securities of each class will
constitute either a regular interest or a high-yield regular interest (a FASIT
regular security) or an ownership interest (a FASIT Ownership security). The
opinion shall be attached on Form 8-K to be filed with the securities and
Exchange Commission within fifteen days after the initial issuance of the
securities or filed with the securities and Exchange Commission as a
post-effective amendment to the prospectus.
Special Tax Attributes
FASIT securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of sections 856(c)(5)(A) and 856(c)(6)
and interest on the FASIT regular securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) in the same proportion
that, for both purposes, the assets of the FASIT trust and the income thereon
would be so treated. FASIT regular securities held by a domestic building and
loan association will be treated as "regular interest[s] in a FASIT" under
section 7701(a)(19)(C)(xi), but only in the proportion that the FASIT trust
holds "loans . . . secured by an interest in real property which is . . .
residential real property" within the meaning of section 7701(a)(19)(C)(v). If
at all times 95% or more of the assets of the FASIT trust or the income thereon
qualify for the foregoing treatments, the FASIT regular securities will qualify
for the corresponding status in their entirety. For purposes of section
856(c)(5)(A), payments of principal and interest on a mortgage loan that are
reinvested pending distribution to holders of FASIT regular securities should
qualify for that treatment. FASIT regular securities held by a regulated
investment company will not constitute "government securities" within the
meaning of section 851(b)(4)(A)(i). FASIT regular securities held by financial
institutions will constitute an "evidence of indebtedness" within the meaning of
section 582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Securities
A FASIT trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances as
described below. The FASIT regular securities generally will be treated for
federal income tax purposes as newly-originated debt instruments. In general,
interest, original issue discount and market discount on a FASIT regular
security will be treated as ordinary income to the beneficial owner, and
principal payments, other than principal payments that do not exceed accrued
market discount, on an FASIT regular security will be treated as a return of
capital to the extent of the beneficial owner's basis allocable thereto.
Beneficial owners must use the accrual method of accounting with respect to
FASIT regular securities, regardless of the method of accounting otherwise used
by those beneficial owners. See discussion of "Discount and Premium" below.
In order for the FASIT trust to qualify as a FASIT, there must be
ongoing compliance with the requirements of the code. The FASIT must fulfill an
asset test, which requires that substantially all the assets of the FASIT, as of
the close of the third calendar month beginning after the "startup day," which
for purposes of this discussion is the date of the initial issuance of the FASIT
securities, and at all times thereafter, must consist of cash or cash
equivalents, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a REMIC. Based
on identical statutory language applicable to REMICs, it appears that the
"substantially all" requirement should be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the FASIT's assets. The FASIT provisions,
sections 860H through 860L, also require the FASIT
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ownership interest and "high-yield regular interests" to be held only by fully
taxable domestic corporations.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance, guarantees
of payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the sponsor had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
The various interests in a FASIT also must meet additional
requirements. All of the interests in a FASIT must be either one or more classes
of regular interests or a single class of ownership interest. A regular interest
is an interest in a FASIT that is issued on or after the Startup Day with fixed
terms, is designated as a regular interest, and (1) unconditionally entitles the
holder to receive a specified principal amount (or other similar amount), (2)
provides that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or a qualified variable rate,
(3) has a stated maturity of not longer than 30 years, (4) has an issue price
not greater than 125% of its stated principal amount, and (5) has a yield to
maturity not greater than 5 percentage points higher than the related applicable
federal rate, as defined in section 1274(d). In order to meet the 30 year
maturity requirement, the FASIT regular securities will be retired and replaced,
to the extent then-outstanding, with new regular interests on the 30th
anniversary of the date of issuance of the FASIT regular securities. A regular
interest that is described in the preceding sentence except that if fails to
meet one or more of requirements (1), (2) (4) or (5) is a "high-yield regular
interest." A high-yield regular interest that fails requirement (2) must consist
of a specified, nonvarying portion of the interest payments on the permitted
assets, by reference to the REMIC rules. An ownership interest is an interest in
a FASIT other than a regular interest that is issued on the Startup Day, is
designated an ownership interest and is held by a single, fully-taxable,
domestic corporation. An interest in a FASIT may be treated as a regular
interest even if payments of principal with respect to the interest are
subordinated to payments on other regular interests or the ownership interest in
the FASIT, and are dependent on the absence of defaults or delinquencies on
permitted assets lower than reasonably expected returns on permitted assets,
unanticipated expenses incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing
requirements for status as a FASIT during any taxable year, the code provides
that the entity or applicable potion thereof will not be treated as a FASIT
thereafter. In this event, any entity that holds mortgage loans and is the
obligor with respect to debt obligations with two or more maturities, such as
the trust fund, may be treated as a separate association taxable as a
corporation, and the FASIT regular securities may be treated as equity interests
in that association. The legislative history to the FASIT provisions indicates,
however, that an entity can continue to be a FASIT if loss of its status was
inadvertent, it takes prompt steps to requalify and other requirements that may
be provided in treasury regulations are met. Loss of FASIT status results in
retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
Taxes on a FASIT Trust
Income from "prohibited transactions" by a FASIT are taxable to the
holder of the ownership interest in a FASIT at a 100% rate. Prohibited
transactions generally include (1) the disposition of a permitted asset other
than for (a) foreclosure, default, or imminent default of a qualified mortgage,
(b) bankruptcy or insolvency of the FASIT, (c) a qualified (complete)
liquidation, (d) substitution for another
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permitted debt instrument or distribution of the debt instrument to the holder
of the ownership interest to reduce overcollateralization, but only if a
principal purpose of acquiring the debt instrument which is disposed of was not
the recognition of gain, or the reduction of a loss, on the withdrawn asset as a
result of an increase in the market value of the asset after its acquisition by
the FASIT or (e) the retirement of a class of FASIT regular interests; (2) the
receipt of income from nonpermitted assets; (3) the receipt of compensation for
services; or (4) the receipt of any income derived from a loan originated by the
FASIT. It is unclear the extent to which tax on these transactions could be
collected from the FASIT trust directly under the applicable statutes rather
than from the holder of the FASIT residual security.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY
REGULATIONS AND THE CURRENT UNCERTAINTY AS TO THE MANNER TO THEIR APPLICATION TO
THE TRUST AND TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THEIR ACQUISITION OWNERSHIP AND DISPOSITION OF THE FASIT REGULAR SECURITIES.
Discount and Premium
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and some
grantor trust fractional interest securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286. In very
general terms, (1) original issue discount is treated as a form of interest and
must be included in a beneficial owner's income as it accrues (regardless of the
beneficial owner's regular method of accounting) using a constant yield method;
(2) market discount is treated as ordinary income and must be included in a
beneficial owner's income as principal payments are made on the security (or
upon a sale of a security); and (3) if a beneficial owner so elects, premium may
be amortized over the life of the security and offset against inclusions of
interest income. These tax consequences are discussed in greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the settlement date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an accrual security is equal to the sum of
all distributions to be made under the security. The stated redemption price at
maturity of any other security is its stated principal amount, plus an amount
equal to the excess, if any, of the interest payable on the first distribution
date over the interest that accrues for the period from the settlement date to
the first distribution date.
Notwithstanding the general definition, original issue discount will be
treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (1) the number of complete years (rounding down for
partial years) from the settlement date until the date on which each
distribution is expected to be made under the assumption that the mortgage loans
prepay at the rate specified in the prospectus supplement by (2) a fraction, the
numerator of which is the amount of the distribution and the denominator of
which is the security's stated redemption price at maturity. If original issue
discount is treated as zero under this rule, the actual amount of original issue
discount must be allocated to the principal distributions on the security and,
when each distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
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Section 1272(a)(6) contains special original issue discount rules
directly applicable to REMIC securities and debt securities. The Taxpayer Relief
Act of 1997 extends application of section 1272(a)(6) to the grantor trust
securities for tax years beginning after August 5, 1997. Under these rules, (1)
the amount and rate of accrual of original issue discount on each series of
securities will be based on (x) the prepayment assumption, and (y) in the case
of a security calling for a variable rate of interest, an assumption that the
value of the index upon which the variable rate is based remains equal to the
value of that rate on the settlement date, and (2) adjustments will be made in
the amount of discount accruing in each taxable year in which the actual
prepayment rate differs from the prepayment assumption.
Section 1272(a)(6)(B)(iii) requires that the prepayment assumption used
to calculate original issue discount be determined in the manner prescribed in
treasury regulations. To date, no such regulations have been promulgated. The
legislative history of this Code provision indicates that the assumed prepayment
rate must be the rate used by the parties in pricing the particular transaction.
The sponsor anticipates that the prepayment assumption for each series of
securities will be consistent with this standard. The sponsor makes no
representation, however, that the mortgage loans for a given series will prepay
at the rate reflected in the prepayment assumption for that series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the securities.
Each beneficial owner must include in gross income the sum of the
"daily portions" of original issue discount on its security for each day during
its taxable year on which it held the security. For this purpose, in the case of
an original beneficial owner, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The trustee
will supply, at the time and in the manner required by the IRS, to beneficial
owners, brokers and middlemen information with respect to the original issue
discount accruing on the securities. The trustee will report original issue
discount based on accrual periods of no longer than one year either (1)
beginning on a distribution date or, in the case of the first accrual period,
the settlement date, and ending on the day before the next distribution date or
(2) beginning on the next day following a distribution date and ending on the
next distribution date.
Under section 1272(a)(6), the portion of original issue discount
treated as accruing for any accrual period will equal the excess, if any, of (1)
the sum of (A) the present values of all the distributions remaining to be made
on the security, if any, as of the end of the accrual period and (B) the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) the adjusted issue price of
the security at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on (1) the yield to maturity of the security, calculated as of the
settlement date, giving effect to the prepayment assumption, (2) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (3) the prepayment assumption, and (4) in the case of a security
calling for a variable rate of interest, an assumption that the value of the
index upon which the variable rate is based remains the same as its value on the
settlement date over the entire life of the security. The adjusted issue price
of a security at any time will equal the issue price of the security, increased
by the aggregate amount of previously accrued original issue discount with
respect to that security, and reduced by the amount of any distributions made on
the security as of that time of amounts included in the stated redemption price
at maturity. The original issue discount accruing during any accrual period will
then be allocated ratably to each day during the period to determine the daily
portion of original issue discount.
In the case of grantor trust strip securities and some REMIC
securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of the negative
amounts. The legislative history to section 1272(a)(6) indicates that the
negative amounts may be used to offset
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subsequent positive accruals but may not offset prior accruals and may not be
allowed as a deduction item in a taxable year in which negative accruals exceed
positive accruals. Beneficial owners of the securities should consult their own
tax advisors concerning the treatment of negative accruals.
A subsequent purchaser of a security that purchases the security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds the security,
the daily portion of original issue discount with respect to that security, but
reduced, if the cost of the security to the purchaser exceeds its adjusted issue
price, by an amount equal to the product of (1) the daily portion and (2) a
constant fraction, the numerator of which is the excess and the denominator of
which is the sum of the daily portions of original issue discount on the
security for all days on or after the day of purchase.
Market Discount
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of a security with original issue
discount, its adjusted issue price, will be required to allocate each principal
distribution first to accrued market discount on the security, and recognize
ordinary income to the extent that the distribution does not exceed the
aggregate amount of accrued market discount on the security not previously
included in income. With respect to securities that have unaccrued original
issue discount, the market discount must be included in income in addition to
any original issue discount. A beneficial owner that incurs or continues
indebtedness to acquire a security at a market discount may also be required to
defer the deduction of all or a portion of the interest on the indebtedness
until the corresponding amount of market discount is included in income. In
general terms, market discount on a security may be treated as accruing either
(1) under a constant yield method or (2) in proportion to remaining accruals of
original issue discount, if any, or if none, in proportion to remaining
distributions of interest on the security, in any case taking into account the
prepayment assumption. The trustee will make available, as required by the IRS,
to beneficial owners of securities information necessary to compute the accrual
of market discount.
Notwithstanding the above rules, market discount on a security will be
considered to be zero if that discount is less than 0.25% of the remaining
stated redemption price at maturity of the security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments, including prepayments, prior to the date of acquisition of the
security by the subsequent purchaser. If market discount on a security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the security and, when
each distribution is received, gain equal to the discount allocated to that
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a security that purchases the security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased that "premium security" at a premium. The purchaser need not
include in income any remaining original issue discount and may elect, under
section 171(c)(2) , to treat the premium as an "amortizable bond premium." If a
beneficial owner makes that election, the amount of any interest payment that
must be included in the beneficial owner's income for each period ending on a
distribution date will be reduced by the portion of the premium allocable to
each period based on the plan's yield to maturity. The premium amortization
should be made using constant yield principles. If the election is made by the
beneficial owner, the election will also apply to all bonds the interest on
which is not excludible from gross income held by the beneficial owner at the
beginning of the first taxable year to which the election applies and to all the
fully taxable bonds
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thereafter acquired by it, and is irrevocable without the consent of the IRS. If
the election is not made, (1) the beneficial owner must include the full amount
of each interest payment in income as it accrues, and (2) the premium must be
allocated to the principal distributions on the plan and, when each principal
distribution is received, a loss equal to the premium allocated to that
distribution will be recognized. Any tax benefit from the premium not previously
recognized will be taken into account in computing gain or loss upon the sale or
disposition of the plan.
Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding some securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that a security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In that event, section 1272(a)(6) would govern the accrual
of the original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2). Unless and until the Treasury
Department or the IRS publishes specific guidance relating to the tax treatment
of these securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all "interest" that accrues on the security
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A beneficial owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup withholding
tax" under section 3406 at a rate of 31% if recipients of the distributions fail
to furnish to the payor information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from the tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against that recipient's federal income tax. Furthermore, penalties may
be imposed by the IRS on a recipient of distributions that is required to supply
information but that does not do so in the proper manner.
The Internal Revenue Service recently issued final withholding
regulations, that change the rules relating to presumptions currently available
relating to information reporting and backup withholding. The withholding
regulations would provide alternative methods of satisfying the beneficial
ownership certification requirement. The withholding regulations are effective
January 1, 2001, although valid withholding certificates that are held on
December 31, 2000 remain valid until the earlier of December 31, 2001 or the due
date of expiration of the certificate under the rules as currently in effect.
Foreign Investors
The withholding regulations would require, in the case of securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide information, including a United States taxpayer
identification number. See "--Backup Withholding" above. A look-through rule
would apply in the case of tiered partnerships.
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Non-U.S. Persons should consult their own tax advisors regarding the application
to them of the withholding regulations.
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a grantor trust security, Debt security or a
REMIC regular security to, or on behalf of, a beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
taxes. The term "U.S. Person" means a citizen or resident of the United States,
a corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income, or
a trust if a court within the United States can exercise primary supervision
over its administration and at least one United States fiduciary has the
authority to control all substantial decisions of the trust. This exemption is
applicable provided (a) the beneficial owner is not subject to U.S. tax as a
result of a connection to the United States other than ownership of the
security, (b) the beneficial owner signs a statement under penalties of perjury
that certifies that the beneficial owner is not a U.S. Person, and provides the
name and address of that beneficial owner, and (c) the last U.S. Person in the
chain of payment to the beneficial owner receives a statement from the
beneficial owner or a financial institution holding on its behalf and does not
have actual knowledge that the statement is false. Beneficial owners should be
aware that the IRS might take the position that this exemption does not apply to
a beneficial owner that also owns 10% or more of the REMIC residual securities
of any REMIC trust, or to a beneficial owner that is a "controlled foreign
corporation" described in section 881(c)(3)(C).
REMIC Residual Securities and FASIT Ownership Securities
Amounts distributed to a beneficial owner of a REMIC residual security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary treasury
regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual security or a FASIT ownership security to a
beneficial owner that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding tax, subject to the same conditions applicable to
distributions on grantor trust securities, debt securities and REMIC regular
securities, as described above, but only to the extent that the obligations
directly underlying the REMIC or FASIT trust that issued the REMIC residual
security or FASIT ownership security, e.g., mortgage loans or regular interests
in another REMIC or FASIT, were issued after July 18, 1984. In no case will any
portion of REMIC or FASIT income that constitutes an excess inclusion be
entitled to any exemption from the withholding tax or a reduced treaty rate for
withholding. See "--REMIC Securities--Taxation of Beneficial Owners of REMIC
residual securities--Excess Inclusions."
Partnership Interests
Depending upon the particular terms of the trust agreement and
servicing agreement, a trust may be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons. If the trust is considered to be engaged in a trade
or business in the United States for those purposes and the trust is treated as
a partnership, the income of the trust distributable to a non-U.S. person would
be subject to federal withholding tax. Also, in those cases, a non-U.S.
beneficial owner of a partnership interest that is a corporation may be subject
to the branch profits tax. If the trust is notified that a beneficial owner of a
partnership interest is a foreign person, the trust may withhold as if it were
engaged in a trade or business in the United States in order to protect the
trust from possible adverse consequences of a failure to withhold. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to withheld taxes, taking the position that no taxes were due because
the trust was not in a U.S. trade or business.
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FASIT Regular Securities
"High-yield" FASIT regular securities may not be sold to or
beneficially owned by non-U.S. Persons. Any such purported transfer will be null
and void and, upon the trustee's discovery of any purported transfer in
violation of this requirement, the last preceding owner of the high-yield FASIT
regular securities will be restored to ownership thereof as completely as
possible. The last preceding owner will, in any event, be taxable on all income
with respect to the high-yield FASIT regular securities for federal income tax
purposes. The pooling and servicing agreement will provide that, as a condition
to transfer of a high-yield FASIT regular security, the proposed transferee must
furnish an affidavit as to its status as a U.S. Person and otherwise as a
permitted transferee.
State Tax Considerations
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
securities.
ERISA Considerations
Section 406 of ERISA and section 4975 of the Internal Revenue Code
prohibit a "plan," which is a pension, profit sharing or other employee benefit
plan and individual retirement arrangements from engaging in transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan, unless a statutory or administrative exemption applies to the transaction.
ERISA and the Internal Revenue Code also prohibit generally actions involving
conflicts of interest by persons who are fiduciaries of those plans or
arrangements. A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Internal Revenue Code for
those persons. In addition, investments by plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a plan's investments be made in
accordance with the documents governing the plan. Employee benefit plans that
are governmental plans, as defined in Section 3(32) of ERISA, and church plans,
as defined in section 3(33) of ERISA, are not subject to ERISA requirements.
Accordingly, assets of these plans may be invested in securities without regard
to the ERISA considerations discussed below, subject to the provisions of other
applicable federal, state and local law. Any plan which is qualified and exempt
from taxation under section 401(a) and 501(a) of the Internal Revenue Code,
however, is subject to the prohibited transaction rules of section 503 of the
Internal Revenue Code.
Transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Internal Revenue Code with respect
to a plan, including an individual retirement arrangement, that purchased
securities. Therefore, in the absence of an exemption, the purchase, sale or
holding of a security by a plan, including individual retirement arrangements,
subject to section 406 of ERISA or section 4975 of the Internal Revenue Code
might result in prohibited transactions and the imposition of excise taxes and
civil penalties.
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Certificates
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of section 406(a), 406(b)(1), 406(b)(2)
and 407(a) of ERISA and the excise taxes imposed by sections 4975(a) and (b) of
the Internal Revenue Code, transactions with respect to the initial purchase,
the holding and the subsequent resale by plans of certificates in pass-through
trusts that consist of secured receivables, secured loans and other secured
obligations that meet the conditions and requirements of the underwriter
exemptions. The underwriter exemptions will only be available for securities
that are certificates.
Among the conditions that must be satisfied in order for the
underwriter exemptions to apply to offered certificates are the following:
o the acquisition of the certificates by a plan is on terms,
including the price for the certificates, that are at least as
favorable to the plan as they would be in an arm's-length
transaction with an unrelated party;
o the rights and interests evidenced by the certificates acquired
by the plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
o the certificates acquired by the plan have received a rating at
the time of the acquisition that is one of the three highest
generic rating categories from Standard & Poor's, Moody's
Investors Service, Duff & Phelps Credit Rating Co. or Fitch
Investors Service;
o the trustee is not an affiliate of any other member of the
restricted group, as defined below)
o the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting
the certificates; the sum of all payments made to and retained by
the originators and the sponsor in exchange for the assignment of
the loans to the trust estate represents not more than the fair
market value of the loans; the sum of all payments made to and
retained by any servicer represents not more than reasonable
compensation for that person's services under the pooling and
servicing agreement and reimbursement of that person's reasonable
expenses;
o the plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of
1933; and
o in the event that all of the obligations used to fund the trust
have not been transferred to the trust on the closing date,
additional obligations of the types specified in the prospectus
supplement and/or pooling and servicing agreement having an
aggregate value equal to no more than 25% of the total principal
amount of the certificates being offered by the trust may be
transferred to the trust, in exchange for amounts credited to the
account funding the additional obligations, within a funding
period of no longer than 90 days or 3 months following the
closing date.
The trust estate must also meet the following requirements:
o the corpus of the trust estate must consist solely of assets of
the type that have been included in other investment pools;
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o certificates in the other investment pools must have been rated
in one of the three highest rating categories of Standard &
Poor's, Moody's Investors Service, Fitch Investors Service or
Duff & Phelps Credit Rating Co. for at least one year prior to
the plan's acquisition of certificates; and
o certificates evidencing interests in other investment pools must
have been purchased by investors other than plans for at least
one year prior to the plan's acquisition of certificates.
Moreover, the underwriter exemptions provide relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
although, among other requirements, (1) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which plans have invested is acquired by persons
independent of the restricted group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the restricted
group; (2) the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (3) the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (4) immediately after the acquisition, no more than
twenty-five percent of the assets of the plan with respect to which the person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The
underwriter exemptions do not apply to plans sponsored by the "restricted
group," which is the sponsor, the underwriters, the trustee, any servicer, any
obligor with respect to mortgage loans included in the trust fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust fund, or any affiliate of the parties.
In addition to the underwriter exemptions, the Department of Labor has
issued Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for transactions involving the sale or exchange of residential
mortgage pool pass-through certificates by plans and for transactions in
connection with the servicing and operation of the mortgage pool.
Notes
The underwriter exemptions will not be available for securities that
are notes. Under the "plan assets regulation" issued by the United States
Department of Labor, the assets of the trust would be treated as plan assets of
a plan for the purposes of ERISA and the Internal Revenue Code only if the plan
acquired an equity interest in the trust and none of the exceptions contained in
the plan assets regulation were applicable. An "equity interest" is defined
under the plan assets regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Accordingly, if the notes are treated as having
substantial equity features, the purchase, holding and resale of the notes could
result in a transaction that is prohibited under ERISA or the Internal Revenue
Code. If the notes are treated as indebtedness without substantial equity
features, the trust's assets would not be deemed assets of a plan. However, in
that case, the acquisition or holding of the notes by or on behalf of a plan
could nevertheless give rise to a prohibited transaction, if the acquisition and
holding of notes by or on behalf of a plan was deemed to be a prohibited loan to
a party in interest with respect to the plan. Exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of notes by a
plan, depending on the type and circumstances of the plan fiduciary making the
decision to acquire the notes. Included among these exemptions are: PTCE 84-14,
regarding transactions effected by "qualified professional asset managers"; PTCE
90-1, regarding transactions entered into by insurance company pooled separate
accounts; PTCE 91-38, regarding transactions entered into by bank collective
investment funds; PTCE 95-60, regarding transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding transactions effected by
"in-house asset
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managers". Each purchaser and each transferee of a note that is treated as debt
for purposes of the plan assets regulation may be required to represent and
warrant that its purchase and holding of the note will be covered by one of the
exemptions listed above or by another Department of Labor class exemption.
Consultation with Counsel
The prospectus supplement for each series of securities will provide
further information which plans should consider before purchasing the offered
securities. A plan fiduciary considering the purchase of securities should
consult its tax and/or legal advisors regarding whether the assets of the trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, each plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the plan, taking into account
the overall investment policy of the plan and the composition of the plan's
investment portfolio. The sale of securities to a plan is in no respect a
representation by the sponsor or the underwriters that this investment meets all
relevant requirements with respect to investments by plans generally or any
particular plan or that this investment is appropriate for plans generally or
any particular plan.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank, 510 U.S. 86 (1993), the United States Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes.
Legal Investment
The related prospectus supplement will describe whether or not the
securities will constitute "mortgage-related securities" within the meaning of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
Available Information
The sponsor has filed a registration statement with respect to the
securities with the Securities and Exchange Commission. This prospectus, which
forms a part of the registration statement, and the prospectus supplement
relating to each series of securities contain summaries of the material terms of
the agreements, but do not contain all of the information in the registration
statement. For further information, reference is made to the registration
statement and its exhibits. The registration statement and exhibits can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at its Public Reference
Section, 450 Fifth Street, NW, Washington, D.C. 20549, and at its Regional
Office located as follows, Midwest Regional Office, 500 West Madison Street,
Chicago, Illinois 60661; and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. In addition, the Securities and Exchange
Commission maintains a World Wide Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including the sponsor, that file electronically with the Securities
and Exchange Commission.
Each trust fund will be required to file reports with the Securities
and Exchange Commission as required by the Securities Exchange Act of 1934. The
sponsor intends to cause each trust fund to suspend filing the reports if and
when the reports are no longer required under said act.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus and any prospectus
supplement and you must not rely upon such
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information or representations. This prospectus and any prospectus supplement do
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities offered hereby and thereby nor an offer of
the securities to any person in any state or other jurisdiction in which that
offer would be unlawful. You should not assume that information in this
prospectus is correct as of any time subsequent to its date.
Incorporation of Documents by Reference
All documents that we subsequently file with the Securities and
Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, after the date of this prospectus shall be incorporated by
reference in this prospectus and be a part of this prospectus. Any statement
contained in a document incorporated by reference shall be modified or
superseded if a statement contained in this prospectus, the prospectus
supplement or in any other document subsequently incorporated by reference
modifies or replaces that statement.
The sponsor will provide without charge, on request of each person to
whom this prospectus is delivered, a copy of any of the documents that are
incorporated by reference in this prospectus. Requests should be directed to the
sponsor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-0630, telephone no. (704) 374- 4868.
Plan of Distribution
The sponsor may offer each series of securities through First Union
Securities, 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.
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