AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 4, 2001
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RESIDENTIAL ASSET FUNDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
NORTH CAROLINA 56-2064715
-------------------------------- -------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
James F. Powers, Esq.
Senior Vice President and Deputy General Counsel
First Union Corporation
One First Union Center
301 South College Street
Charlotte, North Carolina 28288-0630
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Christopher J. DiAngelo
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
(212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of each class of Amount to be Proposed Maximum Aggregate Proposed Maximum Aggregate Amount of
securities registered Registered Price Per Unit Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Asset Backed Securities $1,000,000 100% $1,000,000(1) $250
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
</FN>
</TABLE>
There is also being registered hereunder an indeterminate amount of
asset-backed securities that may be sold by the registrant or any affiliate of
the registrant, including First Union Securities, Inc., in furtherance of
market-making activities in the asset-backed securities and in connection with
which it is necessary under the federal securities laws to deliver a
market-making prospectus.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the commission, acting pursuant to said
section 8(a), may determine.
<PAGE>
PROSPECTUS
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RESIDENTIAL ASSET FUNDING CORPORATION Asset-Backed Securities Sponsor
Issuable in Series
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YOU SHOULD READ THE SECTION ENTITLED THE SECURITIES
"RISK FACTORS" STARTING ON PAGE 3 OF
THIS PROSPECTUS AND CONSIDER THESE o will be issued from
FACTORS BEFORE MAKING A DECISION TO time to time in
INVEST IN THE SECURITIES. series,
o will consist of either
asset-backed
certificates or
asset-backed notes,
o will be issued by a
Retain this prospectus for future trust or other special
reference. This prospectus may not purpose entity
be used to consummate sales of established by the
securities unless accompanied by the sponsor,
prospectus supplement relating to
the offering of the securities. 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 January 4, 2001
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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...............................................................12
THE MORTGAGE LOANS.........................................................13
THE CONTRACTS..............................................................16
PRIVATE SECURITIES.........................................................17
ACCOUNTS...................................................................19
COLLECTION AND DISTRIBUTION ACCOUNTS.......................................19
PRE-FUNDING ACCOUNT........................................................19
CREDIT ENHANCEMENT............................................................20
SUBORDINATE SECURITIES.....................................................20
INSURANCE..................................................................20
RESERVE FUNDS..............................................................21
MINIMUM PRINCIPAL PAYMENT AGREEMENT........................................22
DEPOSIT AGREEMENT..........................................................22
DERIVATIVE CONTRACTS.......................................................22
SERVICING.....................................................................22
COLLECTION PROCEDURES; ESCROW ACCOUNTS.....................................22
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT....................23
ADVANCES AND LIMITATIONS THEREON...........................................24
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES...........24
REALIZATION UPON DEFAULTED MORTGAGE LOANS..................................26
ENFORCEMENT OF DUE-ON-SALE CLAUSES.........................................26
SERVICING COMPENSATION AND PAYMENT OF EXPENSES.............................26
EVIDENCE AS TO COMPLIANCE..................................................27
MATTERS REGARDING THE SERVICER.............................................27
THE AGREEMENTS................................................................28
ASSIGNMENT OF PRIMARY ASSETS...............................................29
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<PAGE>
REPORTS TO HOLDERS.........................................................30
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT............................31
THE TRUSTEE................................................................33
DUTIES OF THE TRUSTEE......................................................33
RESIGNATION OF TRUSTEE.....................................................33
AMENDMENT OF AGREEMENT.....................................................34
VOTING RIGHTS..............................................................34
LIST OF HOLDERS............................................................34
REMIC ADMINISTRATOR........................................................34
TERMINATION................................................................34
LEGAL ASPECTS OF LOANS........................................................34
MORTGAGE LOANS.............................................................35
CONTRACTS..................................................................41
SECURITY INTERESTS IN THE MANUFACTURED HOMES...............................41
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES....................43
CONSUMER PROTECTION LAWS...................................................43
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES...44
APPLICABILITY OF USURY LAWS................................................44
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS..........................44
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940............................45
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................45
GRANTOR TRUST SECURITIES...................................................46
REMIC SECURITIES...........................................................47
DEBT SECURITIES............................................................54
PARTNERSHIP INTERESTS......................................................55
FASIT SECURITIES...........................................................57
DISCOUNT AND PREMIUM.......................................................59
BACKUP WITHHOLDING.........................................................62
FOREIGN INVESTORS..........................................................63
STATE TAX CONSIDERATIONS......................................................64
ERISA CONSIDERATIONS..........................................................64
CERTIFICATES...............................................................65
NOTES......................................................................67
CONSULTATION WITH COUNSEL..................................................67
LEGAL INVESTMENT..............................................................68
AVAILABLE INFORMATION.........................................................68
INCORPORATION OF DOCUMENTS BY REFERENCE.......................................68
PLAN OF DISTRIBUTION..........................................................69
LEGAL MATTERS.................................................................69
FINANCIAL INFORMATION.........................................................69
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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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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. Its telephone number is (704) 590-6161.
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 may be held either through the
Depository Trust Company (in the United States) or Clearstream, Luxembourg or
Euroclear (in Europe) if the investors are participants of such systems, or
indirectly through participants in such systems. Securities issued in book-entry
form will be registered in the name of Cede & Co., the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code 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
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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 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.
Cross-market transfers between DTC, on the one hand, and, directly or
indirectly through Euroclear or Clearstream, or their respective participants,
on the other, will be effected in DTC in accordance with DTC rules on behalf of
Euroclear or Clearstream, Luxembourg, as the case may be, by its respective
depositary; however, these cross-market transactions will require delivery of
instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the
counterparty in the system in accordance with its rules and procedures and
within its established deadlines (Brussels time). Euroclear or Clearstream,
Luxembourg, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to DTC 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 immediately
available funds settlement applicable to DTC. Clearstream, Luxembourg
participants and Euroclear participants may not deliver instructions directly to
DTC.
Because of time zone differences, the securities account of a Euroclear
or Clearstream, Luxembourg participant purchasing an interest in a security from
a DTC participant will be credited during the securities settlement processing
day (which must be a business day for Euroclear and Clearstream, Luxembourg)
immediately following the DTC settlement date and the credit of any transaction
in interests in a security settled during the processing day will be reported to
the relevant Euroclear or Clearstream, Luxembourg participant on that day. Cash
received by Euroclear or Clearstream, Luxembourg as a result of sales of
securities by or through a Euroclear or Clearstream, Luxembourg participant to a
DTC participant will be received with value on the DTC settlement date but will
be available in the relevant Euroclear or Clearstream, Luxembourg cash account
only as of the business day following settlement in DTC.
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.
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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.
Clearstream, Luxembourg (formerly known as Cedelbank, societe anonyme
or Cedel) is incorporated under the laws of Luxembourg and is a global
securities settlement clearing house. Clearstream holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream,m Luxembourg participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream, Luxembourg in any of
28 currencies, including United States dollars. Clearstream, Luxembourg provides
to its participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities,
and securities lending and borrowing. Clearstream, Luxembourg interfaces with
domestic markets in several countries. Clearstream, Luxembourg is regulated as a
bank by the Luxembourg Monetary Institute. Clearstream, Luxembourg participants
are recognized financial institutions around the workd, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Clearstream, Luxembourg is
also available to others, such as banks, brokers, dealers and trust companies,
that clear through or maintain a custodial relationship with a Clearstream,
Luxembourg participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear system and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need of physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 27 currencies, including United States
dollars. The Euroclear system includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries. Euroclear is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium Office, under contract with Euroclear Clearance System, S.C.,
a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts maintained with the Euroclear
operator, not the Cooperative. The Cooperative established policy for the
Euroclear system on behalf of Euroclear participants. Euroclear participants
include banks (including central banks), securities brokers and dealers, and
other professional financial intermediaries. Indirect access to the Euroclear
system 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 that is a member of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear system, withdrawal of
securities and cash from the Euroclear system, and receipts of payments with
respect to securities in the Euroclear system. All securities in the Euroclear
system are held on a fungible basis without attribution of specific
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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.
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.
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.
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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.
Primary assets included in the trust fund for a series may consist of
any combination of mortgage loans, contracts and private securities. Some of the
loans may be delinquent, although the loans that are delinquent as of the
cut-off date will not exceed 20% of the initial aggregate principal balance of
the primary assets for that series. The following is a brief description of the
loans we expect to be include as trust property.
THE MORTGAGE LOANS
Mortgage Loans. The primary assets for a series may consist, in whole
or in part, of mortgage loans secured by mortgages on one- to four-family
residential housing, including condominium units and cooperative dwellings which
may be subordinated to other mortgages on the same mortgaged property. The
mortgage loans may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
prospectus supplement.
The mortgage loans may be either "closed-end" loans, which do not
permit the borrower to obtain the proceeds of future advances, or "open-end"
loans structured as lines of credit, which permit the borrower, subject to a
maximum dollar amount, to obtain more than one advance of proceeds. The mortgage
loans will be secured by first, second or more junior liens on fee simple or
leasehold interests in one- to four-family residential properties. The principal
and interest on the mortgage loans included in the trust for a series of
securities will be payable either on the first day of each month or on different
scheduled days throughout each month, and the interest will be calculated either
on a simple interest, actuarial method or "Rule of 78s" method. When a full
principal prepayment is paid on a mortgage loan during a month, the mortgagor is
generally charged interest only on the days of the month actually elapsed up to
the date of prepayment, at a daily interest rate that is applied to the
principal amount of the mortgage loan so prepaid.
Payment Terms. The payment terms of the mortgage loans to be included
in a trust for a series will be described in the prospectus supplement and may
include any of the following features of combinations thereof or other features
described in the prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is
fixed for a period of time or under specified circumstances
and is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is convertible from
and adjustable rate to a fixed rate. Changes to an adjustable
rate may be subject to periodic limitations, maximum rates,
minimum rates
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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 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
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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.
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.
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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;
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.
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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;
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
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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.
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;
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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;
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:
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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 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.
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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 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
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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.
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
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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:
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
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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;
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
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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 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
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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 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.
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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.
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
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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.
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.
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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 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.
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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.
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;
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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."
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
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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:
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.
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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, 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.
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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.
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.
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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 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.
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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.
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.
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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 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
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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.
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.
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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.
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
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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 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,
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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.
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
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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.
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
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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.
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
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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 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
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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 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, local and other tax 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, as amended.
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.
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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 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
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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
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.
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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 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.
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The requirement that each beneficial owner of a REMIC residual security
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual security may have received
full payment of the stated interest and principal on its REMIC residual
security.
The trustee will provide to beneficial owners of REMIC residual
securities of each series of securities (i) 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 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
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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 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,
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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 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
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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 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
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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 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
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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.
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.
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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.
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.
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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).
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.
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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 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
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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 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
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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 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
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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.
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
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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 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
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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 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. Holders that
are not exempt recipients must provide form W-9 or the equivalent to avoid
having such amounts withheld. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against that
recipient's federal
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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.
FOREIGN INVESTORS
General
U.S. withholding regulations require, in the case of securities held by
a foreign partnership, that (x) certification of exemption from U.S. tax be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors regarding
the application to them of U.S. 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
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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.
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
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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.
CERTIFICATES
First Union Corporation has received from the Department of Labor an
underwriter individual prohibited transaction exemption (which has been amended
by prohibited transaction exemptions 97-34 and 2000-58), which generally exempts
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 exemption. The underwriter exemption will only be available for
securities that are certificates.
Among the conditions that must be satisfied in order for the
underwriter exemption 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 assets held by the trust must be fully secured (other than
one-to-four family residential mortgage loans and home equity
loans or receivables backing certain types of certificates, as
described below);
o unless the certificates are issued in "designated
transactions" (as described below) and are backed by
fully-secured loans, 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 (or,
in the case of designated transactions, four) highest generic
rating categories from Standard & Poor's, Moody's Investors
Service or Fitch, Inc.;
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
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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;
o certificates in the other investment pools must have been
rated in one of the three (or, in the case of designated
transactions, four) highest rating categories of Standard &
Poor's, Moody's Investors Service or Fitch, Inc. 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.
In the case where the certificates are backed by trust assets which are
residential, home equity, manufactured housing or multi-family loans which are
described and defined in the underwriter exemption as designated transactions,
certificates issued by the trust in such transactions may be rated in one of the
highest four generic rating categories by the specified rating agencies and/or
may be subordinated. In addition, one subset of designated transactions,
residential (one-to-four family) and home equity loans, may be less than fully
secured, provided that the rights and interests evidenced by certificates issued
in such designated transactions are: (a) not subordinated to the rights and
interests evidenced by securities of the same trust; (b) such certificates
acquired by the plan have received a rating from the specified rating agencies
at the time of such acquisition that is in one of the two highest generic rating
categories; and (c) any loan included in the corpus or assets of the trust is
secured by collateral whose fair market value on the closing date of the
designated transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the trust and
(ii) the outstanding principal balance(s) of any other loan(s) of higher
priority (whether or not held by the trust) which are secured by the same
collateral.
Moreover, the underwriter exemption provides 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)
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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
exemption does 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, the insurer, the counterparty of any interest rate swap or any
affiliate of the parties.
The underwriter exemption permits interest-rate swaps and/or a yield
supplement agreements to be assets of a trust provided that certain requirements
are satisfied. The prospectus supplement for a series of securities will provide
further information if the trust holds such a contract.
In addition to the underwriter exemption, 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 exemption 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 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
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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 may cause any 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 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
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<PAGE>
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, telephone no. (704) 590-6161.
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 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.
This prospectus and prospectus supplement also may be used by the
sponsor, First Union Securities, Inc., an affiliate of the sponsor, and any
other affiliate of the sponsor when required under the federal securities laws
in connection with offers and sales of securities in furtherance of
market-making activities in securities. First Union Securities, Inc. or any
other such affiliate may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
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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FORM OF PROSPECTUS
SUPPLEMENT -- CERTIFICATES
Prospectus supplement to prospectus dated ____________
--------------------------------------------------------------------------------
$-----------
----------------------
Mortgage-Backed Certificates, Series _______
$_____ ___% Class A-1 Certificates $_______ ____% Class A-2 Certificates
_____________ Residential Asset Funding Corporation
Depositor Sponsor
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
The trust fund --
o The trust fund consists
primarily of two pools
of fixed-rate business
and consumer purpose
home equity loans
secured by first- or
second-lien mortgages
on residential or
commercial
You should read the section entitled real properties.
"Risk Factors" starting on page S-__
of this prospectus supplement and The certificates--
page 3 of the accompanying
prospectus and consider these o Each class of offered certificates will represent a beneficial
factors before making a decision to ownership interest in one pool of mortgage loans.
invest in the certificates.
Credit enhancement --
The certificates ownership interests
in the trust fund only and are not o The certificates will have the benefit of a financial guaranty
interests in or obligations of any insurance policy to be issued by [certificate insurer]
other person.
o The certificates will be cross-collateralized to a limited
Neither the certificates nor the extent.
underlying mortgage loans will be o The certificates have the benefit of initial
insured or guaranteed by any over-collateralization.
governmental agency or o Excess interest will be used in the early years of the
instrumentality. transaction to increase this over-collateralization.
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Original Certificate Price to the Underwriting Proceeds to the Ratings Final Stated
Class Principal Balance Public Discount Depositor [ ] Maturity Date
---------- ------------------ ------------ ------------ ---------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $_____________ ____% ____% $_____________
A-2 $_____________ ____% ____% $_____________ ________ ______________
--------
Total $_____________ $____________ $____ $_____________
</TABLE>
You will also be required to pay the interest that accrued on your
note since ________. The proceeds to the depositor are calculated
without taking into effect the expenses of this offering, which
are expected to be $________.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus supplement. Any representation to the contrary is a
criminal offense.
First Union Securities, Inc.
The date of this prospectus supplement is ________
<PAGE>
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates.
This prospectus supplement does not contain complete information about the
offering of the certificates. Additional information is contained in the
accompanying prospectus. You are urged to read both this prospectus supplement
and the accompanying prospectus in full. We cannot sell the certificates to you
unless you have received both this prospectus supplement and the accompanying
prospectus.
The accompanying prospectus contains information which describes the
possible characteristics of different series of securities, and is not intended
to be contradictory to the information contained in this prospectus supplement.
If the accompanying prospectus contemplates multiple options, you should rely on
the information in this prospectus supplement as to the applicable option.
[This prospectus supplement and the accompanying prospectus may be used by
us, First Union Securities, Inc., our affiliate, and any of our other affiliates
when required under the federal securities laws in connection with offers and
sales of offered certificates in furtherance of market-making activities in
offered certificates. First Union Securities, Inc. or any other such affiliate
may act as principal or agent in such transactions. Sales will be made at prices
related to prevailing market prices at the time of sale or otherwise.]
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
<PAGE>
Table of Contents
Summary...............................................S-1
Risk Factors..........................................S-3
Transaction Overview..................................S-7
Parties..........................................S-7
The Transaction..................................S-7
The Mortgage Loan Pools...............................S-8
The Pool I Mortgage Loans........................S-9
The Pool II Mortgage Loans......................S-13
Conveyance of subsequent mortgage loans.........S-16
The Originators, the Depositor and the Servicer......S-17
Underwriting Guidelines.........................S-17
The Servicer....................................S-17
Delinquency and Loan Loss Experience............S-17
The Trustee..........................................S-19
The Collateral Agent.................................S-19
Description of the Certificates......................S-19
Book-Entry Registration.........................S-20
Definitive Certificates.........................S-24
Assignment and Pledge of Initial Mortgage
Loans.........................................S-24
Assignment and Pledge of Subsequent Mortgage
Loans.........................................S-24
Delivery of Mortgage Loan Documents.............S-25
Representations and Warranties of the Depositor.S-26
Payments on the Mortgage Loans..................S-28
Over-collateralization Provisions...............S-30
Cross-collateralization Provisions..............S-31
Flow of Funds...................................S-32
Reports to Certificateholders...................S-32
Amendment.......................................S-33
Servicing of the Mortgage Loans......................S-33
The Servicer....................................S-33
Servicing Fees and Other Compensation and
Payment of Expenses...........................S-33
Periodic Advances and Servicer Advances.........S-34
Prepayment Interest Shortfalls..................S-35
Civil Relief Act Interest Shortfalls............S-35
Optional Purchase of Defaulted Mortgage Loans...S-35
ii
<PAGE>
Servicer Reports................................S-35
Collection and Other Servicing Procedures.......S-36
Hazard Insurance................................S-36
Realization Upon Defaulted Mortgage Loans.......S-37
Removal and Resignation of the Servicer.........S-37
Termination; Purchase of Mortgage Loans.........S-39
The Certificate Insurance Policy.....................S-40
The Certificate Insurer..............................S-43
The Certificate Insurer.........................S-43
Reinsurance.....................................S-44
Ratings.........................................S-44
Capitalization..................................S-44
Insurance Regulation............................S-44
Prepayment and Yield Considerations..................S-45
Certain Federal Income Tax Considerations............S-48
ERISA Considerations.................................S-49
Legal Investment.....................................S-51
Plan of Distribution.................................S-51
Incorporation of Certain Information by Reference....S-52
Additional Information...............................S-52
Experts..............................................S-53
Legal Matters........................................S-53
Ratings..............................................S-53
Glossary.............................................S-54
iii
<PAGE>
Summary
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the certificates, carefully read this entire
prospectus supplement and the accompanying prospectus.
-------------------------------
The Certificates
The ___________ will issue the class A-1 certificates and the class A-2
certificates. The class A certificates are being offered to you by this
prospectus supplement.
The class A certificates will accrue interest at the interest rate, have the
original principal balance and have the final stated maturity date indicated on
the cover of this prospectus supplement.
The trust will also issue one class of residual certificates, the class R
certificates, for each class of class A certificates. The class R certificates
are not offered by this prospectus supplement.
Distributions
Distributions on the certificates will be made on the ____ day of each month,
or, if the ____ day is not a business day, on the next succeeding
business day, beginning on _________.
Distributions of Interest
On each distribution date, each class of certificates is entitled to receive its
current interest.
o Current Interest. The current interest for a distribution date is
the interest which accrues on a class of certificates at that
class's certificate rate on the outstanding principal balance of
the class during the accrual period.
o Accrual Period. The accrual period for the certificates is the
calendar month preceding the distribution date.
All computations of interest accrued on the certificates will be made on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of Principal
The holders of each class of certificates are entitled to receive distributions
of principal on each distribution date which generally reflect collections of
principal during the preceding calendar month on the mortgage loans in the pool
relating to their class.
In addition, in accordance with the over-collateralization features of the
transaction, holders may also receive extra distributions of principal from
excess interest on a distribution date.
The Mortgage Loans
The mortgage loans to be included in the trust estate will be primarily
fixed-rate, closed-end, monthly pay, business and consumer purpose home equity
loans secured by first, second or multiple mortgages or deeds of trust on
residential or commercial real properties.
On the closing date, the trust will purchase the mortgage loans. The aggregate
principal balance of the pool I mortgage loans will be approximately
$_____________ and the aggregate principal balance of the pool II mortgage loans
will be approximately $_____________.
The aggregate principal balance of the mortgage loans purchased by the trust on
the closing date will be less than the amount required to be held by the trust.
The amount of the difference will be taken from the proceeds of the sale of the
certificates, placed in the pre-funding accounts and used for the purchase of
mortgage loans by the trust after the closing date.
S-1
<PAGE>
Servicing of the Mortgage Loans
__________________ will act as servicer and will be obligated to service and
administer the mortgage loans.
Option of the Servicer to Terminate the Trust
The servicer may, at its option, terminate the trust on the distribution date on
which the aggregate outstanding principal balance of all mortgage loans is less
than 10% of the sum of the aggregate original principal balance of the mortgage
loans purchased on the closing date and the amount on deposit in the pre-funding
accounts on the closing date.
ERISA Considerations
Subject to the conditions described under "ERISA Considerations" in this
prospectus supplement, the certificates may be purchased by any employee benefit
plan or other retirement arrangement subject to ERISA or the Internal Revenue
Code.
Federal Income Tax Status
An election will be made to treat the trust fund as a REMIC. The class A
certificates will be designated as "regular interests" and the class R
certificates will be designated as "residual interests" in the REMIC.
The class A certificates will be treated as newly originated debt instruments
and the beneficial owners will be required to report income thereon in
accordance with the accrual method of accounting.
Ratings
In order to be issued, the certificates must be rated [ ]by ________ and [ ] by
________, taking into account the certificate insurance policy issued for the
certificates.
S-2
<PAGE>
Risk Factors
Investors should consider, among other things, the following factors --
as well as the factors enumerated under "Risk Factors" in the accompanying
prospectus -- before deciding to invest in the certificates.
If the funds on deposit in the pre-funding accounts are not used to purchase
additional mortgage loans, those funds will be distributed as a prepayment of
principal, which may adversely affect the yield on your certificate.
If the principal balance of the eligible mortgage loans
available for purchase by the trust on _____________ is less
than the amount on deposit in either pre-funding account on
that date, the remaining amount will be applied as a
prepayment of principal on the following distribution date to
the holders of the class of certificates relating to that
pre-funding account. You will bear the risk of reinvesting
these unscheduled distributions and there can be no assurance
that you will be able to reinvest them at a yield equaling or
exceeding the yield on your certificate.
Any purchase of additional mortgage loans by the trust using
funds on deposit in the pre-funding accounts is subject to the
following conditions, among others:
o each additional mortgage loan must satisfy specified
statistical criteria and representations and
warranties;
o additional mortgage loans will not be selected in a
manner that is believed to be adverse to the
interests of the holders of the certificates and the
certificate insurer; and
o opinions of counsel will be delivered with concerning
the validity of the conveyance of additional mortgage
loans.
If the originators do not have additional mortgage loans which
satisfy these conditions with an aggregate principal balance
equal to the amount on deposit in the pre-funding accounts,
such a prepayment will occur.
Because many of the mortgage loans backing your certificate were made to
borrowers with impaired or unsubstantiated credit histories, there is a greater
risk of delinquent payments on these mortgage loans, which could lead to greater
risk of losses on your certificate.
The mortgage loans were made, in part, to borrowers who, for
one reason or another, are not able, or do not wish, to obtain
financing from traditional sources such as commercial banks.
These mortgage loans may be considered to be of a riskier
nature than mortgage loans made by traditional sources of
financing, so that the holders of the certificates may be
deemed to be at greater risk than if the mortgage loans were
made to other types of borrowers.
The underwriting standards used in the origination of the
mortgage loans held by the trust are generally less stringent
than those of Fannie Mae or Freddie Mac concerning a
borrower's credit history and in certain other respects.
Borrowers on the mortgage loans may have an impaired or
unsubstantiated credit history. As a result of this less
stringent approach to underwriting, the mortgage loans
purchased by the trust may experience higher rates of
delinquencies, defaults and
S-3
<PAGE>
foreclosures than mortgage loans underwritten in a manner
which is more similar to the Fannie Mae and Freddie Mac
guidelines.
Geographic concentration of the mortgage loans in particular jurisdictions may
result in greater losses if those jurisdictions experience economic downturns.
Some geographic regions of the United States from time to time
will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher
rates of loss and delinquency on mortgage loans generally. Any
concentration of the mortgage loans in such a region may
present risk considerations in addition to those generally
present for similar mortgage-backed securities without this
concentration. The mortgaged properties underlying the
mortgage loans are located primarily on the eastern seaboard
of the United States. This may subject the mortgage loans held
by the trust to the risk that a downturn in the economy in
this area of the country would more greatly affect the pool
than if the pool were more diversified.
In particular, the states listed below had the following
percentages of mortgage loans in pool I and pool II, measured
as of _______, ______, which are secured by mortgaged
properties located in the their states:
------- ------- ------- ------- --------
Pool I % % % % %
Pool II % % % % %
Because of the relative geographic concentration of the
mortgage loans within the states of _____________,
_____________, _____________, _____________ and _____________,
losses on the mortgage loans may be higher than would be the
case if the mortgage loans were more geographically
diversified. For example, some of the mortgaged properties may
be more susceptible to particular types of special hazards,
such as earthquakes and other natural disasters and major
civil disturbances, than residential or commercial properties
located in other parts of the country. In addition, the
economies of _____________, _____________, _____________,
_____________ and _____________ may be adversely affected to a
greater degree than the economies of other areas of the
country by regional developments. If the _____________,
_____________, _____________, _____________ and _____________
residential or commercial real estate markets experience an
overall decline in property values after the dates of
origination of the respective mortgage loans, then the rates
of delinquencies, foreclosures and losses on the mortgage
loans may be expected to increase and this increase may be
substantial.
Loans with balloon and non-traditional payment methods may have a greater
default risk, which could lead to losses on your securities.
Approximately ____% of the mortgage loans in pool I, measured
as of _____, ____, and ____% of the mortgage loans in pool II,
measured as of ____, ____, are not fully amortized over their
terms and instead require substantial balloon payments on
their maturity dates. The borrower's ability to pay the
balloon amount due at maturity of his or her balloon loan will
depend on the borrower's ability to obtain adequate
refinancing or funds from other sources to repay the balloon
loan. The originators have only limited historical default
data concerning their balloon loans and they do not believe
that their data is sufficient to predict the default
experience of the balloon loans. Other "non-traditional" loans
include
S-4
<PAGE>
loans with escalating or variable principle payments. Because
borrowers of non-traditional loans are required to make
substantial single payments upon maturity, the default risk
associated with balloon loans may be greater than that
associated with fully-amortizing loans.
A portion of the mortgage loans are secured by subordinate mortgages; in the
event of a default, these mortgage loans are more likely to experience losses.
Approximately _____% of the mortgage loans in pool I, measured
as of ____, _____, and ____% of the mortgage loans in pool II,
measured as of ____, ____, are secured by subordinate or
junior mortgages which are subordinate to the rights of the
holder of the senior mortgages. As a result, the proceeds from
any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of such a mortgage
loan only to the extent that the claims, if any, of each
senior mortgagee are satisfied in full, including any
foreclosure costs. In addition, a holder of a junior mortgage
may not foreclose on the mortgaged property securing the
mortgage unless it forecloses subject to the related senior
mortgages, in which case it must either pay the entire amount
of the senior mortgages to the mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments
on each senior mortgage in the event of default thereunder. In
servicing business and consumer purpose home equity loans in
its portfolio, it is the servicer's practice to satisfy or
reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and
collections on the mortgage loans or otherwise. The trust will
have no source of funds to satisfy any senior mortgage or make
payments due to any senior mortgagee.
An overall decline in the residential or commercial real
estate markets could adversely affect the values of the
mortgaged properties such that the outstanding principal
balances of the mortgage loans, together with the primary
senior financing thereon, equals or exceeds the value of the
mortgaged properties. Such a decline would adversely affect
the position of a second mortgagee before having such an
effect on that of the first mortgagee. A rise in interest
rates over a period of time and the general condition of the
mortgaged property as well as other factors may have the
effect of reducing the value of the mortgaged property from
the appraised value at the time the mortgage loan was
originated. If there is a reduction in value of the mortgaged
property, the ratio of the amount of the mortgage loan to the
value of the mortgaged property may increase over what it was
at the time the mortgage loan was originated. Such an increase
may reduce the likelihood of liquidation or other proceeds
being sufficient to satisfy the mortgage loan after
satisfaction of any first liens.
A portion of the mortgage loans are high loan-to-value (LTV) ratios which may
not have adequate security in the event of a default, which could lead to losses
on your note.
Even though all of the mortgage loans are secured be
residential real estate, approximately _____% of the mortgage
loans in pool I, measured as of ____, _____, and ____% of the
mortgage loans in pool II, measured as of ____, ____, are
secured by real estate which has a value that may be close to,
or even less than, the amount of the loan. As a result, the
mortgaged properties may not provide adequate security for
these high LTV loans. Underwriting analysis with respect to
high LTV loans relies more heavily on the mortgagor's
S-5
<PAGE>
creditworthiness than on the protection afforded by the
security interest in the underlying mortgaged property.
Additionally, there is also the risk that if the borrower
moves, he or she will be unable to pay the loan in full from
the proceeds of the sale of the property. The costs incurred
by the servicer in the collection and liquidation of high LTV
loans may be higher than with respect to other loans, because
the servicer may be required to pursue collection solely
against the borrower. Consequently, the losses on defaulted
high LTV loans may be more severe as there is no assurance
that any proceeds will be recovered, which could lead to
losses on your certificate.
Security interests in the manufactured homes may not be perfected and the issuer
may not realize upon the full amount due under the loan.
Approximately _____% of the mortgage loans in pool I, measured
as of ____, _____, and ____% of the mortgage loans in pool II,
measured as of ____, ____, are secured by manufactured homes
and, in some cases, the real estate on which the manufactured
home is located. Some federal and state laws, which do not
apply to other types of mortgage loans, limit the issuer's
ability to foreclose on manufactured homes or may limit the
amount realized to less than the amount due under the loan.
These limitations could cause losses on your certificate.
Prepayments on the mortgage loans could lead to shortfalls in the payment of
interest on your certificate.
The scheduled monthly payment dates for the mortgage loans
occur throughout a month. When a principal prepayment in full
is made on a mortgage loan, the mortgagor is charged interest
only up to the date of the prepayment, instead of for a full
month. However, the principal receipts will only be passed
through to the holders of the certificates once a month, on
the distribution date which follows the calendar month in
which the prepayment was received by the servicer. The
servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections
payable on the certificates that are attributable to the
difference between the interest paid by a mortgagor in
connection with a prepayment in full and thirty days' interest
on the mortgage loan, but only to the extent of the servicing
fee for that calendar month.
If the servicer fails to make these payments or the shortfall
exceeds the servicing fee, there will be less funds available
for the payment of interest on the related class of
certificates. These shortfalls of interest, if they result in
the inability of the trust to pay the full amount of the
current interest on the related class of certificates, are not
covered by the certificate insurance policy.
S-6
<PAGE>
Some of the terms used in this prospectus supplement are capitalized.
These capitalized terms have specified definitions, which are included at the
end of this prospectus supplement under the heading "Glossary."
Transaction Overview
Parties
The Sponsor. Residential Asset Funding Corporation, a North Carolina
corporation. The principal executive office of the sponsor is located at 301
South College Street, Charlotte, North Carolina 28288, telephone no.
(704) 590-6161.
The Depositor. ________________, a __________ corporation, which is
owned by the originators. The principal executive office of the depositor is at
___________________________, and its telephone number is _____________.
The Originators. _____________, a _____________ corporation, and
_____________, a _____________ corporation, originated or purchased the mortgage
loans. For a description of the business of the originators, see "The
Originators, the Depositor and the Servicer" in this prospectus supplement.
The Servicer and the Subservicers. _____________ will act as servicer
of the mortgage loans, and _____________ and _____________ will act as
subservicers for different portions of the mortgage loans. For a description of
the business of the servicer, see "The Originators, the Depositor and the
Servicer" in this prospectus supplement.
The Trustee. _____________, a _____________ banking corporation. The
corporate trust office of the trustee is located at _____________, and its
telephone number is _____________. For a description of the trustee and its
responsibilities with respect to the certificates, see "The Trustee" in this
prospectus supplement.
The Collateral Agent. _________________________, a national banking
association. The corporate trust office of the collateral agent is located at
________________________, and its telephone number is _____________.
The Certificate Insurer. ___________________________, a _____________
financial guaranty insurance company. The certificate insurer will issue a
financial guaranty insurance policy for the benefit of the holders of the
certificates. For a description of the business and selected financial
information of the certificate insurer, see "The Certificate Insurance Policy"
and "The Certificate Insurer" in this prospectus supplement.
The Rating Agencies. ________________ and ________________ will issue
ratings for each class of certificates.
The Transaction
Formation of the Trust and Issuance of the Certificates. The trust will
be formed pursuant to the terms of a Pooling and Servicing Agreement, dated as
of _____________, between the trustee, the collateral agent, the servicer and
the depositor. Under the Pooling and Servicing Agreement, the trust will also
issue the certificates to the depositor, together evidencing the entire
beneficial ownership interest in the sub-trust of the trust consisting of a pool
of mortgage loans.
S-7
<PAGE>
Sale and Servicing of the Mortgage Loans. The mortgage loans have been
originated or purchased by the originators pursuant to their respective
underwriting guidelines, as described under "The Originators, the Depositor and
the Servicer." The originators will sell the mortgage loans to the depositor,
pursuant to Loan Sale Agreement, dated as of _____________, among the
originators and the depositor. The depositor will deposit the mortgage loans in
the trust pursuant to the Pooling and Servicing Agreement. The servicer will
service the mortgage loans pursuant to the terms of the Pooling and Servicing
Agreement.
Issuance of the Certificate Insurance Policy. The certificate insurer
will issue the certificate insurance policy pursuant to the terms of an
Insurance and Indemnity Agreement, dated as of _____________, among the
certificate insurer, the trust, the depositor, the originators and the servicer.
The Mortgage Loan Pools
Difference between Statistical Calculation Date and Closing Date Pools.
The statistical information presented in this prospectus supplement concerning
the mortgage loans is based on the pools of mortgage loans that existed on a
statistical calculation date, in this case _______, ____. Pool I aggregated
$_____________ as of the statistical calculation date and pool II aggregated
$_____________ as of the statistical calculation date. The depositor expects
that the actual pools on the closing date will represent approximately
$_____________ in aggregate principal balance of mortgage loans in pool I, as of
a cut-off date of ________, ____, and approximately $_____________ in aggregate
principal balance of mortgage loans in pool II, as of the cut-off date. The
additional mortgage loans will represent mortgage loans acquired or to be
acquired by the trust on or prior to the closing date. In addition, with respect
to the pools as of the statistical calculation date as to which statistical
information is presented in this prospectus supplement, some amortization will
occur prior to the closing date. Moreover, some mortgage loans included in the
pools as of the statistical calculation date may prepay in full, or may be
determined not to meet the eligibility requirements for the final pools, and may
not be included in the final pools. As a result of the foregoing, the
statistical distribution of characteristics as of the closing date for the final
mortgage loan pools will vary somewhat from the statistical distribution of the
characteristics as of the statistical calculation date as presented in this
prospectus supplement, although this variance should not be material. In the
event that the depositor does not, as of the closing date, have the full amount
of mortgage loans which the depositor expects to sell to the trust on this date,
the depositor will increase the size of the pre-funding accounts and the
capitalized interest accounts, as applicable.
Additional mortgage loans are intended to be purchased by the trust
from time to time on or before _____________ from funds on deposit in the
pre-funding accounts. These subsequent mortgage loans to be purchased by the
trust, if available, will be originated or purchased by the originators, sold by
the originators to the depositor and then sold by the depositor to the trust.
The Pooling and Servicing Agreement will provide that the mortgage loans,
following the conveyance of the subsequent mortgage loans, must in the aggregate
conform to specified characteristics described below under " -- Conveyance of
subsequent mortgage loans."
Unless otherwise noted, all statistical percentages in this prospectus
supplement are approximate and are measured by the aggregate principal balance
of the applicable mortgage loans in relation to the aggregate principal balance
of the mortgage loans in the applicable pool, in each case, as of the
statistical calculation date.
The mortgage loans will be predominantly business or consumer purpose
residential home equity loans used to refinance an existing mortgage loan, to
consolidate debt, or to obtain cash proceeds by borrowing against the
mortgagor's equity in the mortgaged property in order to provide funds for,
S-8
<PAGE>
working capital for business, business expansion, equipment acquisition, or
personal acquisitions. The mortgaged properties securing the mortgage loans
consist primarily of single-family residences -- which may be detached, part of
a multi-family dwelling, a condominium unit, a townhouse, a mobile home or a
unit in a planned unit development -- and commercial or mixed use property. The
mortgaged properties may be owner-occupied properties, which includes second and
vacation homes, non-owner occupied investment properties or business purpose
properties.
The majority of the mortgage loans have a prepayment fee clause. These
prepayment fee clauses generally provide that the mortgagor pay, upon
prepayment, one or more of the following:
o a fee equal to a percentage, negotiated at origination, of the
outstanding principal balance of the mortgage loan,
o a fee which is designed to allow the holder of the mortgage note
to earn interest on the mortgage loan as if the mortgage loan
remained outstanding until a designated point in time, or
o a fee equal to the amount of interest on the outstanding principal
balance of the mortgage loan calculated pursuant to a rule of 78's
calculation, which has the effect of requiring the mortgagor to
pay a greater amount of interest than would be required to be paid
if the actuarial method of calculating interest was utilized.
The Pool I Mortgage Loans
As of the statistical calculation date, each of the mortgage loans in
pool I had a remaining term to maturity of no greater than 360 months and had a
mortgage interest rate of at least ____% per annum.
The combined loan-to-value ratios or CLTV's described in this
prospectus supplement were calculated based upon the appraised values of the
mortgaged properties at the time of origination. No assurance can be given that
the appraised values of the mortgaged properties have remained or will remain at
the levels that existed on the dates of origination of the mortgage loans. If
property values decline such that the outstanding principal balances of the
mortgage loans, together with the outstanding principal balances of any first
liens, 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 historically experienced by the servicer, as described below under "The
Originators, the Depositor and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry generally.
As of the statistical calculation date, the mortgage loans in pool I
had the following characteristics:
o there were ___ mortgage loans under which the mortgaged properties
are located in __ states,
o the aggregate principal balance, after application of all payments
due on or before the statistical calculation date, was
$_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average principal
balance was $_____________,
o the mortgage interest rates ranged from _____% to ____% per annum,
and the weighted average mortgage interest rate was approximately
____% per annum,
o the original term to stated maturity ranged from ___ months to 360
months,
S-9
<PAGE>
o the remaining term to stated maturity ranged from __ months to
____ months, the weighted average original term to stated maturity
was approximately ___ months and the weighted average remaining
term to stated maturity was approximately ____ months,
o no mortgage loan had a maturity later than _________,
o approximately _______% of the aggregate principal balance of the
mortgage loans require monthly payments of principal that will
fully amortize these mortgage loans by their respective maturity
dates, and approximately ____% of the aggregate principal balance
of the mortgage loans are balloon loans,
o the weighted average CLTV was approximately _____%,
o approximately _____% of mortgage loans are secured by first liens,
and approximately _____% of mortgage loans are secured by second
liens, and
o approximately _____%, _____%, ____%, _____% and ____% of the
mortgage loans are secured by mortgaged properties located in the
States of _____________, _____________, _____________,
_____________ and _____________, respectively.
On or prior to _____________, the trust is expected to purchase,
subject to availability, subsequent mortgage loans to be added to pool I. The
maximum aggregate principal balance of subsequent mortgage loans that may be
purchased is expected to be approximately $_____________.
S-10
<PAGE>
The following tables present statistical information on the mortgage
loans in pool I. Due to rounding, the percentages shown may not precisely total
100.00%.
Geographical Distribution of Mortgaged Properties
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of CLTV Ratios
Pool I
<TABLE>
<CAPTION>
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Gross Mortgage Interest Rates
Pool I
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Original Terms to Maturity
(in months)
Pool I
<TABLE>
<CAPTION>
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Remaining Terms to Maturity
(in months)
Pool I
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
S-11
<PAGE>
Distribution of Original Principal Balances
Pool I
<TABLE>
<CAPTION>
Range of Original Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Current Principal Balances
Pool I
<TABLE>
<CAPTION>
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution by Lien Status
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution by Amortization Type
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution by Occupancy Status
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
S-12
<PAGE>
Distribution by Property Type
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
The Pool II Mortgage Loans
As of the statistical calculation date, each of the mortgage loans in
pool II had a remaining term to maturity of no greater than 360 months and had a
mortgage interest rate of at least _____% per annum.
The CLTVs described in this prospectus supplement were calculated based
upon the appraised values of the mortgaged properties at the time of
origination. No assurance can be given that the appraised values of the
mortgaged properties have remained or will remain at the levels that existed on
the dates of origination of the mortgage loans. If property values decline such
that the outstanding principal balances of the mortgage loans, together with the
outstanding principal balances of any first liens, 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 historically experienced by
the servicer, as described below under "The Originators, the Depositor and the
Servicer -- Delinquency and Loan Loss Experience," and in the mortgage lending
industry.
As of the statistical calculation date, the mortgage loans in pool II
had the following characteristics:
o there were ___ mortgage loans under which the mortgaged properties
are located in ___ states,
o the aggregate principal balance, after application of all payments
due on or before the statistical calculation date, was
$_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average principal
balance was $_____________,
o the mortgage interest rates ranged from ____% to ___% per annum,
and the weighted average mortgage interest rate was approximately
___% per annum,
o the original term to stated maturity ranged from __ months to 360
months,
o the remaining term to stated maturity ranged from __ months to ___
months, the weighted average original term to stated maturity was
approximately ___ months and the weighted average remaining term
to stated maturity was approximately ___ months,
o no mortgage loan had a maturity later than _____________,
o approximately ____% of the aggregate principal balance of the
mortgage loans require monthly payments of principal that will
fully amortize these mortgage loans by their respective maturity
dates, and approximately ____% of the aggregate principal balance
of the mortgage loans are balloon loans,
o the weighted average CLTV was approximately ____%,
S-13
<PAGE>
o approximately ____% of mortgage loans are secured by first liens,
and approximately ____% of mortgage loans are secured by second
liens, and
o approximately ___%, ___%, ____%, ____% and ____% of the mortgage
loans are secured by mortgaged properties located in the States of
_____________, _____________, _____________, _____________ and
_____________, respectively.
On or prior to _____________, the trust is expected to purchase,
subject to availability, subsequent mortgage loans to be added to pool II. The
maximum aggregate principal balance of subsequent mortgage loans that may be
purchased is expected to be approximately $_____________.
The following tables present statistical information on the mortgage
loans in pool II. Due to rounding, the percentages shown may not precisely total
100.00%.
Geographical Distribution of Mortgaged Properties
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of CLTV Ratios
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid of Statistical Calculation Date
Original CLTV Ratio Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Gross Mortgage Interest Rates
Pool II
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Original Terms to Maturity
(in months)
Pool II
<TABLE>
<CAPTION>
Range of Original Terms Number of Aggregate Unpaid of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
S-14
<PAGE>
Distribution of Remaining Terms to Maturity
(in months)
Pool II
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Original Principal Balances
Pool II
<TABLE>
<CAPTION>
Range of Original Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Loan Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution of Current Principal Balances
Pool II
<TABLE>
<CAPTION>
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation
Principal Balances Mortgage Loans Principal Balance Date Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution by Lien Status
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution by Amortization Type
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
S-15
<PAGE>
Distribution by Occupancy Status
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Distribution By Property Type
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation
Property Type Mortgage Loans Principal Balance Date Aggregate Principal Balance
------------------------------- --------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Total --------------- ----------------- ---------------------------------
</TABLE>
Conveyance of subsequent mortgage loans
The Pooling and Servicing Agreement permits the trust to acquire
subsequent mortgage loans with the funds on deposit in the pre-funding accounts.
It is expected that the amount on deposit in the pre-funding accounts on the
closing date will be approximately $_____________ for pool I and $_____________
for pool II. Accordingly, the statistical characteristics of the mortgage loans
in pool I and pool II will vary as of any subsequent cut-off date upon the
acquisition of subsequent mortgage loans.
The obligation of the trust to purchase the subsequent mortgage loans
on any subsequent transfer date during the Pre-Funding Period is subject to the
following requirements:
o the subsequent mortgage loan may not be 30 or more days
contractually delinquent as of a subsequent cut-off date which is
the close of business on the last day of the calendar month
preceding the month in which the subsequent mortgage loan was
purchased by the trust;
o the original term to maturity of the subsequent mortgage loan may
not exceed 360 months for pool I and 360 months for pool II;
o the subsequent mortgage loan must have a mortgage interest rate of
at least ____% for pool I and ____% for pool II;
o the purchase of the subsequent mortgage loans is consented to by
the certificate insurer and the rating agencies, notwithstanding
the fact that the subsequent mortgage loans meet the parameters
stated in this prospectus supplement;
o the principal balance of any subsequent mortgage loan may not
exceed $_____________ for pool I and $_____________ for pool II;
o no more than _____% for pool I and ____% for pool II of the
aggregate principal balance of the subsequent mortgage loans may
be second liens;
S-16
<PAGE>
o no such subsequent mortgage loan shall have a CLTV of more than
(a) for consumer purpose loans, ___% for pool I and ____% for pool
II, and (b) for business purpose loans, ___% for pool I and ___%
for pool II;
o no more than ____% for pool I and ___% for pool II of the
subsequent mortgage loans may be balloon loans;
o no more than ____% for pool I and ____% for pool II of the
subsequent mortgage loans may be secured by mixed-use properties,
commercial properties, or five or more unit multifamily
properties; and
o following the purchase of the subsequent mortgage loans by the
trust, the mortgage loans, including the subsequent mortgage
loans, (a) will have a weighted average mortgage interest rate,
(I) for consumer purpose loans, of at least ____% for pool I and
____% for pool II and (II) for business purpose loans, of at least
____% for pool I and ____% for pool II; and (b) will have a
weighted average CLTV of not more than (I) for consumer purpose
loans, ____% for pool I and ____% for pool II, and (II) for
business purpose loans, ____% for pool I and ____% for pool II.
The Pooling and Servicing Agreement will provide that any of these
requirements may be waived or modified in any respect upon prior written consent
of the certificate insurer, with the exception of the requirements concerning
maximum principal balance.
The Originators, the Depositor and the Servicer
[Corporate description]
[To be supplied by originators, depositor and servicer]
Underwriting Guidelines
[To be supplied by originators]
The Servicer
[To be supplied by servicer]
Delinquency and Loan Loss Experience
The following tables present information relating to the delinquency
and loan loss experience on the mortgage loans included in originators servicing
portfolio for the periods shown. The delinquency and loan loss experience
represents the historical experience of the originators, and there can be no
assurance that the future experience on the mortgage loans in the trust will be
the same as, or more favorable than, that of the mortgage loans in the
originators' overall servicing portfolio.
S-17
<PAGE>
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At At At
------------------ ------------------ -----------------
% of % of % of
Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced
------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio..............
Past due loans:
60-89 days...................
90 days or more .............
------------------ ------------------ -----------------
Total past due loans.............
REO Properties...................
------------------ ------------------ -----------------
</TABLE>
Total past due loans, foreclosures pending and REO Properties(3)....
The foregoing table was prepared assuming that:
o The past due period is based on the actual number of days that a
payment is contractually past due; a loan as to which a monthly
payment was due 60-89 days prior to the reporting period is
considered 60-89 days past due, etc.;
o total past due loans includes pending foreclosures; and
o an "REO property" is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
Loan Charge-Off Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At At At
---------- --------- ---------
<S> <C> <C> <C>
Servicing portfolio at period end.........
Average outstanding.......................
Gross losses............................
Loan recoveries.........................
Net loan charge-offs....................
Net loan charge-offs as a percentage
of servicing portfolio at period end....
Net loan charge-offs as a percentage
of average outstanding..................
</TABLE>
The foregoing table was prepared assuming that:
o "average outstanding" is the arithmetic average of the principal
balances of the loans in the originators' servicing portfolio
outstanding at the opening and closing of business for this
period; and
S-18
<PAGE>
o "gross losses" means the outstanding principal balance plus
accrued but unpaid interest on liquidated mortgage loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the originators' experiences at the dates for the
periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the mortgage loans will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the mortgage loans included in the trust, or as a basis of
assessing the likelihood, amount or severity of losses on the mortgage loans.
The statistical data in the tables is based on all of the mortgage loans in the
originators' servicing portfolio. The mortgage loans, in general, may have
characteristics which distinguish them from the majority of the loans in the
originators' servicing portfolio.
The Trustee
________________________, a ____________ banking corporation, has an
office at ________________________. The trustee will act as initial
authenticating agent, paying agent and certificate registrar pursuant to the
terms of the Pooling and Servicing Agreement.
The Collateral Agent
________________________, a national banking association, has its
corporate trust office at ________________________. The collateral agent's
duties are limited solely to its express obligations under the Pooling and
Servicing Agreement.
Description of the Certificates
On the closing date, the trust will issue the class A-1 certificates,
the class A-2 certificates and both classes of class R certificates pursuant to
the Pooling and Servicing Agreement. Each class A-1 certificate represents a
beneficial ownership interest in the portion of the trust estate consisting of
the pool I mortgage loans and, to the extent provided in this prospectus
supplement, the pool II mortgage loans. Each class A-2 certificate represents a
beneficial ownership interest in the portion of the trust estate consisting of
the pool II mortgage loans and, to the extent provided in this prospectus
supplement, the pool I mortgage loans. Pursuant to the Pooling and Servicing
Agreement, the trust will also issue two class R certificates, one relating to
the class A-1 certificates and the other relating to the class A-2 certificates.
Together the class A certificate and the related class R certificate represent
the entire beneficial ownership interest in the portion of the trust consisting
of the related pool of mortgage loans. None of the class R certificates may be
transferred without the consent of the certificate insurer and compliance with
the transfer provisions of the Pooling and Servicing Agreement.
The trust estate consists of
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof collected
after the cut-off date,
o the assets as from time to time are identified as REO property and
collections thereon and proceeds thereof,
o assets that are deposited in the accounts relating to the trust,
including amounts on deposit in the Accounts and invested in
accordance with the Pooling and Servicing Agreement,
S-19
<PAGE>
o the trustee's rights with respect to the mortgage loans under all
insurance policies required to be maintained pursuant to the
Pooling and Servicing Agreement and any insurance proceeds,
o Liquidation Proceeds and
o released mortgaged property proceeds. In addition, the depositor
will cause the certificate insurer to issue the certificate
insurance policy under which it will guarantee payments to the
holders of the certificates as described in this prospectus
supplement.
The class A certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one certificate of each class may be
issued in a different amount.
Book-Entry Registration
The certificates are sometimes referred to in this prospectus
supplement as "book-entry certificates." No person acquiring an interest in the
book-entry certificates will be entitled to receive a definitive certificate
representing an obligation of the trust, except under the limited circumstances
described in this prospectus supplement. beneficial owners may elect to hold
their interests through DTC, in the United States, or Cedelbank or the Euroclear
System, in Europe. Transfers within DTC, Cedelbank or Euroclear, as the case may
be, will be in accordance with the usual rules and operating procedures of the
relevant system. So long as the certificates are book-entry certificates, these
certificates will be evidenced by one or more certificates registered in the
name of Cede & Co., which will be the "holder" of these certificates, as the
nominee of DTC or one of the relevant depositaries. Cross-market transfers
between persons holding directly or indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through Cedelbank or Euroclear, on
the other, will be effected in DTC through The Chase Manhattan Bank, the
relevant depositories of Cedelbank or Euroclear, respectively, and each a
participating member of DTC. The certificates will initially be registered in
the name of Cede & Co.. The interests of the holders of these certificates will
be represented by book-entries on the records of DTC and participating members
thereof. All references in this prospectus supplement to any certificates
reflect the rights of beneficial owners only as these rights may be exercised
through DTC and its participating organizations for so long as these
certificates are held by DTC.
The beneficial owners of certificates may elect to hold their
certificates through DTC in the United States, or Cedelbank or Euroclear if they
are participants in these systems, or indirectly through organizations which are
participants in these systems. The book-entry certificates will be issued in one
or more certificates per class of certificates which in the aggregate equal the
outstanding principal balance of the related class of certificates and will
initially be registered in the name of Cede & Co., the nominee of DTC. Cedelbank
and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Cedelbank'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. Chase will act as depositary for Cedelbank and Morgan Guaranty
Trust Company of New York will act as depositary for Euroclear. Investors may
hold their beneficial interests in the book-entry certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no beneficial owner will be entitled to receive a physical or definitive
certificate representing this certificate. Unless and until definitive
certificates are issued, it is anticipated that the only "holder" of these
certificates will be Cede & Co., as nominee of DTC. beneficial owners will not
be "holders" or "certificateholders" as those terms are used in the Pooling and
Servicing Agreement. Beneficial owners are only permitted to exercise their
rights indirectly through participants and DTC.
S-20
<PAGE>
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC or on the records of a
participating firm that acts as agent for the financial intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's financial intermediary is not a DTC participant and on the records of
Cedelbank or Euroclear, as appropriate.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. participants
include securities brokers and dealers, including the underwriter, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly through "indirect participants".
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
certificates, such as the certificates, among participants on whose behalf it
acts for the book-entry certificates and to receive and transmit distributions
of principal of and interest on the book-entry certificates. Participants and
indirect participants with which beneficial owners have accounts with respect to
the book-entry certificates similarly are required to make book-entry transfers
and receive and transmit these payments on behalf of their respective beneficial
owners.
Beneficial owners that are not participants or indirect participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, book-entry certificates may do so only through participants and
indirect participants. In addition, beneficial owners will receive all
distributions of principal and interest from the trustee, or a paying agent on
behalf of the trustee, through DTC participants. DTC will forward these
distributions to its participants, which thereafter will forward them to
indirect participants or beneficial owners. Beneficial owners will not be
recognized by the trustee, the servicer or any paying agent as holders of the
certificates, and beneficial owners will be permitted to exercise the rights of
the holders of the certificates only indirectly through DTC and its
participants.
Because of time zone differences, credits of securities received in
Cedelbank 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. These credits or any transactions in the
securities settled during this processing will be reported to the relevant
Euroclear or Cedelbank participants on that business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank 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 Cedelbank or Euroclear cash account only as of the business day
following settlement in DTC. For information concerning tax documentation
procedures relating to the certificates, see "Material Federal Income Tax
Consequences -- REMIC Securities" in the accompanying prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedelbank participants and Euroclear participants will occur
in accordance with their respective rules and operating procedures.
S-21
<PAGE>
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in this system in accordance
with its rules and procedures and within its established deadlines. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the relevant depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Cedelbank
participants and Euroclear participants may not deliver instructions directly to
the European Depositaries.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participant
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need for
physical movement of certificates. Transactions may be settled in Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to its
Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic markets
in several countries. As a professional depository, Cedelbank is subject to
regulation by the Luxembourg Monetary Institute. Cedelbank 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 Cedelbank is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedelbank participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 31 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear Operator,
and all Euroclear Securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not Euroclear Clearance. Euroclear
Clearance establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the Operating Procedures of the Euroclear System and applicable Belgian law. The
Terms and Conditions govern transfers of securities and cash within
S-22
<PAGE>
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments on securities in Euroclear. All securities in Euroclear are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear operator acts under the Terms and
Conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of these payments to the accounts of the
applicable DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing this payment to the beneficial
owners of the book-entry certificates that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry
certificates may experience some delay in their receipt of payments, since these
payments will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions on certificates held through Cedelbank or Euroclear will be
credited to the cash accounts of Cedelbank participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. These distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a beneficial owner to pledge book-entry certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of the book-entry certificates, may be limited due to the lack of
physical certificates for the book-entry certificates. In addition, issuance of
the book-entry certificates in book-entry form may reduce the liquidity of the
certificates in the secondary market since some potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust provided by the trustee to Cede
& Co., as nominee of DTC, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting DTC, and to the financial intermediaries to whose DTC accounts the
book-entry certificates of the beneficial owners are credited.
DTC has advised the depositor and the servicer that it will take any
action permitted to be taken by a holder of the certificates under the Pooling
and Servicing Agreement only at the direction of one or more participants to
whose accounts with DTC the book-entry certificates are credited. Additionally,
DTC has advised the depositor that it will take these actions concerning
specified percentages of voting rights only at the direction of and on behalf of
participants whose holdings of book-entry certificates evidence the specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to the extent that participants whose holdings of
book-entry certificates evidence the percentages of voting rights authorize
divergent action.
None of the trust, the depositor, the servicer, the certificate insurer
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 for DTC, or for
maintaining, supervising or reviewing any records relating to the beneficial
ownership interests.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of certificates among participants
of DTC, Cedelbank and Euroclear, they are under no obligation to perform or
continue to perform these procedures and these procedures may be discontinued at
any time.
S-23
<PAGE>
Definitive Certificates
The certificates, which will be issued initially as book-entry
certificates, will be converted to definitive certificates and reissued to
beneficial owners or their nominees, rather than to DTC or its nominee, only if
(a) DTC or the servicer advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository of the
book-entry certificates and DTC or the servicer is unable to locate a qualified
successor or (b) the trustee, at its option, elects to terminate the book-entry
system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive certificates. Upon delivery of definitive
certificates, the trustee will reissue the book-entry certificates as definitive
certificates to beneficial owners. Distributions of principal of, and interest
on, the book-entry certificates will thereafter be made by the trustee, or a
paying agent on behalf of the trustee, directly to holders of definitive
certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement.
Definitive certificates will be transferable and exchangeable at the
offices of the trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment and Pledge of Initial Mortgage Loans
Pursuant to the Loan Sale Agreement, the originators will sell,
transfer, assign, set over and otherwise convey the mortgage loans, without
recourse, to the depositor on the closing date. Pursuant to the Pooling and
Servicing Agreement, the depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the trustee, on behalf of the trust, all
right, title and interest in and to each mortgage loan, including all principal
outstanding as of, and interest due after, the cut-off date. Each transfer will
convey all right, title and interest in and to (a) principal outstanding as of
the cut-off date, and (b) interest due on each mortgage loan after the cut-off
date. The originators cannot convey, and should reserve and retain all their
respective right, title and interest in and to, principal, including principal
prepayments in full and curtailments or partial prepayments, received on each
mortgage loan on or prior to the cut-off date and (ii) interest due on each
mortgage loan on or prior to the cut-off date.
Assignment and Pledge of Subsequent Mortgage Loans
The trust may acquire subsequent mortgage loans with the funds on
deposit in either pre-funding account at any time during the period from the
closing date until the earliest of
o the date on which the amount on deposit in pre-funding account is
less than $100,000,
o the date on which an event of default occurs under the terms of
the Pooling and Servicing Agreement, or
o the close of business on ____________.
The amount on deposit in the pre-funding accounts will be reduced
during the this period by the amount thereof used to purchase subsequent
mortgage loans in accordance with the terms of the Pooling and Servicing
Agreement. The depositor expects that the amount on deposit in each of the
pre-funding accounts will be reduced to less than $100,000 by ____________. To
the extent funds in the pre-funding accounts are not used to purchase subsequent
mortgage loans by ____________, these funds will be used to prepay the principal
of the related class of certificates on the following distribution date.
Subsequent
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mortgage loans will be transferred by the originators to the depositor and
transferred by the depositor to the trust. The trust will then pledge the
subsequent mortgage loans to the trustee, on behalf of the holders of the
certificates and the certificate insurer.
Delivery of Mortgage Loan Documents
In connection with the sale, transfer, assignment or pledge of the
mortgage loans to the trust, the trust will cause to be delivered to the
collateral agent, on behalf of the trustee, on the closing date, the following
documents concerning each mortgage loan which constitute the mortgage file:
(a) the original mortgage note, endorsed without recourse in blank by
the originator, including all intervening endorsements showing a
complete chain of endorsement;
(b) the original mortgage with evidence of recording indicated thereon
or, in limited circumstances, a copy thereof certified by the
applicable recording office;
(c) the recorded mortgage assignment(s), or copies thereof certified
by the applicable recording office, if any, showing a complete
chain of assignment from the originator of the mortgage loan to
the originator -- which assignment may, at the originator's
option, be combined with the assignment referred to in clause (d)
below;
(d) a mortgage assignment in recordable form, which, if acceptable for
recording in the relevant jurisdiction, may be included in a
blanket assignment or assignments, of each mortgage from the
originator to the trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a
mortgage or mortgage note have been modified or the mortgage or
mortgage note has been assumed; and
(f) an original title insurance policy or (A) a copy of the title
insurance policy, or (B) a binder thereof or copy of the binder
together with a certificate from the originator that the original
mortgage has been delivered to the title insurance company that
issued the binder for recordation.
Pursuant to the Pooling and Servicing Agreement, the collateral agent,
on behalf of the trustee, agrees to execute and deliver on or prior to the
closing date, or, for subsequent mortgage loans, on or prior to the subsequent
transfer date, an acknowledgment of receipt of the original mortgage note, item
(a) above, for each of the mortgage loans, with any exceptions noted. The
collateral agent, on behalf of the trustee, agrees, for the benefit of the
holders of the certificates and the certificate insurer, to review, or cause to
be reviewed, each mortgage file within thirty days after the closing date or the
subsequent transfer date, as applicable -- or, for any Qualified Substitute
Mortgage Loan, within thirty days after the receipt by the collateral agent
thereof -- and to deliver a certification generally to the effect that, as to
each mortgage loan listed in the schedule of mortgage loans,
o all documents required to be delivered to it pursuant to the
Pooling and Servicing Agreement are in its possession,
o each of these documents has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered, appears
regular on its face and relates to the mortgage loan, and
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o based on its examination and only as to the foregoing documents,
specified information included on the schedule of mortgage loans
accurately reflects the information included in the mortgage file
delivered on that date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of an mortgage file which is not
executed, has not been received or is unrelated to the mortgage loans, or that
any mortgage loan does not conform to the requirements above or to the
description thereof as included in the schedule of mortgage loans, the
collateral agent shall promptly so notify the trustee, the servicer, the
depositor and the certificate insurer in writing with details thereof. The
depositor agrees to use reasonable efforts to cause to be remedied a material
defect in a document constituting part of an mortgage file of which it is so
notified by the collateral agent. If, however, within sixty days after the
collateral agent's notice of the defect, the depositor has not caused the defect
to be remedied and the defect materially and adversely affects the interest of
the holders of the certificates or the interests of the certificate insurer in
the mortgage loan, the depositor or the originator will either (a) substitute in
lieu of the mortgage loan a Qualified Substitute Mortgage Loan and, if the then
outstanding principal balance of the Qualified Substitute Mortgage Loan is less
than the principal balance of the mortgage loan as of the date of the
substitution plus accrued and unpaid interest thereon, deliver to the servicer a
substitution adjustment equal to the amount of any such shortfall or (b)
purchase the mortgage loan at a price equal to the outstanding principal balance
of the mortgage loan as of the date of purchase, plus the greater of (1) all
accrued and unpaid interest thereon and (2) thirty days' interest thereon,
computed at the mortgage interest rate, net of the servicing fee if the servicer
is effecting the repurchase, plus the amount of any unreimbursed servicing
advances made by the servicer, which purchase price shall be deposited in the
Distribution Account on the next succeeding servicer remittance date after
deducting therefrom any amounts received in respect of the repurchased mortgage
loan or Loans and being held in the Distribution Account for future distribution
to the extent these amounts have not yet been applied to principal or interest
on the mortgage loan. In addition, the depositor and the originators shall be
obligated to indemnify the trustee, the collateral agent, the holders of the
certificates and the certificate insurer for any third-party claims arising out
of a breach by the depositor or the originators of representations or warranties
regarding the mortgage loans. The obligation of the depositor and the
originators to cure a breach or to substitute or purchase any mortgage loan and
to indemnify constitute the sole remedies respecting a material breach of any
representation or warranty to the holders of the certificates, the trustee, the
collateral agent and the certificate insurer.
Representations and Warranties of the Depositor
The depositor will represent, among other things, for each mortgage
loan, as of the closing date or the subsequent transfer date, as applicable, the
following:
1. the information included in the schedule of mortgage loans
for each mortgage loan is true and correct;
2. all of the original or certified documentation constituting
the mortgage files, including all material documents related thereto,
has been or will be delivered to the collateral agent, on behalf of the
trustee, on the closing date or the subsequent transfer date, as
applicable;
3. the mortgaged property consists of a single parcel of real
property separately assessed for tax purposes, upon which is erected a
detached or an attached one-family residence or a detached two- to
six-family dwelling, or an individual condominium unit in a low-rise
condominium, or a mobile home unit, or an individual unit in a planned
unit development, or a commercial property, or a mixed use or multiple
purpose property. The residence, dwelling or unit is not,
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o a unit in a cooperative apartment,
o a property constituting part of a syndication,
o a time share unit,
o a property held in trust,
o a manufactured dwelling,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage is a valid first or second lien on a fee
simple, or its equivalent under applicable state law, estate in the
real property securing the amount owed by the mortgagor under the
mortgage note subject only to,
o the lien of current real property taxes and
assessments which are not delinquent,
o any first mortgage loan on the property,
o covenants, conditions and restrictions, rights of
way, easements and other matters of public record as
of the date of recording of the mortgage, the
exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area
wherein the property subject to the mortgage is
located or specifically reflected in the appraisal
obtained in connection with the origination of the
mortgage loan obtained by the depositor, and
o other matters to which like properties are commonly
subject which do not materially interfere with the
benefits of the security intended to be provided by
the mortgage;
5. immediately prior to the transfer and assignment by the
depositor to the depositor, the depositor had good title to, and was
the sole owner of each mortgage loan, free of any interest of any other
person, and the depositor has transferred all right, title and interest
in each mortgage loan to the depositor;
6. each mortgage loan conforms, and all the mortgage loans in
the aggregate conform, to the description thereof in this prospectus
supplement; and
7. all of the mortgage loans were originated in accordance
with the underwriting criteria described in this prospectus supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
any of the holder of the certificates, the depositor, the servicer, any
subservicer, the certificate insurer, the collateral agent or the trustee that
any of the representations and warranties contained in the Pooling and Servicing
Agreement have been breached in any material respect as of the closing date or
the subsequent transfer date, as applicable, with the result that the interests
of the holders of the certificates in the mortgage loan or the interests of the
certificate insurer were materially and adversely affected, notwithstanding that
any representation and warranty was made to the depositor's or the originator's
best knowledge and the depositor or the originator lacked knowledge of the
breach, the party discovering the breach is required to give prompt written
notice to the other parties. Subject to specified provisions of the Pooling and
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Servicing Agreement, within sixty days of the earlier to occur of the
depositor's or an originator's discovery or its receipt of notice of any breach,
the depositor or the originators will
o promptly cure the breach in all material respects,
o remove each mortgage loan which has given rise to the requirement
for action by the depositor or the originators, substitute one or
more Qualified Substitute Mortgage Loans and, if the outstanding
principal balance of the Qualified Substitute Mortgage Loans as of
the date of the substitution is less than the outstanding
principal balance, plus accrued and unpaid interest thereon, of
the replaced mortgage loans as of the date of substitution,
deliver to the trust as part of the amounts remitted by the
servicer on the distribution date the amount of the shortfall, or
o purchase the mortgage loan at a price equal to the principal
balance of the mortgage loan as of the date of purchase plus the
greater of
o all accrued and unpaid interest thereon and
o thirty days' interest thereon computed at the
mortgage interest rate, net of the servicing fee if
____________ is the servicer, plus the amount of any
unreimbursed servicing advances made by the servicer,
and deposit the purchase price into the Distribution Account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of this repurchased mortgage loan or mortgage loans and
being held in the Distribution Account for future distribution to the extent
these amounts have not yet been applied to principal or interest on the mortgage
loan. In addition, the depositor and the originators shall be obligated to
indemnify the trust, the trustee, the collateral agent, the holders of the
certificates and the certificate insurer for any third-party claims arising out
of a breach by the depositor or the originators of representations or warranties
regarding the mortgage loans. The obligation of the depositor and the
originators to cure any breach or to substitute or purchase any mortgage loan
and to indemnify constitute the sole remedies respecting a material breach of
any representation or warranty to the holders of the certificates, the trustee,
the collateral agent and the certificate insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the servicer, for the
benefit of the holders of the certificates, shall establish and maintain the
Collection Account, which will generally be (a) an account maintained with a
depository institution or trust company whose long term unsecured debt
obligations are rated by each rating agency in one of its two highest rating
categories at the time of any deposit therein or (b) trust accounts maintained
with a depository institution acceptable to each rating agency and the
certificate insurer. The Pooling and Servicing Agreement permits the servicer to
direct any depository institution maintaining the Collection Account to invest
the funds in the Collection Account in one or more eligible investments that
mature, unless payable on demand, no later than the business day preceding the
date on which the servicer is required to transfer the servicer remittance
amount from the Collection Account to the Distribution Account, as described
below.
The servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following payments
received and collections made by it after the cut-off date, other than in
respect of monthly payments on the mortgage loans due on each mortgage loan up
to and including any due date occurring on or prior to the cut-off date:
o all payments on account of principal, including prepayments of
principal;
o all payments on account of interest on the mortgage loans;
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o all Liquidation Proceeds and all Insurance Proceeds to the extent
the proceeds are not to be applied to the restoration of the
mortgaged property or released to the borrower in accordance with
the express requirements of law or in accordance with prudent and
customary servicing practices;
o all Net REO Proceeds;
o all other amounts required to be deposited in the Collection
Account pursuant to the Pooling and Servicing Agreement; and
o any amounts required to be deposited in connection with net losses
realized on investments of funds in the Collection Account.
The trustee will be obligated to set up an account for each class of
certificates a distribution account into which the servicer will deposit or
cause to be deposited the servicer remittance amount on the _____ day of each
month.
The servicer remittance amount" for a servicer remittance date is equal
to the sum, without duplication, of
o all collections of principal and interest on the mortgage loans,
including principal prepayments, Net REO Proceeds and Liquidation
Proceeds, if any, collected by the servicer during the prior
calendar month,
o all Periodic Advances made by the servicer with respect to
payments due to be received on the mortgage loans on the due date
and
o any other amounts required to be placed in the Collection Account
by the servicer pursuant to the Pooling and Servicing Agreement,
but excluding the following:
(a) amounts received on particular mortgage loans, for which the
servicer has previously made an unreimbursed Periodic Advance, as
late payments of interest, or as Net Liquidation Proceeds, to the
extent of the unreimbursed Periodic Advance;
(b) amounts received on a particular mortgage loan for which the
servicer has previously made an unreimbursed servicing advance, to
the extent of the unreimbursed servicing advance;
(c) for the servicer remittance date, the aggregate servicing fee;
(d) all net income from eligible investment that is held in the
Collection Account for the account of the servicer;
(e) all amounts actually recovered from the servicer in respect of
late fees, assumption fees, prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) other amounts which are reimbursable to the servicer, as provided
in the Pooling and Servicing Agreement.
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The amounts described in clauses (a) through (g) above may be withdrawn
by the servicer from the Collection Account on or prior to each servicer
remittance date.
Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, starting with the second distribution
date, the Excess Interest for a pool of mortgage loans, if any, that is not used
to make cross-collateralization payments will be applied on each distribution
date as an accelerated payment of principal on the related class of
certificates, but only to the limited extent hereafter described. The
application of Excess Interest as a payment of principal has the effect of
accelerating the amortization of a class of certificates relative to the
amortization of the related pool of mortgage loans. The Excess Interest from a
pool of mortgage loans will be used
o to reimburse the certificate insurer for any amounts due to it,
o as needed to pay Net Mortgage Loan Interest Shortfalls relating to
that class,
o as needed to make cross-collateralization payments in respect of
the other pool of mortgage loans,
o as a payment of principal to the related class of certificates
until the distribution date on which the amount of
over-collateralization has reached the required level, and
o as needed to fund the Cross-collateralization Reserve Account
relating to the other pool of mortgage loans.
Notwithstanding the foregoing, in the event specified tests enumerated in the
Pooling and Servicing Agreement are violated, all available Excess Interest will
be used as a payment of principal to the related class of certificates to
accelerate the amortization of the certificates.
The Pooling and Servicing Agreement requires that, starting with the
second distribution date, Excess Interest from a pool of mortgage loans that is
not used to make cross-collateralization payments will be applied as an
accelerated payment of principal on the related class of certificates until the
Over-collateralized Amount has increased to the level required by the Pooling
and Servicing Agreement. After this time, if it is necessary to re-establish the
required level of over-collateralization, Excess Interest from each pool of
mortgage loans that is not used to make cross-collateralization payments will
again be applied as an accelerated payment of principal on the related class of
certificates. Notwithstanding the foregoing, in the event specified tests
enumerated in the Pooling and Servicing Agreement are violated, all available
Excess Interest from each pool of mortgage loans will be used as a payment of
principal to accelerate the amortization of the related class of certificates.
Initially, the Over-collateralized Amount of each pool of mortgage loans will be
an amount equal to approximately 0.50% of the sum of (x) the aggregate principal
balance of the mortgage loans in each pool on the closing date and (y) the
original amount on deposit in the related pre-funding account on the closing
date.
In the event that the required level of the Specified
Over-collateralized Amount for a pool of mortgage loans is permitted to decrease
or "step down" on a distribution date in the future, the Pooling and Servicing
Agreement provides that a portion of the principal which would otherwise be
distributed to the holders of the related class of certificates on the
distribution date shall instead be distributed in the priority described in this
prospectus supplement under "--Flow of Funds." This has the effect of
decelerating the amortization of the related class of certificates relative to
the amortization of that pool of mortgage loans, and of reducing the
Over-collateralized Amount. If, on any distribution date, the Excess
Over-collateralized Amount is, or, after taking into account all other
distributions to be made on the distribution date would be, greater than zero --
i.e., the Over-collateralized Amount is or would be
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greater than the related Specified Over-collateralized Amount -- then any
amounts relating to principal which would otherwise be distributed to the
holders of the related class of certificates on this distribution date shall
instead be distributed in the priority described in this prospectus supplement
under "--Flow of Funds", in an amount equal to the Over-collateralization
Reduction Amount.
The Pooling and Servicing Agreement provides that, on any distribution
date, all amounts collected on account of principal -- other than any such
amount applied to the payment of an Over-collateralization Reduction Amount --
for each pool of mortgage loans during the a due period of the prior calendar
month will be distributed to the holders of the related class of certificates on
the distribution date. In addition, the Pooling and Servicing Agreement provides
that the principal balance of any mortgage loan which becomes a Liquidated
Mortgage Loan shall then equal zero. The Pooling and Servicing Agreement does
not contain any rule which requires that the amount of any Liquidated Loan Loss
be distributed to the holders of the related class of certificates on the
distribution date which immediately follows the event of loss; i.e., the Pooling
and Servicing Agreement does not require the current recovery of losses.
However, the occurrence of a Liquidated Loan Loss will reduce the
Over-collateralized Amount for that pool of mortgage loans, which, to the extent
that the reduction causes the Over-collateralized Amount to be less than the
Specified Over-collateralized Amount applicable to the related distribution
date, will require the payment of an Over-collateralization Increase Amount on
that distribution date, or, if insufficient funds are available on that
distribution date, on subsequent distribution dates, until the
Over-collateralized Amount equals the related Specified Over-collateralized
Amount. The effect of the foregoing is to allocate losses to the holders of the
related class R certificates by reducing, or eliminating entirely, payments of
Excess Interest and Over-collateralization Reduction Amounts which the holders
would otherwise receive.
Over-collateralization and the Certificate Insurance Policy. The
Pooling and Servicing Agreement requires the trustee to make a claim for an
Insured Payment under the certificate insurance policy not later than the third
business day prior to any distribution date as to which the trustee has
determined that an Over-collateralization Deficit will occur for the purpose of
applying the proceeds of the Insured Payment as a payment of principal to the
holders of the related class of certificates on that distribution date. The
certificate insurer has the option on any distribution date to make a payment of
principal, including in respect of Liquidated Loan Losses, up to the amount that
would have been payable to the holders of the certificates if sufficient funds
were available thereof. Additionally, under the terms of the Pooling and
Servicing Agreement, the certificate insurer will have the option to cause
Excess Interest to be applied without regard to any limitation upon the
occurrence of particular trigger events, or in the event of an "event of
default" under the Insurance Agreement. However, investors in the certificates
should realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no distributions of principal.
Cross-collateralization Provisions
Cross-collateralization Payments. On each distribution date, available
Excess Interest from a pool of mortgage loans, if any, will be paid to the
holders of the class of certificates relating to the other pool of mortgage
loans to the extent of the Shortfall Amount for the other pool. The
cross-collateralization provisions of the transaction are limited to the payment
of specified credit losses, certain interest shortfalls and any amounts due the
certificate insurer. Excess Interest from one pool of mortgage loans will not be
used to build over-collateralization for the other pool of mortgage loans.
Cross-collateralization Reserve Account. Each class of certificates
will have the benefit of a Cross-collateralization Reserve Account. On each
distribution date, available Excess Interest from a pool of mortgage loans, if
any, will be paid into the Cross-collateralization Reserve Account relating to
the other pool of mortgage loans, until the amount of funds on deposit therein
equals the Specified Reserve
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Amount for the other pool. If the amount on deposit in the
Cross-collateralization Reserve Account for a pool of mortgage loans on any
distribution date exceeds the Specified Reserve Amount for the pool and the
distribution date, the amount of this excess shall be distributed in the
priority described in this prospectus supplement under "--Flow of Funds."
Funds on deposit in a Cross-collateralization Reserve Account will be
used on any distribution date to make payments in respect of the Shortfall
Amount for either pool, to the extent that there is no Excess Interest available
therefor on that distribution date.
Flow of Funds
On each distribution date, the trustee, based solely on the information
received from the servicer in the servicer remittance report prior to the
distribution date, shall make payments in respect of each pool of mortgage loans
to the holders of the related class of certificates and reimbursement to the
certificate insurer under the Insurance Agreement, to the extent of funds,
including any Insured Payments, on deposit in the related Distribution Account,
as follows:
(a) to the trustee, an amount equal to the fees then due to it for the
related class of certificates;
(b) from amounts then on deposit in the related Distribution Account,
excluding any Insured Payments, to the certificate insurer the
Reimbursement Amount as of that distribution date;
(c) from amounts then on deposit in the related Distribution Account,
the Interest Distribution Amount for the related class of
certificates;
(d) from amounts then on deposit in the related Distribution Account,
the Principal Distribution Amount for the related class of
certificates, until the principal balance of the class of
certificates is reduced to zero;
(e) from amounts then on deposit in the related Distribution Account
the amount of any Net Mortgage Loan Interest Shortfalls for the
related class of certificates;
(f) from amounts then on deposit in the related Distribution Account,
to the holders of the other class of certificates, the Shortfall
Amount for the other class;
(g) from amounts then on deposit in the related Distribution Account,
to the Cross-collateralization Reserve Account relating to the
other class of certificates, the amount necessary for the balance
of the account to equal the Specified Reserve Amount; and
(h) following the making by the trustee of all allocations, transfers
and disbursements described above, to the holders of the related
class R certificates, the amount remaining on the distribution
date in the related Distribution Account, if any.
Reports to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each distribution
date the trustee will deliver to the servicer, the certificate insurer, the
depositor and each holder of a certificate or a class R certificate a written
remittance report containing information including, without limitation, the
amount of the distribution on the distribution date, the amount of the
distribution allocable to principal and allocable to interest, the aggregate
outstanding principal balance of the certificates as of the distribution date,
the
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amount of any Insured Payment included in the distributions on the distribution
date and any other information as required by the Pooling and Servicing
Agreement.
Amendment
The Pooling and Servicing Agreement may be amended from time to time by
the trust and the trustee by written agreement, upon the prior written consent
of the certificate insurer, without notice to, or consent of, the holder of the
certificates, to cure any ambiguity, to correct or supplement any provisions in
this prospectus supplement, to comply with any changes in the Code, or to make
any other provisions concerning matters or questions arising under the Pooling
and Servicing Agreement which shall not be inconsistent with the provisions of
the Pooling and Servicing Agreement. This action shall not, as evidenced by an
opinion of counsel delivered to, but not obtained at the expense of, the
trustee, adversely affect in any material respect the interests of any holder of
the certificates. In addition, no such amendment shall reduce in any manner the
amount of, or delay the timing of, payments received on mortgage loans which are
required to be distributed on any certificate without the consent of the holder
of the certificate, or change the rights or obligations of any other party to
the Pooling and Servicing Agreement without the consent of that party.
The Pooling and Servicing Agreement may be amended from time to time by
the trust and the trustee with the consent of the certificate insurer, and the
holders of the majority of the percentage interest of the certificates and class
R certificates for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the holders. No such
amendment shall reduce in any manner the amount of, or delay the timing of,
payments received on mortgage loans which are required to be distributed on any
certificate without the consent of the holder of the certificate or reduce the
percentage for each class whose holders are required to consent to any such
amendment without the consent of the holders of 100% of each class of
certificates affected thereby.
The Loan Sale Agreement contains substantially similar restrictions
regarding amendment.
Servicing of the Mortgage Loans
The Servicer
____________ will act as the servicer of the mortgage loan pools
____________ and ____________ will act as subservicers for a portion of the
mortgage loans. See "The Originators, the Depositor, the Servicer and the
Subservicer" in this prospectus supplement. The servicer and the subservicers
will service the mortgage loans on behalf of the trust, for the benefit of the
certificateholders and the certificate insurer and will be required to use the
same care as they customarily employ in servicing and administering mortgage
loans for their own account, in accordance with accepted mortgage servicing
practices of prudent lending institutions, and giving due consideration to the
reliance of the certificate insurer and the holders of the certificates on them.
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as servicer under the Pooling and
Servicing Agreement, the servicer shall be entitled to a servicing fee for each
mortgage loan, which shall be payable monthly from amounts on deposit in the
Collection Account. The servicing fee shall be an amount equal to interest at
one-twelfth of the servicing fee rate for the mortgage loan on the outstanding
principal balance of the mortgage loan. The servicing fee rate for each mortgage
loan will be 0.50% per annum. In addition, the servicer shall be entitled to
receive, as additional servicing compensation, to the extent permitted by
applicable law and the mortgage notes, any late payment charges, assumption
fees, prepayment fees or
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similar items. The servicer shall also be entitled to withdraw from the
Collection Account any net interest or other income earned on deposits therein.
The servicer shall pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not be
entitled to reimbursement therefor except as specifically provided in the
Pooling and Servicing Agreement.
Periodic Advances and Servicer Advances
Periodic Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance, the servicer is required
to make Periodic Advances on each servicer remittance date. This Periodic
Advances by the servicer are reimbursable to the servicer subject to a number of
conditions and restrictions, and are intended to provide both sufficient funds
for the payment of interest to the holders of the certificates, plus an
additional amount intended to maintain a specified level of
over-collateralization and to pay the trustee's fees, and the premium due the
certificate insurer. Notwithstanding the servicer's good faith determination
that a Periodic Advance was recoverable when made, if the Periodic Advance
becomes a nonrecoverable advance, the servicer will be entitled to reimbursement
therefor from the trust estate. See "Description of the Certificates -- Payments
on the Mortgage Loans" in this prospectus supplement.
Servicing Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance and that a prudent mortgage
lender would make a like advance if it or an affiliate owned the mortgage loan,
the servicer is required to advance amounts on the mortgage loans constituting
"out-of-pocket" costs and expenses relating to
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a first
lien not included in the trust estate on the mortgaged property,
and
o other customary amounts described in the Pooling and Servicing
Agreement.
These servicing advances by the servicer are reimbursable to the
servicer subject to a number of conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time the
servicing advance was made, that it would not be a nonrecoverable advance, the
servicing advance becomes a nonrecoverable advance, the servicer will be
entitled to reimbursement therefor from the trust estate.
Recovery of Advances. The servicer may recover Periodic Advances and
servicing advances to the extent permitted by the Pooling and Servicing
Agreement or, if not recovered from the mortgagor on whose behalf the servicing
advance or Periodic Advance was made, from late collections on the mortgage
loan, including Liquidation Proceeds, Insurance Proceeds and any other amounts
as may be collected by the servicer from the mortgagor or otherwise relating to
the mortgage loan. In the event a Periodic Advance or a servicing advance
becomes a nonrecoverable advance, the servicer may be reimbursed for the advance
from the Distribution Account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable servicing advance. A Periodic Advance or servicing advance is
"nonrecoverable" if in the good faith judgment of the servicer, the Periodic
Advance or servicing advance would not ultimately be recoverable.
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Prepayment Interest Shortfalls
Not later than the close of business on the _____ day of each month,
the servicer is required to remit to the trustee a payment of Compensating
Interest in respect of Prepayment Interest Shortfalls and shall not have the
right to reimbursement therefor. Insured Payments do not cover Prepayment
Interest Shortfalls.
Civil Relief Act Interest Shortfalls
The reduction, if any, in interest payable on the mortgage loans in the
applicable pool attributable to the application of the Civil Relief Act will not
reduce the amount of Current Interest due to the holders of the class A-1
certificates or class A-2 certificates, respectively. However, in the event the
full amount of Current Interest is not available on any distribution date due to
Civil Relief Act interest shortfalls in the applicable pool, the amount of this
shortfall will not be covered by the certificate insurance policy. These
shortfalls in Current Interest will be paid from the Excess Interest, if any,
otherwise payable in respect of over-collateralization, cross-collateralization
or to the holder of the class R certificate relating to the applicable pool. See
"Risk Factors -- Legal Considerations" in this prospectus supplement.
Optional Purchase of Defaulted Mortgage Loans
The depositor, or any affiliate of the depositor, has the option, but
is not obligated, to purchase from the trust any mortgage loan ninety days or
more delinquent at a purchase price equal to the outstanding principal balance
thereof as of the date of purchase, plus all accrued and unpaid interest on the
principal balance, computed at the mortgage interest rate -- net of the
servicing fee, if ________ is the servicer -- plus the amount of any
unreimbursed Periodic Advances and servicing advances made by the servicer for
the mortgage loan in accordance with the provisions specified in the Pooling and
Servicing Agreement.
Servicer Reports
On each servicer remittance date, the servicer is required to deliver
to the certificate insurer, the trustee, and the collateral agent, a servicer
remittance report setting forth the information necessary for the trustee to
make the distributions described under "--Flow of Funds" in this prospectus
supplement and containing the information to be included in the trustee's
remittance report for that distribution date.
The servicer is required to deliver to the certificate insurer, the
trustee, the collateral agent, S&P and Moody's, not later than April 30th of
each year, starting in ________, an officer's certificate stating that
o the servicer has fully complied with the servicing provisions of
the Pooling and Servicing Agreement,
o a review of the activities of the servicer during the preceding
calendar year and of performance under the Pooling and Servicing
Agreement has been made under the officer's supervision, and
o to the best of the officer's knowledge, based on that review, the
servicer has fulfilled all its obligations under the Pooling and
Servicing Agreement for that year, or, if there has been a default
in the fulfillment of any obligation, specifying each default
known to that officer and the nature and status thereof including
the steps being taken by the servicer to remedy the default.
Not later than April 30th of each year, the servicer, at its expense,
is required to cause to be delivered to the certificate insurer, the trustee,
the collateral agent, S&P and Moody's from a firm of
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independent certified public accountants, who may also render other services to
the servicer, a statement to the effect that the firm has examined certain
documents and records relating to the servicing of the mortgage loans during the
preceding calendar year, or any longer period from the closing date to the end
of the following calendar year, and that, on the basis of the examination
conducted substantially in compliance with generally accepted auditing standards
and the requirements of the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for Freddie Mac, the
servicing has been conducted in compliance with the Pooling and Servicing
Agreement except for any significant exceptions or errors in records that, in
the opinion of the firm, generally accepted auditing standards and the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac require it to report, in which case the
exceptions and errors shall be so reported.
Collection and Other Servicing Procedures
The servicer will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and will, consistent
with the Pooling and Servicing Agreement, follow the collection procedures as it
follows for loans held for its own account which are comparable to the mortgage
loans. Consistent with the above, the servicer may, in its discretion, (a) waive
any late payment charge and (b) arrange with a mortgagor a schedule for the
liquidation of delinquencies, subject to the provisions of the Pooling and
Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing any "due-on-sale"
clause, the servicer may enter into an assumption and modification agreement
with the person to whom the property has been or is about to be conveyed,
pursuant to which that person becomes liable under the mortgage note.
Any fee collected by the servicer for entering into an assumption
agreement will be retained by the servicer as additional servicing compensation.
In connection with any assumption, the mortgage interest rate borne by the
mortgage note relating to each mortgage loan may not be decreased. For a
description of circumstances in which the servicer may be unable to enforce
"due-on-sale" clauses, see "Servicing -- Enforcement of Due-on-Sale Clauses" in
the accompanying prospectus.
Hazard Insurance
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of the mortgaged property or (b) the principal balance of the mortgage
loan plus the outstanding balance of any mortgage loan senior to the mortgage
loan, but in no event may this amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As stated above, all amounts
collected by the servicer under any hazard policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the servicer's normal servicing procedures, to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the related Distribution Account. The ability of the
servicer to assure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy, or upon the extent to which information in this regard is
furnished to the servicer by a borrower. The Pooling and Servicing Agreement
provides that the servicer may satisfy its obligation to cause hazard policies
to be maintained by maintaining a blanket policy issued by an insurer acceptable
to the rating agencies insuring against losses on the mortgage loans. If this
blanket policy contains a deductible clause, the servicer is obligated
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to deposit in the related Distribution Account the sums which would have been
deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most of these policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. The foregoing list is
merely indicative of the types of uninsured risks and is not intended to be
all-inclusive.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, that clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(a) the replacement cost of the improvements less physical depreciation or (b)
this proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of these improvements.
Since residential and commercial properties, generally, have
historically appreciated in value over time, if the amount of hazard insurance
maintained on the improvements securing the mortgage loans were to decline as
the principal balances owing thereon decreased, hazard insurance proceeds could
be insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the mortgage loans as come into
default when, in the opinion of the servicer, no satisfactory arrangements can
be made for the collection of delinquent payments. In connection with the
foreclosure or other conversion, the servicer will follow the practices as it
deems necessary or advisable and as are in keeping with the servicer's general
loan servicing activities and the Pooling and Servicing Agreement; although the
servicer will not expend its own funds in connection with foreclosure or other
conversion, correction of a default on a senior mortgage or restoration of any
property unless the foreclosure, correction or restoration is determined to
increase Net Liquidation Proceeds.
Removal and Resignation of the Servicer
The certificate insurer may, pursuant to the Pooling and Servicing
Agreement, remove the servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clauses (g), (h) or (i) below
and the trustee, only at the direction of the certificate insurer or the
majority holders of certificates, with the consent of the certificate insurer,
in the case of any direction of the majority holders, may remove the servicer
upon the occurrence and continuation beyond the applicable cure period of an
event described in clause (a), (b), (c), (d), (e) or (f) below. Each of the
following constitutes a servicer event of default:
(a) any failure by the servicer to remit to the trustee any payment
required to be made by the servicer under the terms of the Pooling
and Servicing Agreement, other than servicing
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advances covered by clause (b) below, which continues unremedied
for one business day after the date upon which written notice of
any failure, requiring the same to be remedied, shall have been
given to the servicer and the certificate insurer by the trustee
or to the servicer and the trustee by the certificate insurer or
the holders of certificates evidencing percentage interests of at
least 25%;
(b) the failure by the servicer to make any required servicing advance
which failure continues unremedied for a period of thirty days
after the date on which written notice of any failure, requiring
the same to be remedied, shall have been given to the servicer by
the trustee or to the servicer and the trustee by any holder of a
certificate or the certificate insurer;
(c) any failure on the part of the servicer duly to observe or perform
in any material respect any other of the covenants or agreements
on the part of the servicer contained in the Pooling and Servicing
Agreement, or the failure of any representation and warranty
enumerated in the Pooling and Servicing Agreement, which continues
unremedied for a period of thirty days after the date on which
written notice of any failure, requiring the same to be remedied,
shall have been given to the servicer by the trustee, or to the
servicer and the trustee by any holder of a certificate or the
certificate insurer;
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or
future federal or state bankruptcy, insolvency or similar law or
for the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the
servicer and this decree or order shall have remained in force,
undischarged or unstayed for a period of sixty days;
(e) the servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the servicer or of or relating to all or substantially
all of the servicer's property;
(f) the servicer shall admit in writing its inability generally to pay
its debts as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations;
(g) the delinquency or loss experience of the mortgage loans exceeds
levels specified in the Pooling and Servicing Agreement; or
(h) the certificate insurer shall notify the trustee of any "event of
default" under the Insurance Agreement.
The servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the servicer, ________, if ________ is not the
servicer, the certificate insurer, the collateral agent and the trustee, or upon
the determination that the servicer's duties thereunder are no longer
permissible under applicable law and such incapacity cannot be cured by the
servicer without the incurrence, in the reasonable judgment of the certificate
insurer, of unreasonable expense. No such resignation shall become effective
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until a successor has assumed the servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the servicer, the trustee will be the
successor servicer. The trustee, as successor servicer, will be obligated to
make Periodic Advances and servicing advances and other advances unless it
determines reasonably and in good faith that the advances would not be
recoverable. If, however, the trustee is unwilling or unable to act as successor
servicer, or if the majority holders, with the consent of the certificate
insurer, or the certificate insurer so requests, the trustee shall appoint, or
petition a court of competent jurisdiction to appoint, in accordance with the
provisions of the Pooling and Servicing Agreement and subject to the approval of
the certificate insurer, any established mortgage loan servicing institution
acceptable to the certificate insurer having a net worth of not less than
$____________ as the successor servicer in the assumption of all or any part of
the responsibilities, duties or liabilities of the servicer.
Pursuant to the Pooling and Servicing Agreement, the servicer covenants
and agrees to act as the servicer for an initial term from the closing date to
____________, which term will be extendable by the certificate insurer by notice
to the trustee for successive terms of three calendar months each, until the
termination of the trust estate. The servicer will, upon its receipt of each
notice of extension, become bound for the duration of the term covered by the
extension notice to continue as the servicer subject to and in accordance with
the other provisions of the Pooling and Servicing Agreement. If as of the
fifteenth day prior to the last day of any term of the servicer the trustee
shall not have received any extension notice from the certificate insurer, the
trustee will, within five days thereafter, give written notice of non-receipt to
the certificate insurer and the servicer. The certificate insurer has agreed to
extend each three month term of the servicer, in the absence of a servicer event
of default under the Pooling and Servicing Agreement.
The trustee and any other successor servicer in that capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the servicer. See "--Servicing and Other Compensation
and Payment of Expenses" in this prospectus supplement.
Termination; Purchase of Mortgage Loans
The Pooling and Servicing Agreement will terminate upon notice to the
trustee of either: (a) the later of the distribution to certificateholders of
the final payment or collection on the last mortgage loan, or Periodic Advances
of same by the servicer, or the disposition of all funds from the last mortgage
loan and the remittance of all funds due under the Pooling and Servicing
Agreement and the payment of all amounts due and payable to the certificate
insurer, the collateral agent and the trustee or (b) mutual consent of the
servicer, the certificate insurer and all holders in writing. In no event will
the trust terminate later than twenty-one years after the death of the last
surviving lineal descendant of the person named in the Trust Agreement.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the servicer may, at its option and at
its sole cost and expense, terminate the Pooling and Servicing Agreement on any
date on which the aggregate principal balance of the mortgage loans is less than
10% of the sum of (x) the aggregate original principal balance of the mortgage
loans purchased on the closing date and (y) the original amount on deposit in
the pre-funding accounts, by purchasing, on the next succeeding distribution
date, all of the outstanding mortgage loans and REO Properties at a price equal
to the sum of
o 100% of the principal balance of each outstanding mortgage loan
and each REO property,
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o the greater of (a) the aggregate amount of accrued and unpaid
interest on the mortgage loans through the due period and (b)
thirty days' accrued interest thereon computed at a rate equal to
the mortgage interest rate, in each case net of the servicing fee,
o any unreimbursed amounts due to the certificate insurer under the
Pooling and Servicing Agreement, the Insurance Agreement and,
without duplication, accrued and unpaid Insured Payments, and
o the trustee's fees.
Any such purchase shall be accomplished by depositing into each Distribution
Account the portion of the purchase price specified above which relates to the
class of certificates. No such termination is permitted without the prior
written consent of the certificate insurer if it would result in a draw on the
certificate insurance policy.
The Certificate Insurance Policy
The following summary of the terms of the certificate insurance policy
does not purport to be complete and is qualified in its entirety by reference to
the certificate insurance policy. A form of the certificate insurance policy may
be obtained, upon request, from the depositor.
Simultaneously with the issuance of the certificates, the certificate
insurer will deliver the certificate insurance policy to the trustee, for the
benefit of the holders of the certificates. Under the certificate insurance
policy, the certificate insurer will irrevocably and unconditionally guarantee
payment on each distribution date to the trustee, for the benefit of the holders
of the certificates, of the Insured Distribution Amounts for the related class
of certificates calculated in accordance with the original terms of the
certificates when issued and without regard to any amendment or modification of
the certificates or the Pooling and Servicing Agreement except amendments or
modifications to which the certificate insurer has given its prior written
consent. In addition, for any distribution date occurring on a date when an
event of default under the Insurance Agreement, as described below, has occurred
and is continuing or a date on or after the first date on which a claim is made
under the certificate insurance policy, the certificate insurer at its sole
option, may pay any or all of the outstanding principal balance of the
certificates. Mortgage Loan Interest Shortfalls will not be covered by payments
under the certificate insurance policy.
Payment of claims under the certificate insurance policy will be made
by the certificate insurer following receipt by the certificate insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
City time, on the second business day following receipt of notice for payment,
and (b) 12:00 noon, New York City time, on the relevant distribution date.
If any payment of an amount guaranteed by the certificate insurer
pursuant to the certificate insurance policy is avoided as a preference payment
under applicable bankruptcy, insolvency, receivership or similar law the
certificate insurer will pay the amount out of the funds of the certificate
insurer on the later of
o the date when due to be paid pursuant to the bankruptcy order
referred to below or
o the first to occur of
o the fourth business day following receipt by the
certificate insurer from the trustee of (A) a
certified copy of the order of the court or other
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governmental body which exercised jurisdiction to the
effect that a holder is required to return principal
or interest distributed on a certificate during the
term of the certificate insurance policy because
these distributions were avoidable preferences under
applicable bankruptcy law, (B) a certificate of the
holder(s) that the bankruptcy order has been entered
and is not subject to any stay, and (C) an assignment
duly executed and delivered by the holder(s), in such
form as is reasonably required by the certificate
insurer and provided to the holder(s) by the
certificate insurer, irrevocably assigning to the
certificate insurer all rights and claims of the
holder(s) relating to or arising under the
certificates against the debtor which made the
preference payment or otherwise concerning the
preference payment, or
o the date of receipt by the certificate insurer from
the trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four business days
prior to the date of receipt, the certificate insurer
shall have received written notice from the trustee
that these items were to be delivered on that date
and that date was specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the bankruptcy order and
not to the trustee or any holder directly -- unless a holder has previously paid
the amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the bankruptcy order, in which case the payment shall be
disbursed to the trustee for distribution to the holder upon proof of the
payment reasonably satisfactory to the certificate insurer.
The terms "receipt" and "received," with respect to the certificate
insurance policy, means actual delivery to the certificate insurer and to its
fiscal agent appointed by the certificate insurer at its option, if any, prior
to 12:00 p.m., New York City time, on a business day; delivery either on a day
that is not a business day or after 12:00 p.m., New York City time, shall be
deemed to be receipt on the next succeeding business day. If any notice or
certificate given under the certificate insurance policy by the trustee is not
in proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been received, and the certificate insurer or the fiscal
agent shall promptly so advise the trustee and the trustee may submit an amended
notice.
Under the certificate insurance policy, "business day" means any day
other than a Saturday or Sunday or a day on which banking institutions in the
City of New York, New York or the State of New York, are authorized or obligated
by law or executive order to be closed. The certificate insurer's obligations
under the certificate insurance policy to make Insured Payments shall be
discharged to the extent funds are transferred to the trustee as provided in the
certificate insurance policy, whether or not the funds are properly applied by
the trustee.
The certificate insurer shall be subrogated to the rights of each
holder to receive payments of principal and interest, as applicable, with
respect to distributions on the certificates to the extent of any payment by the
certificate insurer under the certificate insurance policy. To the extent the
certificate insurer makes Insured Payments, either directly or indirectly, as by
paying through the trustee, to the holders of certificates, the certificate
insurer will be subrogated to the rights of the holders, as applicable, with
respect to this Insured Payment and shall be deemed to the extent of the
payments so made to be a registered holder for purposes of payment.
Claims under the certificate insurance policy will rank equally with
any other unsecured debt and unsubordinated obligations of the certificate
insurer except for particular obligations in respect of tax and
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other payments to which preference is or may become afforded by statute. Claims
against the certificate insurer under the certificate insurance policy
constitute pari passu claims against the general assets of the certificate
insurer. The terms of the certificate insurance policy cannot be modified or
altered by any other agreement or instrument, or by the merger, consolidation or
dissolution of the trust. The certificate insurance policy is governed by the
laws of the State of New York. The certificate insurance policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
To the fullest extent permitted by applicable law, the certificate
insurer agrees under the certificate insurance policy not to assert, and waives,
for the benefit of each holder, all its rights, whether by counterclaim, setoff
or otherwise, and defenses, including, without limitation, the defense of fraud,
whether acquired by subrogation, assignment or otherwise, to the extent that
these rights and defenses may be available to the certificate insurer to avoid
payment of its obligations under the certificate insurance policy in accordance
with the express provisions of the certificate insurance policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
certificate insurer default exists, the certificate insurer shall be deemed to
be the holder of the certificates for all purposes, other than for payment on
the certificates, will be entitled to exercise all rights of the holders
thereunder, without the consent of the holders, and the holders may exercise
these rights only with the prior written consent of the certificate insurer. In
addition, the certificate insurer will, as a third-party beneficiary to the
Pooling and Servicing Agreement and the Loan Sale Agreement, have, among others,
the following rights:
o the right to give notices of breach or to terminate the rights and
obligations of the servicer under the Pooling and Servicing
Agreement in the event of a servicer event of default and to
institute proceedings against the servicer;
o the right to consent to or direct any waivers of defaults by the
servicer;
o the right to remove the trustee pursuant to the Pooling and
Servicing Agreement;
o the right to direct the actions of the trustee during the
continuation of a servicer default;
o the right to require the depositor to repurchase mortgage loans
for breach of representation and warranty or defect in
documentation;
o the right to direct foreclosures upon the failure of the servicer
to do so in accordance with the Pooling and Servicing Agreement;
o the right to direct all matters relating to a bankruptcy or other
insolvency proceeding involving the depositor; and
o the right to direct the trustee to investigate specified matters.
The certificate insurer's consent will be required prior to, among
other things, (x) the removal of the trustee, (y) the appointment of any
successor trustee or servicer or (z) any amendment to the Pooling and Servicing
Agreement.
The trust, the depositor, the servicer, the originators and the
certificate insurer will enter into the Insurance Agreement pursuant to which
the trust, the depositor, the servicer and the originators will agree to
reimburse, with interest, the certificate insurer for amounts paid pursuant to
claims under the certificate insurance policy. The payment obligations shall be
non-recourse obligations of the depositor, the originators, the trust and the
servicer and shall be payable only from monies available for the payment in
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accordance with the provisions of the Pooling and Servicing Agreement. The
servicer will further agree to pay the certificate insurer all reasonable
charges and expenses which the certificate insurer may pay or incur relative to
any amounts paid under the certificate insurance policy or otherwise in
connection with the transaction and to indemnify the certificate insurer against
specified liabilities. Except to the extent provided therein, amounts owing
under the Insurance Agreement will be payable solely from the trust estate. An
"event of default" under the Insurance Agreement will constitute an event of
default under the Pooling and Servicing Agreement and a servicer event of
default under the Pooling and Servicing Agreement and allow the certificate
insurer, among other things, to direct the trustee to terminate the servicer. An
"event of default" under the Insurance Agreement includes:
o the originators', the depositor's or the servicer's failure to pay
when due any amount owed under the Insurance Agreement or other
documents,
o the inaccuracy or incompleteness in any material respect of any
representation or warranty of the originators, the depositor or
the servicer in the Insurance Agreement, the Pooling and Servicing
Agreement or other documents,
o the originators', the depositor's or the servicer's failure to
perform or to comply with any covenant or agreement in the
Insurance Agreement, the Pooling and Servicing Agreement and other
documents,
o a finding or ruling by a governmental authority or agency that the
Insurance Agreement, the Pooling and Servicing Agreement or other
documents are not binding on the originators, the depositor or the
servicer,
o the originators', the depositor's or the servicer's failure to pay
its debts in general or the occurrence of specified events of
insolvency or bankruptcy with respect to the depositor or the
servicer, and
o the occurrence of specified "performance test violations" designed
to measure the performance of the mortgage loans.
The Certificate Insurer
The following information has been obtained from
________________________ and has not been verified by the originators, the
servicer, the depositor or the underwriter. No representation or warranty is
made by the depositor, the originators, the servicer, the depositor or the
underwriter with respect thereto.
The Certificate Insurer
____________ is a monoline insurance company incorporated in ______
under the laws of the State of ____________. ________________________ is
licensed to engage in the financial guaranty insurance business in all 50
states, the District of Columbia and Puerto Rico.
___________ and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's securities --
thereby enhancing the credit rating of those securities -- in consideration for
the payment of a premium to the insurer. ____________ and its subsidiaries
principally insure asset-backed, collateralized and municipal securities.
Asset-backed securities are generally supported by residential or commercial
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage
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bonds and sale/leaseback obligation bonds. Municipal securities consist largely
of general obligation bonds, special revenue bonds and other special obligations
of state and local governments. ____________ insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy ____________ underwriting criteria.
The principal executive offices of ____________ are located at
________________________, and its telephone number at that location is
____________.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by ____________ or
any of its domestic operating insurance company subsidiaries are generally
reinsured among these companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, ____________ reinsures a
portion of its liabilities under some of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. This reinsurance is utilized by ____________
as a risk management device and to comply with statutory and rating agency
requirements; it does not alter or limit ____________ obligations under any
financial guaranty insurance policy.
Ratings
____________ insurance financial strength is rated "Aaa" by Moody's and
____________ insurer financial strength is rated "AAA" by Standard & Poor's and
Standard & Poor's (Australia) Pty. Ltd. ____________ claims-paying ability is
rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment Information,
Inc. These ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by the rating agencies.
Capitalization
The following table sets forth the capitalization of ____________ and
its wholly owned subsidiaries on ____________ the basis of generally accepted
accounting principles as of ____________:
[Certificate insurer to provide]
For further information concerning ____________, see the Consolidated
Financial Statements of ____________, and the certificates thereto, incorporated
by reference in this prospectus supplement. ____________ financial statements
are included as exhibits to the annual report on Form 10-K and Quarterly Reports
on Form 10-Q filed with the Commission by ____________ and may be reviewed at
the EDGAR website maintained by the Commission. Copies of the statutory
quarterly and annual statements filed with the State of ____________ Insurance
Department by ____________ are available upon request to the State of
____________ Insurance Department.
Insurance Regulation
____________ is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of ____________, its
state of domicile. In addition, ____________ and its insurance subsidiaries are
subject to regulation by insurance laws of the various other jurisdictions in
which they are licensed to do business. As a financial guaranty insurance
corporation licensed to do business in the State of ____________, ____________
is subject to Article __ of the ____________ Insurance Law which, among other
things, limits the business of each such insurer to financial guaranty insurance
and related lines, requires that each such insurer maintain a minimum surplus to
policyholders,
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establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions -- "single risks"
-- and the volume of transactions -- "aggregate risks" -- that may be
underwritten by each such insurer. Other provisions of the ____________
Insurance Law, applicable to non-life insurance companies such as ____________,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
Prepayment and Yield Considerations
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a certificate will be directly related to the rate of
payment of principal of the mortgage loans, including for this purpose voluntary
payment in full of mortgage loans prior to stated maturity, liquidations due to
defaults, casualties and condemnations, and repurchases of or substitutions for
mortgage loans by ____________ or an affiliate of ____________ as required or
permitted under the Pooling and Servicing Agreement or the Loan Sale Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in these properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments on conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing interest rates fall
significantly below the interest rates of some mortgage loans at the time of
origination, these mortgage loans may be subject to higher prepayment rates than
if prevailing rates remain at or above those at the time these mortgage loans
were originated. Conversely, if prevailing interest rates rise appreciably above
the interest rates of some mortgage loans at the time of origination, these
mortgage loans may experience a lower prepayment rate than if prevailing rates
remain at or below those at the time these mortgage loans were originated.
However, there can be no assurance that the mortgage loans will conform to the
prepayment experience of conventional mortgage loans or to any past prepayment
experience or any published prepayment forecast. No assurance can be given as to
the level of prepayments on mortgage loans that the trust estate will
experience.
As indicated above, if purchased at other than par, the yield to
maturity on a certificate will be affected by the rate of the payment of
principal on the mortgage loans. If the actual rate of payments on the mortgage
loans is slower than the rate anticipated by an investor who purchases a
certificate at a discount, the actual yield to the investor will be lower than
the investor's anticipated yield. If the actual rate of payments on the mortgage
loans is faster than the rate anticipated by an investor who purchases a
certificate at a premium, the actual yield to the investor will be lower than
the investor's anticipated yield.
The final stated maturity date is expected to be ____________ for the
class A-1 certificates and the class A-2 certificates. Each final stated
maturity date was calculated using the assumption that the final stated maturity
date is thirteen months after the final stated maturity date of the mortgage
loan having the latest maturity date in each pool and assuming a subsequent
mortgage loan having a final stated maturity date of ____________ is purchased
by the trust and included in each pool. The weighted average life of the
certificates is likely to be shorter than would be the case if payments actually
made on the mortgage loans conformed to the foregoing assumptions, and the final
distribution date for any class of the certificates could occur significantly
earlier than the final stated maturity date because:
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o prepayments, including, for this purpose, prepayments attributable
to foreclosure, liquidation, repurchase and the like, on mortgage
loans are likely to occur,
o thirteen months have been added to obtain the final stated
maturity date above,
o the over-collateralization provisions of the transaction result in
the application of Excess Interest to the payment of principal;
o the servicer may cause a liquidation of the trust estate when the
aggregate outstanding principal amount of the mortgage loans is
less than 10% of the sum of (a) the aggregate principal balance of
the mortgage loans purchased on the closing date and (b) the
original amount on deposit in the pre-funding accounts; and
o the servicer may, at its option, call the class A-1 certificates
or the class A-2 certificates, separately, when the aggregate
outstanding principal balance of the class A-1 certificates or the
class A-2 certificates, respectively, is equal to or less than 10%
of the aggregate original principal balance of the class A-1
certificates or the class A-2 certificates, respectively.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
the security is scheduled to be repaid to an investor. The weighted average life
of the certificates will be influenced by the rate at which principal of the
mortgage loans is paid, which may be in the form of scheduled amortization or
prepayments -- for this purpose, the term "prepayment" includes liquidations due
to default.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this prospectus supplement, Home
Equity Prepayment or HEP, is a prepayment assumption which represents an assumed
rate of prepayment each month relative to the then outstanding principal balance
of a pool of mortgage loans for the life of the mortgage loans. For example, 25%
HEP assumes a constant prepayment rate of 2.5% per annum of the then outstanding
principal balance of the mortgage loans in the first month of the life of the
mortgage loans and an additional 2.5% per annum in each month thereafter up to
and including the tenth month. Beginning in the eleventh month and in each month
thereafter during the life of the mortgage loans, 25% HEP assumes a constant
prepayment rate of 25% per annum. As used in the table below, 0% prepayment
assumption assumes prepayment rates equal to 0% of the prepayment
assumption--i.e., no prepayments on the mortgage loans having the
characteristics described below. The prepayment assumption does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans.
The following table has been prepared on the basis of the following
modeling assumptions:
o The mortgage loans prepay at the indicated percentage of the
prepayment assumption,
o distributions on the certificates are received in cash on the ____
day of each month commencing in ____________,
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payment by the mortgagors of principal
and interest on the mortgage loans occur,
o scheduled payments are assumed to be received on the last day of
each month commencing in ____________, or as presented in the
following table, and prepayments represent payments in full of
individual mortgage loans and are assumed to be received on the
last day of each month, commencing in
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<PAGE>
____________, or as presented in the following table, and include
thirty (30) days' interest thereon,
o the certificates are purchased on ____________,
o the Specified Over-collateralized Amount is as enumerated in the
Pooling and Servicing Agreement,
o on each distribution date, all Excess Interest for each pool is
applied to build up over-collateralization necessary to satisfy
the Specified Over-Collateralized Amount for each pool, except for
the first distribution date, on which the amount of Excess
Interest applied to build up over-collateralization is zero,
o the mortgage loans in pool I consist of ____________ mortgage
loans having the following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Amortizing Remaining Amortizing Remaining Term to
Balance($) Interest Rate(%) Interest Rate(%) Term (in months) Term (in months) Maturity (in months)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
o The mortgage loans in pool II consists of ____________ mortgage
loans having the following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Amortizing Remaining Amortizing Remaining Term to
Balance($) Interest Rate(%) Interest Rate(%) Term (in months) Term (in months) Maturity (in months)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
The foregoing modeling assumptions are assumptions and are not
necessarily indicative of actual performance.
Based upon the foregoing modeling assumptions, the tables below
indicate the weighted average life and earliest retirement date of the
certificates assuming that the mortgage loans prepay according to the indicated
percentages of the prepayment assumption.
WEIGHTED AVERAGE LIVES
Class A-1 Certificates
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
--------------------------------------------------------------------------------
Class A-2 Certificates
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
--------------------------------------------------------------------------------
The foregoing tables were prepared assuming that:
o the weighted average life of each class of certificates is
determined by
o multiplying the amount of each principal payment used
to retire the related class of certificates by the
number of years from the closing date to the final
distribution date when the related class of
certificates is fully retired,
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<PAGE>
o adding the results, and
o dividing the sum by the original principal balance of
that class; and
o the call of the class A-1 certificates or the class A-2
certificates, respectively, occurs as stated in this prospectus
supplement.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
The Pooling and Servicing Agreement provides that none of the
certificate insurer, the trust, the trustee, the depositor, the depositor, the
originators or the servicer will be liable to any holder for any loss or damage
incurred by the holder as a result of any difference in the rate of return
received by the holder as compared to the applicable certificate rate, with
respect to any holder of certificates upon reinvestment of the funds received in
connection with any premature repayment of principal on the certificates,
including any such repayment resulting from any prepayment by the mortgagor, any
liquidation of the mortgage loan, or any repurchase of or substitution for any
mortgage loan by the depositor or the servicer.
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 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 as a REMIC for federal
income tax purposes. __________, special tax counsel, will deliver its opinion
that, assuming compliance with the Pooling and Servicing Agreement, the trust
will be treated as a REMIC for federal income tax purposes. The class A
certificates will be designated as "regular interests" in the REMIC, and 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 certificates possess certain special tax attributes by virtue of
the REMIC provisions of the Code. See "Material Federal Income Tax Consequences
-- REMIC Securities" in the Prospectus.
The class A certificates generally will be treated as debt instruments
for federal income tax purposes. Beneficial owners, or registered holders, in
the case of definitive certificates, of the class A certificates will be
required to report income on such certificates in accordance with the accrual
method of accounting. It is not anticipated that the class A certificates will
be issued with original issue discount. See "Material Federal Income Tax
Consequences -- Discount and Premium -- Original Issue Discount" in the
Prospectus. The prepayment assumption for calculating original issue discount is
100% of the Prepayment Assumption. See "Prepayment and Yield Considerations"
herein.
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<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on
o employee benefit plans--as defined in Section 3(3) of ERISA,
o plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans,
o any entities whose underlying assets include plan assets by reason
of a plan's investment in such entities and
o persons who have certain specified relationships to such Plans --
"Parties-inInterest" under ERISA and "Disqualified Persons" under
the Code.
Section 406 of ERISA prohibits plans from engaging in certain
transactions involving the assets of such plans with Parties-in-Interest with
respect to such plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on plan
fiduciaries and Parties-in-Interest or Disqualified Persons that engage in
"prohibited transactions" involving assets of a plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and Disqualified Persons with respect to such
arrangements and plans, also may be subject to excise taxes and other penalties
if they engage in prohibited transactions. Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account --
e.g., through the purchase of an annuity contract. ERISA also imposes certain
duties on persons who are fiduciaries of plans subject to ERISA.
The Department of Labor has issued a regulation describing what
constitutes the assets of a plan when the plan acquires an equity interest in
another entity. This plan asset regulation states that, unless an exemption
described in the regulation is applicable, the underlying assets of an entity in
which a plan makes an equity investment will be considered, for purposes of
ERISA, to be the assets of the investing plan. Pursuant to the plan asset
regulation, if the assets of the trust were deemed to be plan assets by reason
of a plan's investment in any class A certificates, such plan assets would
include an undivided interest in any assets held in such trust. Therefore, in
the absence of an exemption, the purchase, sale or holding of any class A
certificate by a plan subject to Section 406 of ERISA or Section 4975 of the
Code might result in prohibited transactions and the imposition of excise taxes
and civil penalties.
On April 3, 1996, the Department of Labor issued to First Union
Corporation and its subsidiaries and affiliates, which include First Union
Securities, Inc., an individual administrative exemption, Prohibited Transaction
Exemption 96-22, as amended by Prohibited Transaction Exemptions 97-34 and
2000-58, from certain of the prohibited transaction rules of ERISA with respect
to the initial purchase, the holding and the subsequent resale by a plan of
certificates in pass-through trusts that meet the conditions and requirements of
this exemption. Among the conditions that must be satisfied for this exemption
to apply are the following:
(a) The acquisition of the class A certificates by a plan is
on terms, including the price for the class A certificates, that are at
least as favorable to the plan as they would be in an arm's length
transaction with an unrelated party;
(b) The assets held by the trust fund must be fully secured
(other than one-to-four family residential mortgage loans and home
equity loans or receivables backing certain types of certificates, as
described below);
(c) Unless the class A certificates are issued in "designated
transactions" (as described below) and are backed by fully-secured
loans, the rights and interests evidenced by the class A certificates
acquired by the plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
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<PAGE>
(d) The class A certificates acquired by the plan have
received a rating at the time of such acquisition that is in one of the
three (or, in the case of designated transactions, four) highest
generic rating categories from any of Standard & Poor's, Moody's or
Fitch, Inc.;
(e) The sum of all payments made to the underwriter in
connection with the distribution of the class A certificates represents
not more than reasonable compensation for underwriting the class A
certificates. The sum of all payments made to and retained by the
servicer represents not more than reasonable compensation for the
servicer's services under the Pooling and Servicing Agreement and
reimbursement of the servicer's reasonable expenses in connection
therewith;
(f) The trustee is not an affiliate of any other member of the
restricted group;
(g) The plan investing in the class A 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
(h) In the event that all of the obligations used to fund the
trust fund have not been transferred to the trust fund 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 fund may be transferred to the
trust fund, 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 fund also must meet the following requirements:
o The corpus of the trust fund must consist solely of assets of
the type which have been included in other investment pools;
o certificates in such other investment pools must have been
rated in one of the three (or, in the case of designated
transactions, four) highest rating categories of Standard &
Poor's, Moody's or Fitch, Inc. for at least one year prior to
the plan's acquisition of certificates; and
o certificates evidencing interests in such other investment
pools must have been purchased by investors other than plans
for at least one year prior to any plan's acquisition of class
A certificates.
In the case where the certificates are backed by trust assets which are
residential, home equity, manufactured housing or multi-family loans which are
described and defined in the underwriter exemption as designated transactions,
certificates issued by the trust fund in such transactions may be rated in one
of the highest four generic rating categories by the specified rating agencies
and/or may be subordinated. In addition, one subset of designated transactions,
residential (one-to-four family) and home equity loans, may be less than fully
secured, provided that the rights and interests evidenced by certificates issued
in such designated transactions are: (a) not subordinated to the rights and
interests evidenced by securities of the same trust fund; (b) such certificates
acquired by the plan have received a rating from the specified rating agencies
at the time of such acquisition that is in one of the two highest generic rating
categories; and (c) any loan included in the corpus or assets of the trust fund
is secured by collateral whose fair market value on the closing date of the
designated transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the trust fund
and (ii) the outstanding principal balance(s) of any other loan(s) of higher
priority (whether or not held by the trust fund) which are secured by the same
collateral.
In order for the exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a plan fiduciary causes the
plan to acquire class A certificates, the Exemption requires, among other
matters, that:
o 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 fund is
acquired by persons independent of the restricted group;
o such fiduciary, or its affiliate, is an obligor with respect
to 5 percent or less of the fair market value of the
obligations contained in the trust fund;
o the plan's investment in class A certificates does not exceed
twenty-five percent (25%) of all of the certificates
outstanding at the time of the acquisition and
o immediately after the acquisition, no more than twenty-five
percent (25%) of the assets of the plan are invested in
certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.
The exemption does not apply to certain prohibited transactions in the
case of plans sponsored by the underwriter, the trustee, the servicer, any
obligor with respect to more than 5% of the fair market
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<PAGE>
value of the mortgage loans included in the trust fund, any entity deemed to be
a "sponsor" of the trust fund as such term is defined in the exemption, or any
affiliate of any such party.
The exemption may be available for the purchase of the certificates by
plans following the expiration of the Pre-Funding Period. Before purchasing a
class A certificate, a fiduciary of an ERISA plan should make its own
determination as to the availability of the exemptive relief provided in the
exemption and whether the conditions of such exemption will be applicable to the
class A certificates. Any fiduciary of an ERISA plan considering whether to
purchase a class A certificate should also carefully review with its own legal
advisors the applicability of the fiduciary duty and prohibited transaction
provisions of ERISA and the Code to such investment. The exemption will not
apply with respect to the certificates until such time that the balance of the
Pre-Funding Account for that class is reduced to zero. Accordingly, until such
time, the certificates may not be purchased by any entity using the assets of a
plan.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975. A fiduciary of a governmental plan
should make its own determination as to the need for and the availability of any
exemptive relief under similar law.
The sale of certificates to a plan is in no respect a representation by
the depositor or the underwriter that this investment meets all relevant legal
requirements with respect to investments by plans generally or any particular
plan, or that this investment is appropriate for lans generally or any
particular ERISA plan.
LEGAL INVESTMENT
The certificates will [not] constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
____________ between the depositor and First Union Securities, Inc., as
underwriter, the depositor has agreed to sell to the underwriter and the
underwriter has agreed to purchase from the depositor the certificates. The
depositor is obligated to sell, and the underwriter is obligated to purchase,
all of the certificates offered hereby if any are purchased.
The underwriter has advised the depositor that it proposes to offer the
certificates purchased by the underwriter for sale from time to time in one or
more negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such market prices or at negotiated prices.
The underwriter may effect these transactions by selling these certificates to
or through dealers, and these dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriter or
purchasers of the certificates for whom they may act as agent. Any dealers that
participate with the underwriter in the distribution of the certificates
purchased by the underwriter may be deemed to be underwriters, and any discounts
or commissions received by them or the underwriter and any profit on the resale
of certificates by them or the underwriter may be deemed to be underwriting
discounts or commissions under the Securities Act of 1933.
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In connection with the offering of the certificates, the underwriter
and its affiliates may engage in transactions that stabilize, maintain or
otherwise affect the market price of the certificates. These transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which that person may bid for or purchase the
certificates for the purpose of stabilizing its market price. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the certificates at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are taken, may be discontinued at any time without
notice.
For further information regarding any offer or sale of the certificates
pursuant to this prospectus supplement and the accompanying prospectus, see
"Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the depositor will indemnify
the underwriter or contribute to losses arising out of specified liabilities,
including liabilities under the Securities Act.
[This prospectus supplement and the accompanying prospectus may be used
by us, First Union Securities, Inc., our affiliate, and any of our other
affiliates when required under the federal securities laws in connection with
offers and sales of offered certificates in furtherance of market-making
activities in offered certificates. First Union Securities, Inc. or any other
such affiliate may act as principal or agent in such transactions. Sales will be
made at prices related to prevailing market prices at the time of sale or
otherwise.]
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. This
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Documents by
Reference" and the financial statements of ________________________ included in,
or as exhibits to, the following documents:
o the Annual Report on Form 10-K for the year ended ____________; and
o the Quarterly Report on Form 10-Q for the quarter ended ____________.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
ADDITIONAL INFORMATION
Residential Asset Funding Corporation has filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
for the certificates offered pursuant to this prospectus supplement. This
prospectus supplement and the accompanying prospectus, which form a part of the
registration statement, omit certain information contained in such registration
statement pursuant to the rules and regulations of the Securities and Exchange
Commission. You may read and copy the registration statement at the Public
Reference Room at the Securities and Exchange Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. and at the Securities and Exchange
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the Public Reference
Rooms. In addition, the Securities and Exchange Commission maintains a site on
the World Wide Web containing reports, proxy materials, information statements
and other items. The address is http://www.sec.gov.
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EXPERTS
The consolidated balance sheets of ____________ and subsidiaries as of
____________ and the related consolidated statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended ________________________, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance on
the report of ____________, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the certificates will be
passed upon for the originators, the depositor and the servicer by ____________,
____________, for the trust by ____________, ____________, and for the depositor
and the underwriter by ____________, ____________.
RATINGS
It is a condition to the original issuance of the certificates that
they will receive ratings of [ ] by ________ and [ ] by ________. The ratings
assigned to the certificates will take into account the claims-paying ability of
the certificate insurer. Explanations of the significance of these ratings may
be obtained from ________________________ and _______________________. These
ratings will be the views only of the rating agencies. There is no assurance
that any such ratings will continue for any period of time or that these ratings
will not be revised or withdrawn. Any such revision or withdrawal of these
ratings may have an adverse effect on the market price of the certificates.
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<PAGE>
GLOSSARY
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount means, for any pool of mortgage loans and any
distribution date, the amount on deposit in the related Distribution Account,
exclusive of the amount of any Insured Payment and the Servicing Fee, on that
distribution date.
Class A-1 Interest Distribution Amount means, for any distribution
date, an amount equal to the sum of the Current Interest for the class A-1
certificates on that distribution date, less the amount of any Class A-1
Mortgage Loan Interest Shortfalls relating to that distribution date.
Class A-1 Mortgage Loan Interest Shortfalls means, for any distribution
date, the aggregate of the Mortgage Loan Interest Shortfalls in pool I, if any,
for that distribution date, to the extent any Mortgage Loan Interest Shortfalls
are not paid by the servicer as Compensating Interest.
Class A-1 Certificate Rate means, with respect to any distribution
date, the per annum rate equal to _____%.
Class A-2 Interest Distribution Amount for any distribution date will
be an amount equal to the sum of the Current Interest for the class A-2
certificates on that distribution date, less the amount of any Class A-2
Mortgage Loan Interest Shortfalls relating to that distribution date.
Class A-2 Mortgage Loan Interest Shortfalls for any distribution date
will be the aggregate of the Mortgage Loan Interest Shortfalls in pool II, if
any, for that distribution date, to the extent any Mortgage Loan Interest
Shortfalls are not paid by the servicer as Compensating Interest.
Class A-2 Certificate Rate means, for any distribution date, the per
annum rate equal to _____%.
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related distribution
date resulting from principal prepayments in full during the related due period
and (b) its aggregate servicing fees received in the related due period
Current Interest for any pool of mortgage loans and any distribution
date is the interest that will accrue on the related class of certificates at
the applicable certificate rate on the aggregate outstanding principal balance
of such class during the accrual period.
Excess Interest for any pool of mortgage loans and any distribution
date is equal to the excess of (x) the Available Amount for that pool and that
distribution date over (y) the sum of
o the Interest Distribution Amount for that pool and that
distribution date,
o Principal Distribution Amount for that pool and that distribution
date -- calculated for this purpose without regard to any
Over-collateralization Increase Amount or portion thereof included
therein,
o any Reimbursement Amount or other amount owed to the certificate
insurer relating to that pool and
o the trustee's fees for that pool and that distribution date.
S-54
<PAGE>
Excess Over-collateralized Amount means, for each pool of mortgage
loans and a distribution date, the difference, if any, between (a) the
Over-collateralized Amount that would apply on that distribution date after
taking into account all distributions to be made on that distribution date,
except for any distributions of related Over-collateralization Reduction
Amounts, and (b) the Specified Over-collateralized Amount.
Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (a) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of that servicer remittance date over (b) the sum of the unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
Insurance Proceeds are proceeds paid by any insurer pursuant to any
insurance policy covering a mortgage loan to the extent these proceeds are not
applied to the restoration of the mortgaged property or released to the
mortgagor. "Insurance Proceeds" do not include "Insured Payments."
Insured Distribution Amount for any pool of mortgage loans and any
distribution date, is the sum of:
o the Interest Distribution Amount for that pool and that
distribution date,
o the amount of the Over-collateralization Deficit applicable to
that pool and that distribution date, if any, and
o on the distribution date which is a final stated maturity date,
the aggregate outstanding principal balance for the related class
of certificates.
Insured Payment for any pool of mortgage loans and any distribution
date will equal the amount by which the Insured Distribution Amount for that
pool and that distribution date exceeds the Available Amount less the trustee's
fees for that pool and that distribution date.
Interest Distribution Amount means the Class A-1 Interest Distribution
Amount or the Class A-2 Interest Distribution Amount, as applicable.
Liquidation Expenses as to any Liquidated Mortgage Loan are all
expenses incurred by the servicer in connection with the liquidation of the
mortgage loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed servicing advances. In no event may Liquidation
Expenses on a Liquidated Mortgage Loan exceed the Liquidation Proceeds.
Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess,
if any, of (a) the unpaid principal balance of that Liquidated Mortgage Loan
plus accrued and unpaid interest on the unpaid principal balance from the due
date to which interest was last paid by the Mortgagor over (b) the sum of the
Net Liquidation Proceeds and the amount of any previously unreimbursed Periodic
Advances in respect of the mortgage loan.
Liquidation Proceeds are amounts, other than Insurance Proceeds,
received by the servicer in connection with (a) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(b) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO Disposition or otherwise.
Mortgage Loan Interest Shortfalls means Civil Relief Act interest
shortfalls and Prepayment Interest Shortfalls.
S-55
<PAGE>
Net Foreclosure Profits as to any servicer remittance date, are the
excess, if any, of (a) the aggregate Foreclosure Profits on that servicer
remittance date over (b) Liquidated Loan Losses on that servicer remittance
date.
Net Liquidation Proceeds as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the servicer.
Net Mortgage Loan Interest Shortfalls means the Class A-1 Mortgage Loan
Interest Shortfalls or the Class A-2 Mortgage Loan Interest Shortfalls, as
applicable.
Net REO Proceeds as to any REO property, are REO Proceeds net of any
expenses of the servicer.
Over-collateralized Amount means, for any distribution date and a pool
of mortgage loans, the excess, if any, of (x) the sum of (a) the aggregate
principal balances of the mortgage loans in that pool as of the close of
business on the last day of the preceding calendar month and (b) the amounts, if
any, on deposit in the pre-funding accounts, over (y) the aggregate principal
balance of the related class of certificates as of that distribution date
--following the making of all distributions on that distribution date, other
than any Over-collateralization Increase Amount for that distribution date.
Over-collateralization Deficit for any distribution date, is the amount
by which the aggregate outstanding principal balance of the certificates exceeds
the sum of
o the aggregate principal balance of the mortgage loans,
o any amount on deposit in the pre-funding accounts on that
distribution date, and
o any amounts on deposit in the Cross-collateralization Reserve
Accounts on that distribution date, after application of all
amounts due on that distribution date.
Over-collateralization Increase Amount for any pool of mortgage loans
and any distribution date is the amount of Excess Interest to be applied as an
accelerated payment of principal on the related class of certificates until the
over-collateralization for that pool reaches the Specified Over-collateralized
Amount. This payment is limited to the extent of the Available Amount as
described in the definition of "Principal Distribution Amount.
Over-collateralization Reduction Amount for any pool of mortgage loans
and any distribution date, is the difference, if any, between (a) the
Over-collateralized Amount for that pool that would apply on that distribution
date after taking into account all distributions to be made on that distribution
date -- except for any distributions of related Over-collateralization Reduction
Amounts -- and (b) the Specified Over-collateralized Amount for that pool and
that distribution date to the extent of principal available for distribution.
Periodic Advances means advances made by the servicer on each
distribution date for delinquent payments of interest on the mortgage loans, at
a rate equal to the interest rate on the mortgage note, less the servicing fee
rate.
Prepayment Interest Shortfall means, for any distribution date, an
amount equal to the excess, if any, of (a) thirty days' interest on the
outstanding principal balance of these mortgage loans at a per annum rate equal
to the mortgage interest rate -- or at any lower rate as may be in effect for
these mortgage loan because of application of the Civil Relief Act, any
reduction as a result of a bankruptcy proceeding and/or any reduction by a court
of the monthly payment due on these mortgage loan -- minus the rate at which the
servicing fee is calculated, over (b) the amount of interest actually remitted
by the
S-56
<PAGE>
mortgagor in connection with the principal prepayment in full, less the
servicing fee for such mortgage loan in such month.
Principal Distribution Amount for any pool of mortgage loans and any
distribution date will be the lesser of:
(a) the excess of (x) the sum, as of that distribution date,
of (A) the Available Amount for that pool and (B) any Insured Payment
on the related class of certificates over (y) the sum of Interest
Distribution Amount for that pool, the trustee's fees, and the
Reimbursement Amount allocable to the related class of certificates;
and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage
loans in that pool actually collected
during the related due period;
(2) the principal balance of each mortgage loan
that either was repurchased by the depositor
or purchased by the servicer on the servicer
remittance date from that pool, to the
extent the principal balance is actually
received by the trustee;
(3) any substitution adjustments delivered by
the depositor on the servicer remittance
date in connection with a substitution of a
mortgage loan in that pool, to the extent
the substitution adjustments are actually
received by the trustee;
(4) the Net Liquidation Proceeds actually
collected by the servicer of all mortgage
loans in that pool during the prior calendar
month, to the extent the Net Liquidation
Proceeds relate to principal;
(5) on the ____________ or ____________
distribution dates, moneys released from the
related pre-funding account, if any;
(6) the proceeds received by the trustee upon
the exercise by the servicer of its option
to call the related class of certificates,
to the extent those proceeds relate to
principal;
(7) the amount of any Over-collateralization
Deficit for that pool for that distribution
date;
(8) the proceeds received by the trustee on any
termination of the trust, to the extent
those proceeds relate to principal,
allocable to that pool;
(9) the amount of any Over-collateralization
Increase Amount for that pool for that
distribution date, to the extent of any
Excess Interest for that pool available for
that purpose, exclusive of the amount of
Excess Interest for that pool necessary to
make the payment of (A) any Net Mortgage
Loan Interest Shortfalls for that pool and
that distribution date and (B) the Shortfall
Amount for the other pool and that
distribution date;
S-57
<PAGE>
(10) if the certificate insurer shall so elect,
an amount of principal, including Liquidated
Loan Losses, that would have been payable
pursuant to clauses (1) through (9) above if
sufficient funds were available therefor;
minus
-----
(11) the amount of any Over-collateralization
Reduction Amount for that pool for that
distribution date.
In no event will the Principal Distribution Amount for a pool for any
distribution date be (x) less than zero or (y) greater than the then outstanding
aggregate principal balance for the certificates.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o relates or relate to a detached one-family residence or to the
same type of residential dwelling or commercial property as the
deleted mortgage loan and, has or have the same or a better lien
priority as the deleted mortgage loan and has or have the same
occupancy status as the deleted mortgage loan or is or are
owner-occupied mortgaged property or properties,
o matures or mature no later than, and not more than one year
earlier than, the deleted mortgage loan,
o has or have a LTV or LTV at the time of the substitution no higher
than the LTV of the deleted mortgage loan,
o has or have a CLTV or CLTVs at the time of the substitution no
higher than the CLTV of the deleted mortgage loan,
o has or have a principal balance or principal balances, after
application of all payments received on or prior to the date of
substitution, not substantially less and not more than the
principal balance of the deleted mortgage loan as of that date,
o has or have a mortgage interest rate of at least the same interest
rate as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty enumerated in the Loan Sale Agreement.
Reimbursement Amount means, for each pool of mortgage loans and each
distribution date, the lesser of (x) the excess of (a) the amount then on
deposit in the Distribution Account over (b) the Insured Distribution Amounts
for that pool and that distribution date and (y) the amount of all Insured
Payments and other amounts due to the certificate insurer for that pool pursuant
to the Insurance Agreement, including the premium amount, which have not been
previously paid.
REO Proceeds are monies received from any REO property, including,
without limitation, proceeds from the rental of the mortgaged property.
Shortfall Amount means, for a pool of mortgage loans and any
distribution date, the sum of
o any shortfall in the amount of the Interest Distribution Amount
for that pool actually distributed to the holders of the related
class of certificates,
S-58
<PAGE>
o any shortfall in the amount of the Net Mortgage Loan Interest
Shortfalls for that pool actually distributed to the holders of
the related class of certificates,
o the amount of any Over-collateralization Deficit for that pool and
that distribution date and
o any shortfall in the payment of any amounts owed the certificate
insurer.
Specified Over-collateralized Amount for a pool of mortgage loans and
any distribution date will be the amount of Over-collateralization which the
certificate insurer requires for that pool and that distribution date.
Specified Reserve Amount means, for each pool of mortgage loans and any
distribution date, the difference between (x) the Specified Over-collateralized
Amount for that pool and that distribution date and (y) the Over-collateralized
Amount for that pool on that distribution date.
S-59
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriter. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making the offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer or
solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information in this prospectus supplement or in the prospectus
is correct as of any time since the date of this prospectus supplement or the
prospectus.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Table of Contents...........................................................S-ii
Summary......................................................................S-1
Risk Factors.................................................................S-3
Transaction Overview.........................................................S-7
The Mortgage Loan Pools......................................................S-8
The Originators, the Depositor, the Servicer and the Subservicer............S-17
The Trustee.................................................................S-19
The Collateral Agent........................................................S-19
Description of the Certificates.............................................S-19
Servicing of the Mortgage Loans.............................................S-33
The Certificate Insurance Policy............................................S-40
The Certificate Insurer.....................................................S-43
Prepayment and Yield Considerations.........................................S-45
Certain Federal Income Tax Considerations...................................S-48
ERISA Considerations........................................................S-49
Legal Investment............................................................S-51
Plan of Distribution........................................................S-51
Experts.....................................................................S-53
Ratings.....................................................................S-53
Legal Matters...............................................................S-53
Glossary....................................................................S-54
PROSPECTUS
Summary of Prospectus..........................................................1
Risk Factors...................................................................3
The Sponsor....................................................................6
Use of Proceeds................................................................6
Description of the Securities..................................................6
The Trust Funds...............................................................11
Credit Enhancement............................................................19
Servicing.....................................................................21
The Agreements................................................................27
Legal Aspects of Loans........................................................33
Material Federal Income Tax Consequences......................................44
State Tax Considerations......................................................63
ERISA Considerations..........................................................63
Legal Investment..............................................................66
Available Information.........................................................66
Incorporation of Documents by Reference.......................................67
Plan of Distribution..........................................................67
Legal Matters.................................................................67
Financial Information.........................................................67
================================================================================
$_______________
______________________
Issuer
_________________________
Servicer
Residential Asset Funding Corporation
Sponsor
$__________
Class A-1 Certificates
$__________
Class A-2 Certificates
Mortgage-Backed Certificates,
Series _______
------------------
PROSPECTUS SUPPLEMENT
------------------
-------------------
----------
<PAGE>
================================================================================
FORM OF PROSPECTUS
SUPPLEMENT -- NOTES
Prospectus supplement to prospectus dated ____________
--------------------------------------------------------------------------------
$___________
----------------------
Mortgage-Backed Notes, Series _______
$______ _____% Class A-1 Notes $________ ______% Class A-2 Notes
_____________ Residential Asset Funding Corporation
Depositor Sponsor
--------------------------------------------------------------------------------
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE S-__ OF
THIS PROSPECTUS SUPPLEMENT AND PAGE 3 OF THE ACCOMPANYING PROSPECTUS AND
CONSIDER THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN THE NOTES.
The notes represent non-recourse obligations of the trust only and are not
interests in or obligations of any other person.
Neither the notes nor the underlying mortgage loans will be insured or
guaranteed by any governmental agency or instrumentality.
THE TRUST FUND --
o The trust fund consists primarily of two pools of fixed-rate
business and consumer purpose home equity loans secured by first-
or second-lien mortgages on residential or commercial real
properties.
THE NOTES--
o Each class of notes will be backed primarily by a pledge of one
of the two pools of mortgage loans.
CREDIT ENHANCEMENT --
o The notes will have the benefit of a financial guaranty
insurance policy to be issued by
[note insurer]
o The notes will be cross-collateralized to a limited extent.
o The notes have the benefit of initial over-collateralization.
o Excess interest will be used in the early years of the
transaction to increase this over-collateralization.
<TABLE>
<CAPTION>
Original Note Price to the Underwriting Proceeds to the Ratings Final Stated
Class Principal Balance Public Discount Depositor [ ] Maturity Date
-------------- ----------------- ------------ ------------ --------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $ % % $
-------------- -------------- ---- ---- ------------
A-2 $ % % $
-------------- -------------- ---- ---- ------------
-------------- ----------------- ------------ ------------ --------------- ------- -------------
Total $ $ $ $
-------------- -------------- --------- --------- ------------
</TABLE>
You will also be required to pay the interest that accrued on your note since
____________. The proceeds to the depositor are calculated without taking into
effect the expenses of this offering, which are expected to be $___________.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FIRST UNION SECURITIES, INC.
The date of this prospectus supplement is ________
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes.
This prospectus supplement does not contain complete information about
the offering of the notes. Additional information is contained in the
accompanying prospectus. You are urged to read both this prospectus supplement
and the accompanying prospectus in full. We cannot sell the notes to you unless
you have received both this prospectus supplement and the accompanying
prospectus.
The accompanying prospectus contains information which describes the
possible characteristics of different series of securities, and is not intended
to be contradictory to the information contained in this prospectus supplement.
If the accompanying prospectus contemplates multiple options, you should rely on
the information in this prospectus supplement as to the applicable option.
[This prospectus supplement and the accompanying prospectus may be used
by us, First Union Securities, Inc., our affiliate, and any of our other
affiliates when required under the federal securities laws in connection with
offers and sales of offered notes in furtherance of market-making activities in
offered notes. First Union Securities, Inc. or any other such affiliate may act
as principal or agent in such transactions. Sales will be made at prices related
to prevailing market prices at the time of sale or otherwise.]
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
TABLE OF CONTENTS
Summary.....................................................................S-1
Risk Factors................................................................S-3
Transaction Overview........................................................S-7
Parties................................................................S-7
The Transaction........................................................S-8
The Mortgage Loan Pools.....................................................S-8
The Pool I Mortgage Loans..............................................S-9
The Pool II Mortgage Loans............................................S-13
Conveyance of subsequent mortgage loans...............................S-16
The Originators, the Depositor and the Servicer............................S-17
Underwriting Guidelines...............................................S-17
The Servicer..........................................................S-17
Delinquency and Loan Loss Experience..................................S-17
The Owner Trustee..........................................................S-19
The Indenture Trustee......................................................S-19
The Collateral Agent.......................................................S-19
Description of the Notes and the Trust Certificates........................S-19
Book-Entry Registration...............................................S-20
Definitive Notes......................................................S-24
Assignment and Pledge of Initial Mortgage Loans.......................S-24
Assignment and Pledge of Subsequent Mortgage Loans....................S-24
Delivery of Mortgage Loan Documents...................................S-25
Representations and Warranties of the Depositor.......................S-26
Payments on the Mortgage Loans........................................S-28
Over-collateralization Provisions.....................................S-30
Cross-collateralization Provisions....................................S-31
Flow of Funds.........................................................S-32
Events of Default.....................................................S-32
Reports to Noteholders................................................S-33
Amendment.............................................................S-34
Servicing of the Mortgage Loans............................................S-34
The Servicer..........................................................S-34
Servicing Fees and Other Compensation and Payment of Expenses.........S-34
Periodic Advances and Servicer Advances...............................S-35
Prepayment Interest Shortfalls........................................S-36
S-ii
<PAGE>
Civil Relief Act Interest Shortfalls..................................S-36
Optional Purchase of Defaulted Mortgage Loans.........................S-36
Servicer Reports......................................................S-36
Collection and Other Servicing Procedures.............................S-37
Hazard Insurance......................................................S-37
Realization Upon Defaulted Mortgage Loans.............................S-38
Removal and Resignation of the Servicer...............................S-38
Optional Clean-up Call on the Notes...................................S-40
Termination; Purchase of Mortgage Loans...............................S-40
The Note Insurance Policy..................................................S-41
The Note Insurer...........................................................S-44
The Note Insurer......................................................S-44
Reinsurance...........................................................S-45
Ratings...............................................................S-45
Capitalization........................................................S-45
Insurance Regulation..................................................S-45
Prepayment and Yield Considerations........................................S-46
Certain Federal Income Tax Considerations..................................S-49
Treatment of the Notes................................................S-49
Treatment of the Trust................................................S-51
ERISA Considerations.......................................................S-51
Legal Investment...........................................................S-52
Plan of Distribution.......................................................S-52
Incorporation of Certain Information by Reference..........................S-52
Additional Information.....................................................S-53
Experts....................................................................S-53
Legal Matters..............................................................S-53
Ratings....................................................................S-53
Glossary...................................................................S-55
S-iii
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the notes, carefully read this entire prospectus
supplement and the accompanying prospectus.
-------------------------------
THE NOTES AND THE TRUST CERTIFICATES
The __________________ will issue the class A-1 notes and the class A-2 notes.
The notes are being offered to you by this prospectus supplement.
Each class of notes will accrue interest at the interest rate, have the original
principal balance and have the final stated maturity date indicated on the cover
of this prospectus supplement.
The trust will also issue two classes of trust certificates which are not
offered by this prospectus supplement.
DISTRIBUTIONS
Distributions on the notes will be made on the ____ day of each month,
or, if the ____ day is not a business day, on the next succeeding
business day, beginning on _________.
DISTRIBUTIONS OF INTEREST
On each distribution date, each class of notes is entitled to receive its
current interest.
o Current Interest. The current interest for a distribution date is the
interest which accrues on a class of notes at that class's note rate on
the outstanding principal balance of the class during the accrual period.
o Accrual Period. The accrual period for the notes is the calendar month
preceding the distribution date.
All computations of interest accrued on the notes will be made on the basis of a
360-day year consisting of twelve 30-day months.
DISTRIBUTIONS OF PRINCIPAL
The holders of each class of notes are entitled to receive distributions of
principal on each distribution date which generally reflect collections of
principal during the preceding calendar month on the mortgage loans in the pool
relating to their class.
In addition, in accordance with the over-collateralization features of the
transaction, holders may also receive extra distributions of principal from
excess interest on a distribution date
THE MORTGAGE LOANS
The mortgage loans to be included in the trust estate will be primarily
fixed-rate, closed-end, monthly pay, business and consumer purpose home equity
loans secured by first, second or multiple mortgages or deeds of trust on
residential or commercial real properties.
On the closing date, the trust will purchase the mortgage loans. The aggregate
principal balance of the pool I mortgage loans will be approximately
$_____________ and the aggregate principal balance of the pool II mortgage loans
will be approximately $_____________.
The aggregate principal balance of the mortgage loans purchased by the trust on
the closing date will be less than the amount required to be held by the trust.
The amount of the difference will be taken from the proceeds of the sale of the
notes, placed in the pre-funding accounts and used for the purchase of mortgage
loans by the trust after the closing date.
S-1
<PAGE>
SERVICING OF THE MORTGAGE LOANS
__________________ will act as servicer and will be obligated to service and
administer the mortgage loans
OPTION OF THE SERVICER TO CALL EITHER CLASS OF NOTES
The servicer may, at its option, call the class A-1 notes or the class A-2 notes
on any distribution date on which the aggregate outstanding principal balance of
the class is equal to or less than 10% of the aggregate original principal
balance of the class.
OPTION OF THE SERVICER TO TERMINATE THE TRUST
The servicer may, at its option, terminate the trust on the distribution date on
which the aggregate outstanding principal balance of all mortgage loans is less
than 10% of the sum of the aggregate original principal balance of the mortgage
loans purchased on the closing date and the amount on deposit in the pre-funding
accounts on the closing date.
ERISA CONSIDERATIONS
Subject to the conditions described under "ERISA Considerations" in this
prospectus supplement, the notes may be purchased by any employee benefit plan
or other retirement arrangement subject to ERISA or the Internal Revenue Code.
FEDERAL INCOME TAX STATUS
It is the opinion of ____________, special tax counsel to the trust, that for
federal income tax purposes
o the notes will be characterized as indebtedness and
o the trust will not be characterized as an association, or a publicly
traded partnership, taxable as a corporation or as a taxable mortgage
pool.
Each noteholder, by the acceptance of a note, will agree to treat the notes as
indebtedness.
RATINGS
In order to be issued, the notes must be rated [ ] by ________________ and [ ]
by ____________, taking into account the note insurance policy issued for the
notes.
S-2
<PAGE>
RISK FACTORS
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING FACTORS --
AS WELL AS THE FACTORS ENUMERATED UNDER "RISK FACTORS" IN THE ACCOMPANYING
PROSPECTUS -- BEFORE DECIDING TO INVEST IN THE NOTES.
IF THE FUNDS ON DEPOSIT IN THE PRE-FUNDING ACCOUNTS ARE NOT USED TO PURCHASE
ADDITIONAL MORTGAGE LOANS, THOSE FUNDS WILL BE DISTRIBUTED AS A PREPAYMENT OF
PRINCIPAL, WHICH MAY ADVERSELY AFFECT THE YIELD ON YOUR NOTE.
If the principal balance of the eligible mortgage loans
available for purchase by the trust on _____________ is less
than the amount on deposit in either pre-funding account on
that date, the remaining amount will be applied as a
prepayment of principal on the following distribution date to
the holders of the class of notes relating to that pre-funding
account. You will bear the risk of reinvesting these
unscheduled distributions and there can be no assurance that
you will be able to reinvest them at a yield equaling or
exceeding the yield or your note.
Any purchase of additional mortgage loans by the trust using
funds on deposit in the pre-funding accounts is subject to the
following conditions, among others:
o each additional mortgage loan must satisfy specified
statistical criteria and representations and
warranties;
o additional mortgage loans will not be selected in a
manner that is believed to be adverse to the
interests of the holders of the notes and the note
insurer; and
o opinions of counsel will be delivered with concerning
the validity of the conveyance of additional mortgage
loans.
If the originators do not have additional mortgage loans which
satisfy these conditions with an aggregate principal balance
equal to the amount on deposit in the pre-funding accounts,
such a prepayment will occur.
BECAUSE MANY OF THE MORTGAGE LOANS BACKING YOUR NOTE WERE MADE TO BORROWERS WITH
IMPAIRED OR UNSUBSTANTIATED CREDIT HISTORIES, THERE IS A GREATER RISK OF
DELINQUENT PAYMENTS ON THESE MORTGAGE LOANS, WHICH COULD LEAD TO GREATER RISK OF
LOSSES ON YOUR NOTE.
The mortgage loans were made, in part, to borrowers who, for
one reason or another, are not able, or do not wish, to obtain
financing from traditional sources such as commercial banks.
These mortgage loans may be considered to be of a riskier
nature than mortgage loans made by traditional sources of
financing, so that the holders of the notes may be deemed to
be at greater risk than if the mortgage loans were made to
other types of borrowers.
The underwriting standards used in the origination of the
mortgage loans held by the trust are generally less stringent
than those of Fannie Mae or Freddie Mac concerning a
borrower's credit history and in certain other respects.
Borrowers on the mortgage loans may have an impaired or
unsubstantiated credit history. As a result of this less
stringent approach to underwriting, the mortgage loans
purchased by the trust may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans
underwritten in a manner which is more similar to the Fannie
Mae and Freddie Mac guidelines.
S-3
<PAGE>
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS IN PARTICULAR JURISDICTIONS MAY
RESULT IN GREATER LOSSES IF THOSE JURISDICTIONS EXPERIENCE ECONOMIC DOWNTURNS.
Some geographic regions of the United States from time to time
will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher
rates of loss and delinquency on mortgage loans generally. Any
concentration of the mortgage loans in such a region may
present risk considerations in addition to those generally
present for similar mortgage-backed securities without this
concentration. The mortgaged properties underlying the
mortgage loans are located primarily on the eastern seaboard
of the United States. This may subject the mortgage loans held
by the trust to the risk that a downturn in the economy in
this area of the country would more greatly affect the pool
than if the pool were more diversified.
In particular, the states listed below had the following
percentages of mortgage loans in pool I and pool II, measured
as of _______, ______, which are secured by mortgaged
properties located in the their states:
Pool I % % % % %
Pool II % % % % %
Because of the relative geographic concentration of the
mortgage loans within the states of _____________,
_____________, _____________, _____________ and _____________,
losses on the mortgage loans may be higher than would be the
case if the mortgage loans were more geographically
diversified. For example, some of the mortgaged properties may
be more susceptible to particular types of special hazards,
such as earthquakes and other natural disasters and major
civil disturbances, than residential or commercial properties
located in other parts of the country. In addition, the
economies of _____________, _____________, _____________,
_____________ and _____________ may be adversely affected to a
greater degree than the economies of other areas of the
country by regional developments. If the _____________,
_____________, _____________, _____________ and _____________
residential or commercial real estate markets experience an
overall decline in property values after the dates of
origination of the respective mortgage loans, then the rates
of delinquencies, foreclosures and losses on the mortgage
loans may be expected to increase and this increase may be
substantial.
LOANS WITH BALLOON AND NON-TRADITIONAL PAYMENT METHODS MAY HAVE A GREATER
DEFAULT RISK, WHICH COULD LEAD TO LOSSES ON YOUR SECURITIES.
Approximately ____% of the mortgage loans in pool I, measured
as of _____, ____, and ____% of the mortgage loans in pool II,
measured as of ____, ____, are not fully amortized over their
terms and instead require substantial balloon payments on
their maturity dates. The borrower's ability to pay the
balloon amount due at maturity of his or her balloon loan will
depend on the borrower's ability to obtain adequate
refinancing or funds from other sources to repay the balloon
loan. The originators have only limited historical default
data concerning their balloon loans and they do not believe
that their data is sufficient to predict the default
experience of the balloon loans. Other "non-traditional" loans
include loans with escalating or variable principle payments.
Because borrowers of non-traditional loans are required to
make substantial single payments upon maturity,
S-4
<PAGE>
the default risk associated with balloon loans may be greater
than that associated with fully-amortizing loans.
A PORTION OF THE MORTGAGE LOANS ARE SECURED BY SUBORDINATE MORTGAGES; IN THE
EVENT OF A DEFAULT, THESE MORTGAGE LOANS ARE MORE LIKELY TO EXPERIENCE LOSSES.
Approximately _____% of the mortgage loans in pool I, measured
as of ____, _____, and ____% of the mortgage loans in pool II,
measured as of ____, ____, are secured by subordinate or
junior mortgages which are subordinate to the rights of the
holder of the senior mortgages. As a result, the proceeds from
any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of such a mortgage
loan only to the extent that the claims, if any, of each
senior mortgagee are satisfied in full, including any
foreclosure costs. In addition, a holder of a junior mortgage
may not foreclose on the mortgaged property securing the
mortgage unless it forecloses subject to the related senior
mortgages, in which case it must either pay the entire amount
of the senior mortgages to the mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments
on each senior mortgage in the event of default thereunder. In
servicing business and consumer purpose home equity loans in
its portfolio, it is the servicer's practice to satisfy or
reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and
collections on the mortgage loans or otherwise. The trust will
have no source of funds to satisfy any senior mortgage or make
payments due to any senior mortgagee.
An overall decline in the residential or commercial real
estate markets could adversely affect the values of the
mortgaged properties such that the outstanding principal
balances of the mortgage loans, together with the primary
senior financing thereon, equals or exceeds the value of the
mortgaged properties. Such a decline would adversely affect
the position of a second mortgagee before having such an
effect on that of the first mortgagee. A rise in interest
rates over a period of time and the general condition of the
mortgaged property as well as other factors may have the
effect of reducing the value of the mortgaged property from
the appraised value at the time the mortgage loan was
originated. If there is a reduction in value of the mortgaged
property, the ratio of the amount of the mortgage loan to the
value of the mortgaged property may increase over what it was
at the time the mortgage loan was originated. Such an increase
may reduce the likelihood of liquidation or other proceeds
being sufficient to satisfy the mortgage loan after
satisfaction of any first liens.
A PORTION OF THE MORTGAGE LOANS ARE HIGH LOAN-TO-VALUE (LTV) RATIOS WHICH MAY
NOT HAVE ADEQUATE SECURITY IN THE EVENT OF A DEFAULT, WHICH COULD LEAD TO LOSSES
ON YOUR NOTE.
Even though all of the mortgage loans are secured be
residential real estate, approximately _____% of the mortgage
loans in pool I, measured as of ____, _____, and ____% of the
mortgage loans in pool II, measured as of ____, ____, are
secured by real estate which has a value that may be close to,
or even less than, the amount of the loan. As a result, the
mortgaged properties may not provide adequate security for
these high LTV loans. Underwriting analysis with respect to
high LTV loans relies more heavily on the mortgagor's
creditworthiness than on the protection afforded by the
security interest in the underlying mortgaged property.
S-5
<PAGE>
Additionally, there is also the risk that if the borrower
moves, he or she will be unable to pay the loan in full from
the proceeds of the sale of the property. The costs incurred
by the servicer in the collection and liquidation of high LTV
loans may be higher than with respect to other loans, because
the servicer may be required to pursue collection solely
against the borrower. Consequently, the losses on defaulted
high LTV loans may be more severe as there is no assurance
that any proceeds will be recovered, which could lead to
losses on your note.
SECURITY INTERESTS IN THE MANUFACTURED HOMES MAY NOT BE PERFECTED AND THE ISSUER
MAY NOT REALIZE UPON THE FULL AMOUNT DUE UNDER THE LOAN.
Approximately _____% of the mortgage loans in pool I, measured
as of ____, _____, and ____% of the mortgage loans in pool II,
measured as of ____, ____, are secured by manufactured homes
and, in some cases, the real estate on which the manufactured
home is located. Some federal and state laws, which do not
apply to other types of mortgage loans, limit the issuer's
ability to foreclose on manufactured homes or may limit the
amount realized to less than the amount due under the loan.
These limitations could cause losses on your note.
PREPAYMENTS ON THE MORTGAGE LOANS COULD LEAD TO SHORTFALLS IN THE PAYMENT OF
INTEREST ON YOUR NOTE.
The scheduled monthly payment dates for the mortgage loans
occur throughout a month. When a principal prepayment in full
is made on a mortgage loan, the mortgagor is charged interest
only up to the date of the prepayment, instead of for a full
month. However, the principal receipts will only be passed
through to the holders of the notes once a month, on the
distribution date which follows the calendar month in which
the prepayment was received by the servicer. The servicer is
obligated to pay, without any right of reimbursement, those
shortfalls in interest collections payable on the notes that
are attributable to the difference between the interest paid
by a mortgagor in connection with a prepayment in full and
thirty days' interest on the mortgage loan, but only to the
extent of the servicing fee for that calendar month.
If the servicer fails to make these payments or the shortfall
exceeds the servicing fee, there will be less funds available
for the payment of interest on the related class of notes.
These shortfalls of interest, if they result in the inability
of the trust to pay the full amount of the current interest on
the related class of notes, are not covered by the note
insurance policy.
S-6
<PAGE>
Some of the terms used in this prospectus supplement are capitalized.
These capitalized terms have specified definitions, which are included at the
end of this prospectus supplement under the heading "Glossary."
TRANSACTION OVERVIEW
PARTIES
The Trust. ___________________, a Delaware business trust. The
principal executive office of the trust is in Wilmington, Delaware, in care of
the owner trustee, at the address of the owner trustee specified below.
The Sponsor. Residential Asset Funding Corporation, a North Carolina
corporation. The principal executive office of the sponsor is located at 301
South College Street, Charlotte, North Carolina 28288, telephone no.
(704) 590-6161.
The Depositor. ________________, a __________ corporation, which is
owned by the originators. The principal executive office of the depositor is at
___________________________, and its telephone number is _____________.
The Originators. _____________, a _____________ corporation, and
_____________, a _____________ corporation, originated or purchased the mortgage
loans. For a description of the business of the originators, see "The
Originators, the Depositor and the Servicer" in this prospectus supplement.
The Servicer and the Subservicers. _____________ will act as servicer
of the mortgage loans, and _____________ and _____________ will act as
subservicers for different portions of the mortgage loans. For a description of
the business of the servicer, see "The Originators, the Depositor and the
Servicer" in this prospectus supplement.
The Indenture Trustee. _____________, a _____________ banking
corporation. The corporate trust office of the indenture trustee is located at
_____________, and its telephone number is _____________. For a description of
the indenture trustee and its responsibilities with respect to the notes, see
"The Indenture Trustee" in this prospectus supplement.
The Owner Trustee. ___________________________, a national banking
association. The corporate trust office of the owner trustee is located at
_______________________, and its telephone number is _____________. For a
description of the owner trustee and its responsibilities with respect to the
notes and the mortgage loans, see "The Owner Trustee" in this prospectus
supplement.
The Collateral Agent. _________________________, a national banking
association. The corporate trust office of the collateral agent is located at
________________________, and its telephone number is _____________.
The Note Insurer. ___________________________, a _____________
financial guaranty insurance company. The note insurer will issue a financial
guaranty insurance policy for the benefit of the holders of the notes. For a
description of the business and selected financial information of the note
insurer, see "The Note Insurance Policy" and "The Note Insurer" in this
prospectus supplement.
The Rating Agencies. ________________________________ and
__________________ will issue ratings for each class of notes.
S-7
<PAGE>
THE TRANSACTION
Formation of the Trust and Issuance of the Trust Certificates. The
trust will be formed pursuant to the terms of a Trust Agreement, dated as of
_____________, between the owner trustee and the depositor. Under the Trust
Agreement, the trust will also issue the trust certificates to the depositor,
each evidencing the entire beneficial ownership interest in the sub-trust of the
trust consisting of a pool of mortgage loans.
Sale and Servicing of the Mortgage Loans. The mortgage loans have been
originated or purchased by the originators pursuant to their respective
underwriting guidelines, as described under "The Originators, the Depositor and
the Servicer." The originators will sell the mortgage loans to the depositor,
pursuant to Loan Sale Agreement, dated as of _____________, among the
originators and the depositor. The depositor will sell the mortgage loans to the
trust pursuant to a Sale and Servicing Agreement, dated as of _____________,
among the depositor, the trust, the servicer, the collateral agent and the
indenture trustee. The servicer will service the mortgage loans pursuant to the
terms of the Sale and Servicing Agreement.
Issuance of the Notes. Pursuant to the terms of an Indenture, dated as
of _____________, between the trust and the indenture trustee, the trust will
pledge the trust estate to the indenture trustee, for the benefit of the holders
of the notes and the note insurer, and issue the notes.
Issuance of the Note Insurance Policy. The note insurer will issue the
note insurance policy pursuant to the terms of an Insurance and Indemnity
Agreement, dated as of _____________, among the note insurer, the trust, the
depositor, the originators and the servicer.
THE MORTGAGE LOAN POOLS
Difference between Statistical Calculation Date and Closing Date Pools.
The statistical information presented in this prospectus supplement concerning
the mortgage loans is based on the pools of mortgage loans that existed on a
statistical calculation date, in this case _______, ____. Pool I aggregated
$_____________ as of the statistical calculation date and pool II aggregated
$_____________ as of the statistical calculation date. The depositor expects
that the actual pools on the closing date will represent approximately
$_____________ in aggregate principal balance of mortgage loans in pool I, as of
a cut-off date of ______________, ___________, and approximately $_____________
in aggregate principal balance of mortgage loans in pool II, as of the cut-off
date. The additional mortgage loans will represent mortgage loans acquired or to
be acquired by the trust on or prior to the closing date. In addition, with
respect to the pools as of the statistical calculation date as to which
statistical information is presented in this prospectus supplement, some
amortization will occur prior to the closing date. Moreover, some mortgage loans
included in the pools as of the statistical calculation date may prepay in full,
or may be determined not to meet the eligibility requirements for the final
pools, and may not be included in the final pools. As a result of the foregoing,
the statistical distribution of characteristics as of the closing date for the
final mortgage loan pools will vary somewhat from the statistical distribution
of the characteristics as of the statistical calculation date as presented in
this prospectus supplement, although this variance should not be material. In
the event that the depositor does not, as of the closing date, have the full
amount of mortgage loans which the depositor expects to sell to the trust on
this date, the depositor will increase the size of the pre-funding accounts and
the capitalized interest accounts, as applicable.
Additional mortgage loans are intended to be purchased by the trust
from time to time on or before _____________ from funds on deposit in the
pre-funding accounts. These subsequent mortgage loans to be purchased by the
trust, if available, will be originated or purchased by the originators, sold by
the originators to the depositor and then sold by the depositor to the trust.
The Indenture will provide that
S-8
<PAGE>
the mortgage loans, following the conveyance of the subsequent mortgage loans,
must in the aggregate conform to specified characteristics described below under
" -- Conveyance of subsequent mortgage loans."
Unless otherwise noted, all statistical percentages in this prospectus
supplement are approximate and are measured by the aggregate principal balance
of the applicable mortgage loans in relation to the aggregate principal balance
of the mortgage loans in the applicable pool, in each case, as of the
statistical calculation date.
The mortgage loans will be predominantly business or consumer purpose
residential home equity loans used to refinance an existing mortgage loan, to
consolidate debt, or to obtain cash proceeds by borrowing against the
mortgagor's equity in the mortgaged property in order to provide funds for,
working capital for business, business expansion, equipment acquisition, or
personal acquisitions. The mortgaged properties securing the mortgage loans
consist primarily of single-family residences -- which may be detached, part of
a multi-family dwelling, a condominium unit, a townhouse, a mobile home or a
unit in a planned unit development -- and commercial or mixed use property. The
mortgaged properties may be owner-occupied properties, which includes second and
vacation homes, non-owner occupied investment properties or business purpose
properties.
The majority of the mortgage loans have a prepayment fee clause. These
prepayment fee clauses generally provide that the mortgagor pay, upon
prepayment, one or more of the following:
o a fee equal to a percentage, negotiated at origination, of the
outstanding principal balance of the mortgage loan,
o a fee which is designed to allow the holder of the mortgage
note to earn interest on the mortgage loan as if the mortgage
loan remained outstanding until a designated point in time, or
o a fee equal to the amount of interest on the outstanding
principal balance of the mortgage loan calculated pursuant to
a rule of 78's calculation, which has the effect of requiring
the mortgagor to pay a greater amount of interest than would
be required to be paid if the actuarial method of calculating
interest was utilized.
THE POOL I MORTGAGE LOANS
As of the statistical calculation date, each of the mortgage loans in
pool I had a remaining term to maturity of no greater than 360 months and had a
mortgage interest rate of at least ____% per annum.
The combined loan-to-value ratios or CLTV's described in this
prospectus supplement were calculated based upon the appraised values of the
mortgaged properties at the time of origination. No assurance can be given that
the appraised values of the mortgaged properties have remained or will remain at
the levels that existed on the dates of origination of the mortgage loans. If
property values decline such that the outstanding principal balances of the
mortgage loans, together with the outstanding principal balances of any first
liens, 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 historically experienced by the servicer, as described below under "The
Originators, the Depositor and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry generally.
As of the statistical calculation date, the mortgage loans in pool I
had the following characteristics:
S-9
<PAGE>
o there were ___ mortgage loans under which the mortgaged
properties are located in __ states,
o the aggregate principal balance, after application of all
payments due on or before the statistical calculation date,
was $_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average
principal balance was $_____________,
o the mortgage interest rates ranged from _____% to ____% per
annum, and the weighted average mortgage interest rate was
approximately ____% per annum,
o the original term to stated maturity ranged from ___ months to
360 months,
o the remaining term to stated maturity ranged from __ months to
____ months, the weighted average original term to stated
maturity was approximately ___ months and the weighted average
remaining term to stated maturity was approximately ____
months,
o no mortgage loan had a maturity later than _________,
o approximately _______% of the aggregate principal balance of
the mortgage loans require monthly payments of principal that
will fully amortize these mortgage loans by their respective
maturity dates, and approximately ____% of the aggregate
principal balance of the mortgage loans are balloon loans,
o the weighted average CLTV was approximately _____%,
o approximately _____% of mortgage loans are secured by first
liens, and approximately _____% of mortgage loans are secured
by second liens, and
o approximately _____%, _____%, ____%, _____% and ____% of the
mortgage loans are secured by mortgaged properties located in
the States of _____________, _____________, _____________,
_____________ and _____________, respectively.
On or prior to _____________, the trust is expected to purchase,
subject to availability, subsequent mortgage loans to be added to pool I. The
maximum aggregate principal balance of subsequent mortgage loans that may be
purchased is expected to be approximately $_____________.
S-10
<PAGE>
The following tables present statistical information on the mortgage
loans in pool I. Due to rounding, the percentages shown may not precisely total
100.00%.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
POOL I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
</TABLE>
DISTRIBUTION OF CLTV RATIOS
POOL I
<TABLE>
<CAPTION>
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
</TABLE>
DISTRIBUTION OF GROSS MORTGAGE INTEREST RATES
POOL I
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ --------- ---------
</TABLE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
POOL I
<TABLE>
<CAPTION>
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ --------- ---------
</TABLE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
POOL I
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ --------- ---------
</TABLE>
S-11
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
POOL I
<TABLE>
<CAPTION>
Range of Original Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ --------- -------------------------------------
</TABLE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
POOL I
<TABLE>
<CAPTION>
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ --------- -------------------------------------
</TABLE>
DISTRIBUTION BY LIEN STATUS
POOL I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ---------------------- -------------------------------------
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
POOL I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ---------------------- -------------------------------------
</TABLE>
DISTRIBUTION BY OCCUPANCY STATUS
POOL I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ---------------------- -------------------------------------
</TABLE>
S-12
<PAGE>
DISTRIBUTION BY PROPERTY TYPE
POOL I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------- -------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Total
-------------- ---------------------- -------------------------------------
</TABLE>
THE POOL II MORTGAGE LOANS
As of the statistical calculation date, each of the mortgage loans in
pool II had a remaining term to maturity of no greater than 360 months and had a
mortgage interest rate of at least _____% per annum.
The CLTVs described in this prospectus supplement were calculated based
upon the appraised values of the mortgaged properties at the time of
origination. No assurance can be given that the appraised values of the
mortgaged properties have remained or will remain at the levels that existed on
the dates of origination of the mortgage loans. If property values decline such
that the outstanding principal balances of the mortgage loans, together with the
outstanding principal balances of any first liens, 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 historically experienced by
the servicer, as described below under "The Originators, the Depositor and the
Servicer -- Delinquency and Loan Loss Experience," and in the mortgage lending
industry.
As of the statistical calculation date, the mortgage loans in pool II
had the following characteristics:
o there were ___ mortgage loans under which the mortgaged
properties are located in ___ states,
o the aggregate principal balance, after application of all
payments due on or before the statistical calculation date,
was $_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average
principal balance was $_____________,
o the mortgage interest rates ranged from ____% to ___% per
annum, and the weighted average mortgage interest rate was
approximately ___% per annum,
o the original term to stated maturity ranged from __ months to
360 months,
o the remaining term to stated maturity ranged from __ months to
___ months, the weighted average original term to stated
maturity was approximately ___ months and the weighted average
remaining term to stated maturity was approximately ___
months,
o no mortgage loan had a maturity later than _____________,
o approximately ____% of the aggregate principal balance of the
mortgage loans require monthly payments of principal that will
fully amortize these mortgage loans by their respective
maturity dates, and approximately ____% of the aggregate
principal balance of the mortgage loans are balloon loans,
o the weighted average CLTV was approximately ____%,
S-13
<PAGE>
o approximately ____% of mortgage loans are secured by first
liens, and approximately ____% of mortgage loans are secured
by second liens, and
o approximately ___%, ___%, ____%, ____% and ____% of the
mortgage loans are secured by mortgaged properties located in
the States of _____________, _____________, _____________,
_____________ and _____________, respectively.
On or prior to _____________, the trust is expected to purchase,
subject to availability, subsequent mortgage loans to be added to pool II. The
maximum aggregate principal balance of subsequent mortgage loans that may be
purchased is expected to be approximately $_____________.
The following tables present statistical information on the mortgage
loans in pool II. Due to rounding, the percentages shown may not precisely total
100.00%.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
DISTRIBUTION OF CLTV RATIOS
POOL II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Original CLTV Ratio Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
DISTRIBUTION OF GROSS MORTGAGE INTEREST RATES
POOL II
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
POOL II
<TABLE>
<CAPTION>
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
S-14
<PAGE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
POOL II
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
POOL II
<TABLE>
<CAPTION>
Range of Original Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Loan Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
POOL II
<TABLE>
<CAPTION>
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation
Principal Balances Mortgage Loans Principal Balance Date Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ ------------
</TABLE>
DISTRIBUTION BY LIEN STATUS
POOL II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ ------------ -------------------------------------
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
POOL II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------ --------------------- -------------------------------------
</TABLE>
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<PAGE>
DISTRIBUTION BY OCCUPANCY STATUS
POOL II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- ------------------ ------------------------ -------------------------------------
<S> <C> <C> <C>
Total
------------------- ------------------------ -------------------------------------
</TABLE>
DISTRIBUTION BY PROPERTY TYPE
POOL II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation
Property Type Mortgage Loans Principal Balance Date Aggregate Principal Balance
---------------------------------- ------------------ --------------------- -------------------------------------
<S> <C> <C> <C>
Total
------------------- --------------------- -------------------------------------
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Indenture permits the trust to acquire subsequent mortgage loans
with the funds on deposit in the pre-funding accounts. It is expected that the
amount on deposit in the pre-funding accounts on the closing date will be
approximately $_____________ for pool I and $_____________ for pool II.
Accordingly, the statistical characteristics of the mortgage loans in pool I and
pool II will vary as of any subsequent cut-off date upon the acquisition of
subsequent mortgage loans.
The obligation of the trust to purchase the subsequent mortgage loans
on any subsequent transfer date during the Pre-Funding Period is subject to the
following requirements:
o the subsequent mortgage loan may not be 30 or more days
contractually delinquent as of a subsequent cut-off date which
is the close of business on the last day of the calendar month
preceding the month in which the subsequent mortgage loan was
purchased by the trust;
o the original term to maturity of the subsequent mortgage loan
may not exceed 360 months for pool I and 360 months for pool
II;
o the subsequent mortgage loan must have a mortgage interest
rate of at least ____% for pool I and ____% for pool II;
o the purchase of the subsequent mortgage loans is consented to
by the note insurer and the rating agencies, notwithstanding
the fact that the subsequent mortgage loans meet the
parameters stated in this prospectus supplement;
o the principal balance of any subsequent mortgage loan may not
exceed $_____________ for pool I and $_____________ for pool
II;
o no more than _____% for pool I and ____% for pool II of the
aggregate principal balance of the subsequent mortgage loans
may be second liens;
o no such subsequent mortgage loan shall have a CLTV of more
than (a) for consumer purpose loans, ___% for pool I and ____%
for pool II, and (b) for business purpose loans, ___% for pool
I and ___% for pool II;
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<PAGE>
o no more than ____% for pool I and ___% for pool II of the
subsequent mortgage loans may be balloon loans;
o no more than ____% for pool I and ____% for pool II of the
subsequent mortgage loans may be secured by mixed-use
properties, commercial properties, or five or more unit
multifamily properties; and
o following the purchase of the subsequent mortgage loans by the
trust, the mortgage loans, including the subsequent mortgage
loans, (a) will have a weighted average mortgage interest
rate, (I) for consumer purpose loans, of at least ____% for
pool I and ____% for pool II and (II) for business purpose
loans, of at least ____% for pool I and ____% for pool II; and
(b) will have a weighted average CLTV of not more than (I) for
consumer purpose loans, ____% for pool I and ____% for pool
II, and (II) for business purpose loans, ____% for pool I and
____% for pool II.
The Indenture will provide that any of these requirements may be waived
or modified in any respect upon prior written consent of the note insurer, with
the exception of the requirements concerning maximum principal balance.
THE ORIGINATORS, THE DEPOSITOR AND THE SERVICER
[Corporate description]
[To be supplied by originators, depositor and servicer]
UNDERWRITING GUIDELINES
[To be supplied by originators]
THE SERVICER
[To be supplied by servicer]
DELINQUENCY AND LOAN LOSS EXPERIENCE
The following tables present information relating to the delinquency
and loan loss experience on the mortgage loans included in originators servicing
portfolio for the periods shown. The delinquency and loan loss experience
represents the historical experience of the originators, and there can be no
assurance that the future experience on the mortgage loans in the trust will be
the same as, or more favorable than, that of the mortgage loans in the
originators' overall servicing portfolio.
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<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
(Dollars in Thousands)
At At At
----------------- ----------------- -----------------
% of % of % of
Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- --------
Servicing portfolio......
Past due loans:
60-89 days...........
90 days or more .....
-------- -------- -------- -------- -------- --------
Total past due loans.....
REO Properties...........
-------- -------- -------- -------- -------- --------
Total past due loans,
foreclosures pending
and REO Properties(3)...
The foregoing table was prepared assuming that:
o the past due period is based on the actual number of days that
a payment is contractually past due; a loan as to which a
monthly payment was due 60-89 days prior to the reporting
period is considered 60-89 days past due, etc.;
o total past due loans includes pending foreclosures; and
o an "REO property" is a property acquired and held as a result
of foreclosure or deed in lieu of foreclosure.
LOAN CHARGE-OFF EXPERIENCE
(DOLLARS IN THOUSANDS)
At At At
---------- ---------- ----------
Servicing portfolio at period end.........
Average outstanding.......................
Gross losses............................
Loan recoveries.........................
Net loan charge-offs....................
Net loan charge-offs as a percentage
of servicing portfolio at period end....
Net loan charge-offs as a percentage
of average outstanding..................
The foregoing table was prepared assuming that:
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<PAGE>
o "average outstanding" is the arithmetic average of the
principal balances of the loans in the originators' servicing
portfolio outstanding at the opening and closing of business
for this period; and
o "gross losses" means the outstanding principal balance plus
accrued but unpaid interest on liquidated mortgage loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the originators' experiences at the dates for the
periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the mortgage loans will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the mortgage loans included in the trust, or as a basis of
assessing the likelihood, amount or severity of losses on the mortgage loans.
The statistical data in the tables is based on all of the mortgage loans in the
originators' servicing portfolio. The mortgage loans, in general, may have
characteristics which distinguish them from the majority of the loans in the
originators' servicing portfolio.
THE OWNER TRUSTEE
________________________, a national banking association, has its
corporate trust offices located at ________________________. The owner trustee
will perform limited administrative functions on behalf of the trust pursuant to
the Trust Agreement. The owner trustee's duties in connection with the issuance
and sale of the notes are limited solely to its express obligations under the
Trust Agreement.
THE INDENTURE TRUSTEE
________________________, a ____________ banking corporation, has an
office at ________________________. The indenture trustee will act as initial
authenticating agent, paying agent and note registrar pursuant to the terms of
the Indenture.
THE COLLATERAL AGENT
________________________, a national banking association, has its
corporate trust office at ________________________. The collateral agent's
duties are limited solely to its express obligations under the Sale and
Servicing Agreement.
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES
On the closing date, the trust will issue the class A-1 notes and the
class A-2 notes pursuant to the Indenture. Each class A-1 note represents a debt
obligation of the trust secured by a pledge of the portion of the trust estate
consisting of the pool I mortgage loans and, to the extent provided in this
prospectus supplement, the pool II mortgage loans. Each class A-2 note
represents a debt obligation of the trust secured by a pledge of the portion of
the trust estate consisting of the pool II mortgage loans and, to the extent
provided in this prospectus supplement, the pool I mortgage loans. Pursuant to
the Trust Agreement, the trust will also issue two classes of trust
certificates, together representing the entire beneficial ownership interest in
the trust. Each class of trust certificate will represent the entire beneficial
ownership interest in one pool of mortgage loans. None of the trust certificates
may be transferred without the consent of the note insurer and compliance with
the transfer provisions of the Trust Agreement.
The trust estate consists of
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<PAGE>
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof
collected after the cut-off date,
o the assets as from time to time are identified as REO property
and collections thereon and proceeds thereof,
o assets that are deposited in the accounts relating to the
trust, including amounts on deposit in the Accounts and
invested in accordance with the Indenture and the Sale and
Servicing Agreement,
o the indenture trustee's rights with respect to the mortgage
loans under all insurance policies required to be maintained
pursuant to the Sale and Servicing Agreement and any insurance
proceeds,
o Liquidation Proceeds and
o released mortgaged property proceeds. In addition, the
depositor will cause the note insurer to issue the note
insurance policy under which it will guarantee payments to the
holders of the notes as described in this prospectus
supplement.
The notes will be issued only in book-entry form, in denominations of
$1,000 initial principal balance and integral multiples of $1,000 in excess
thereof, except that one note of each class may be issued in a different amount.
BOOK-ENTRY REGISTRATION
The notes are sometimes referred to in this prospectus supplement as
"book-entry notes." No person acquiring an interest in the book-entry notes will
be entitled to receive a definitive note representing an obligation of the
trust, except under the limited circumstances described in this prospectus
supplement. beneficial owners may elect to hold their interests through DTC, in
the United States, or Cedelbank or the Euroclear System, in Europe. Transfers
within DTC, Cedelbank or Euroclear, as the case may be, will be in accordance
with the usual rules and operating procedures of the relevant system. So long as
the notes are book-entry notes, these notes will be evidenced by one or more
notes registered in the name of Cede & Co., which will be the "holder" of these
notes, as the nominee of DTC or one of the relevant depositaries. Cross-market
transfers between persons holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or indirectly through Cedelbank or
Euroclear, on the other, will be effected in DTC through The Chase Manhattan
Bank, the relevant depositories of Cedelbank or Euroclear, respectively, and
each a participating member of DTC. The notes will initially be registered in
the name of Cede & Co.. The interests of the holders of these notes will be
represented by book-entries on the records of DTC and participating members
thereof. All references in this prospectus supplement to any notes reflect the
rights of beneficial owners only as these rights may be exercised through DTC
and its participating organizations for so long as these notes are held by DTC.
The beneficial owners of notes may elect to hold their notes through
DTC in the United States, or Cedelbank or Euroclear if they are participants in
these systems, or indirectly through organizations which are participants in
these systems. The book-entry notes will be issued in one or more notes per
class of notes which in the aggregate equal the outstanding principal balance of
the related class of notes and will initially be registered in the name of Cede
& Co., the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions
on behalf of their participants through customers' securities accounts in
Cedelbank'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. Chase will act as depositary for
Cedelbank and Morgan Guaranty Trust Company of New York will act as depositary
for Euroclear. Investors may hold their beneficial interests in the book-entry
notes in minimum denominations representing principal amounts of $1,000. Except
as described below, no
S-20
<PAGE>
beneficial owner will be entitled to receive a physical or definitive note
representing this note. Unless and until definitive notes are issued, it is
anticipated that the only "holder" of these notes will be Cede & Co., as nominee
of DTC. beneficial owners will not be "holders" or "noteholders" as those terms
are used in the Indenture and the Sale and Servicing Agreement. Beneficial
owners are only permitted to exercise their rights indirectly through
participants and DTC.
The beneficial owner's ownership of a book-entry note 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 the book-entry note
will be recorded on the records of DTC or on the records of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Cedelbank or
Euroclear, as appropriate.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of notes. participants
include securities brokers and dealers, including the underwriter, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly through "indirect participants".
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
notes, such as the notes, among participants on whose behalf it acts for the
book-entry notes and to receive and transmit distributions of principal of and
interest on the book-entry notes. Participants and indirect participants with
which beneficial owners have accounts with respect to the book-entry notes
similarly are required to make book-entry transfers and receive and transmit
these payments on behalf of their respective beneficial owners.
Beneficial owners that are not participants or indirect participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, book-entry notes may do so only through participants and indirect
participants. In addition, beneficial owners will receive all distributions of
principal and interest from the indenture trustee, or a paying agent on behalf
of the indenture trustee, through DTC participants. DTC will forward these
distributions to its participants, which thereafter will forward them to
indirect participants or beneficial owners. Beneficial owners will not be
recognized by the indenture trustee, the servicer or any paying agent as holders
of the notes, and beneficial owners will be permitted to exercise the rights of
the holders of the notes only indirectly through DTC and its participants.
Because of time zone differences, credits of securities received in
Cedelbank 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. These credits or any transactions in the
securities settled during this processing will be reported to the relevant
Euroclear or Cedelbank participants on that business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank 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 Cedelbank or Euroclear cash account only as of the business day
following settlement in DTC. For information concerning tax documentation
procedures relating to the notes, see "Material Federal Income Tax Consequences
-- REMIC Securities" in the accompanying prospectus.
S-21
<PAGE>
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedelbank 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 Cedelbank
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in this system in accordance
with its rules and procedures and within its established deadlines. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the relevant depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Cedelbank
participants and Euroclear participants may not deliver instructions directly to
the European Depositaries.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participant
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need for
physical movement of notes. Transactions may be settled in Cedelbank in any of
28 currencies, including United States dollars. Cedelbank provides to its
Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic markets
in several countries. As a professional depository, Cedelbank is subject to
regulation by the Luxembourg Monetary Institute. Cedelbank 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 Cedelbank is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedelbank participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of notes and any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 31 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear Operator,
and all Euroclear Securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not Euroclear Clearance. Euroclear
Clearance 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.
S-22
<PAGE>
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the 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 on
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific notes to specific securities clearance
accounts. The Euroclear operator acts under the Terms and Conditions only on
behalf of Euroclear participants, and has no record of or relationship with
persons holding through Euroclear participants.
Distributions on the book-entry notes will be made on each distribution
date by the indenture trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of these payments to the accounts of the
applicable DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing this payment to the beneficial
owners of the book-entry notes that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
notes that it represents.
Under a book-entry format, beneficial owners of the book-entry notes
may experience some delay in their receipt of payments, since these payments
will be forwarded by the indenture trustee to Cede & Co., as nominee of DTC.
Distributions on notes held through Cedelbank or Euroclear will be credited to
the cash accounts of Cedelbank participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry notes to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of the
book-entry notes, may be limited due to the lack of physical notes for the
book-entry notes. In addition, issuance of the book-entry notes in book-entry
form may reduce the liquidity of the notes in the secondary market since some
potential investors may be unwilling to purchase notes for which they cannot
obtain physical notes.
Monthly and annual reports on the trust provided by the indenture
trustee to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC, and to the financial intermediaries to whose DTC
accounts the book-entry notes of the beneficial owners are credited.
DTC has advised the depositor and the servicer that it will take any
action permitted to be taken by a holder of the notes under the Indenture only
at the direction of one or more participants to whose accounts with DTC the
book-entry notes are credited. Additionally, DTC has advised the depositor that
it will take these actions concerning specified percentages of voting rights
only at the direction of and on behalf of participants whose holdings of
book-entry notes evidence the specified percentages of voting rights. DTC may
take conflicting actions with respect to percentages of voting rights to the
extent that participants whose holdings of book-entry notes evidence the
percentages of voting rights authorize divergent action.
None of the trust, the owner trustee, the depositor, the servicer, the
note insurer or the indenture trustee will have any responsibility for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the book-entry notes held by Cede & Co., as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Cedelbank and Euroclear, they are under no
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<PAGE>
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
DEFINITIVE NOTES
The notes, which will be issued initially as book-entry notes, will be
converted to definitive notes and reissued to beneficial owners or their
nominees, rather than to DTC or its nominee, only if (a) DTC or the servicer
advises the indenture trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository of the book-entry notes
and DTC or the servicer is unable to locate a qualified successor or (b) the
indenture trustee, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive notes. Upon delivery of definitive notes, the
indenture trustee will reissue the book-entry notes as definitive notes to
beneficial owners. Distributions of principal of, and interest on, the
book-entry notes will thereafter be made by the indenture trustee, or a paying
agent on behalf of the indenture trustee, directly to holders of definitive
notes in accordance with the procedures set forth in the Indenture.
Definitive notes will be transferable and exchangeable at the offices
of the indenture trustee or the note registrar. No service charge will be
imposed for any registration of transfer or exchange, but the indenture trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
ASSIGNMENT AND PLEDGE OF INITIAL MORTGAGE LOANS
Pursuant to the Loan Sale Agreement, the originators will sell,
transfer, assign, set over and otherwise convey the mortgage loans, without
recourse, to the depositor on the closing date. Pursuant to the Sale and
Servicing Agreement, the depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the trust, all right, title and interest in
and to each mortgage loan, including all principal outstanding as of, and
interest due after, the cut-off date. Each transfer will convey all right, title
and interest in and to (a) principal outstanding as of the cut-off date, and (b)
interest due on each mortgage loan after the cut-off date. The originators
cannot convey, and should reserve and retain all their respective right, title
and interest in and to, principal, including principal prepayments in full and
curtailments or partial prepayments, received on each mortgage loan on or prior
to the cut-off date and interest due on each mortgage loan on or prior to the
cut-off date.
Pursuant to the Indenture, the trust will pledge to the indenture
trustee in trust for the benefit of the holders of the notes and the note
insurer, all right, title and interest in and to each mortgage loan, including
all principal outstanding as of, and interest due after, the cut-off date, as
collateral security for the notes.
ASSIGNMENT AND PLEDGE OF SUBSEQUENT MORTGAGE LOANS
The trust may acquire subsequent mortgage loans with the funds on
deposit in either pre-funding account at any time during the period from the
closing date until the earliest of
o the date on which the amount on deposit in pre-funding account
is less than $100,000,
o the date on which an event of default occurs under the terms
of the Indenture, or
o the close of business on ____________.
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<PAGE>
The amount on deposit in the pre-funding accounts will be reduced
during the this period by the amount thereof used to purchase subsequent
mortgage loans in accordance with the terms of the Indenture. The depositor
expects that the amount on deposit in each of the pre-funding accounts will be
reduced to less than $100,000 by ____________. To the extent funds in the
pre-funding accounts are not used to purchase subsequent mortgage loans by
____________, these funds will be used to prepay the principal of the related
class of notes on the following distribution date. Subsequent mortgage loans
will be transferred by the originators to the depositor and transferred by the
depositor to the trust. The trust will then pledge the subsequent mortgage loans
to the indenture trustee, on behalf of the holders of the notes and the note
insurer.
DELIVERY OF MORTGAGE LOAN DOCUMENTS
In connection with the sale, transfer, assignment or pledge of the
mortgage loans to the trust, the trust will cause to be delivered to the
collateral agent, on behalf of the indenture trustee, on the closing date, the
following documents concerning each mortgage loan which constitute the mortgage
file:
(a) the original mortgage note, endorsed without recourse in blank
by the originator, including all intervening endorsements
showing a complete chain of endorsement;
(b) the original mortgage with evidence of recording indicated
thereon or, in limited circumstances, a copy thereof certified
by the applicable recording office;
(c) the recorded mortgage assignment(s), or copies thereof
certified by the applicable recording office, if any, showing
a complete chain of assignment from the originator of the
mortgage loan to the originator -- which assignment may, at
the originator's option, be combined with the assignment
referred to in clause (d) below;
(d) a mortgage assignment in recordable form, which, if acceptable
for recording in the relevant jurisdiction, may be included in
a blanket assignment or assignments, of each mortgage from the
originator to the indenture trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of
a mortgage or mortgage note have been modified or the mortgage
or mortgage note has been assumed; and
(f) an original title insurance policy or (A) a copy of the title
insurance policy, or (B) a binder thereof or copy of the
binder together with a certificate from the originator that
the original mortgage has been delivered to the title
insurance company that issued the binder for recordation.
Pursuant to the Sale and Servicing Agreement, the collateral agent, on
behalf of the indenture trustee, agrees to execute and deliver on or prior to
the closing date, or, for subsequent mortgage loans, on or prior to the
subsequent transfer date, an acknowledgment of receipt of the original mortgage
note, item (a) above, for each of the mortgage loans, with any exceptions noted.
The collateral agent, on behalf of the indenture trustee, agrees, for the
benefit of the holders of the notes and the note insurer, to review, or cause to
be reviewed, each mortgage file within thirty days after the closing date or the
subsequent transfer date, as applicable -- or, for any Qualified Substitute
Mortgage Loan, within thirty days after the receipt by the collateral agent
thereof -- and to deliver a certification generally to the effect that, as to
each mortgage loan listed in the schedule of mortgage loans,
o all documents required to be delivered to it pursuant to the
Sale and Servicing Agreement are in its possession,
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<PAGE>
o each of these documents has been reviewed by it and has not
been mutilated, damaged, torn or otherwise physically altered,
appears regular on its face and relates to the mortgage loan,
and
o based on its examination and only as to the foregoing
documents, specified information included on the schedule of
mortgage loans accurately reflects the information included in
the mortgage file delivered on that date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of an mortgage file which is not
executed, has not been received or is unrelated to the mortgage loans, or that
any mortgage loan does not conform to the requirements above or to the
description thereof as included in the schedule of mortgage loans, the
collateral agent shall promptly so notify the indenture trustee, the servicer,
the depositor and the note insurer in writing with details thereof. The
depositor agrees to use reasonable efforts to cause to be remedied a material
defect in a document constituting part of an mortgage file of which it is so
notified by the collateral agent. If, however, within sixty days after the
collateral agent's notice of the defect, the depositor has not caused the defect
to be remedied and the defect materially and adversely affects the interest of
the holders of the notes or the interests of the note insurer in the mortgage
loan, the depositor or the originator will either (a) substitute in lieu of the
mortgage loan a Qualified Substitute Mortgage Loan and, if the then outstanding
principal balance of the Qualified Substitute Mortgage Loan is less than the
principal balance of the mortgage loan as of the date of the substitution plus
accrued and unpaid interest thereon, deliver to the servicer a substitution
adjustment equal to the amount of any such shortfall or (b) purchase the
mortgage loan at a price equal to the outstanding principal balance of the
mortgage loan as of the date of purchase, plus the greater of (1) all accrued
and unpaid interest thereon and (2) thirty days' interest thereon, computed at
the mortgage interest rate, net of the servicing fee if the servicer is
effecting the repurchase, plus the amount of any unreimbursed servicing advances
made by the servicer, which purchase price shall be deposited in the
Distribution Account on the next succeeding servicer remittance date after
deducting therefrom any amounts received in respect of the repurchased mortgage
loan or Loans and being held in the Distribution Account for future distribution
to the extent these amounts have not yet been applied to principal or interest
on the mortgage loan. In addition, the depositor and the originators shall be
obligated to indemnify the indenture trustee, the collateral agent, the holders
of the notes and the note insurer for any third-party claims arising out of a
breach by the depositor or the originators of representations or warranties
regarding the mortgage loans. The obligation of the depositor and the
originators to cure a breach or to substitute or purchase any mortgage loan and
to indemnify constitute the sole remedies respecting a material breach of any
representation or warranty to the holders of the notes, the indenture trustee,
the collateral agent and the note insurer.
REPRESENTATIONS AND WARRANTIES OF THE DEPOSITOR
The depositor will represent, among other things, for each mortgage
loan, as of the closing date or the subsequent transfer date, as applicable, the
following:
1. the information included in the schedule of mortgage loans
for each mortgage loan is true and correct;
2. all of the original or certified documentation constituting
the mortgage files, including all material documents related thereto,
has been or will be delivered to the collateral agent, on behalf of the
indenture trustee, on the closing date or the subsequent transfer date,
as applicable;
3. the mortgaged property consists of a single parcel of real
property separately assessed for tax purposes, upon which is erected a
detached or an attached one-family residence or a
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detached two- to six-family dwelling, or an individual condominium unit
in a low-rise condominium, or a mobile home unit, or an individual unit
in a planned unit development, or a commercial property, or a mixed use
or multiple purpose property. The residence, dwelling or unit is not,
o a unit in a cooperative apartment,
o a property constituting part of a
syndication,
o a time share unit,
o a property held in trust,
o a manufactured dwelling,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage is a valid first or second lien on a fee
simple, or its equivalent under applicable state law, estate in the
real property securing the amount owed by the mortgagor under the
mortgage note subject only to,
o the lien of current real property taxes and
assessments which are not delinquent,
o any first mortgage loan on the property,
o covenants, conditions and restrictions,
rights of way, easements and other matters
of public record as of the date of recording
of the mortgage, the exceptions appearing of
record being acceptable to mortgage lending
institutions generally in the area wherein
the property subject to the mortgage is
located or specifically reflected in the
appraisal obtained in connection with the
origination of the mortgage loan obtained by
the depositor, and
o other matters to which like properties are
commonly subject which do not materially
interfere with the benefits of the security
intended to be provided by the mortgage;
5. immediately prior to the transfer and assignment by the
depositor to the depositor, the depositor had good title to, and was
the sole owner of each mortgage loan, free of any interest of any other
person, and the depositor has transferred all right, title and interest
in each mortgage loan to the depositor;
6. each mortgage loan conforms, and all the mortgage loans in
the aggregate conform, to the description thereof in this prospectus
supplement; and
7. all of the mortgage loans were originated in accordance
with the underwriting criteria described in this prospectus supplement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the holder of the notes, the depositor, the servicer, any subservicer, the
note insurer, the collateral agent or the indenture trustee that any of the
representations and warranties contained in the Sale and Servicing Agreement
have been breached in any material respect as of the closing date or the
subsequent transfer date, as applicable, with the result that the interests of
the holders of the notes in the mortgage loan or the interests of the note
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insurer were materially and adversely affected, notwithstanding that any
representation and warranty was made to the depositor's or the originator's best
knowledge and the depositor or the originator lacked knowledge of the breach,
the party discovering the breach is required to give prompt written notice to
the other parties. Subject to specified provisions of the Sale and Servicing
Agreement, within sixty days of the earlier to occur of the depositor's or an
originator's discovery or its receipt of notice of any breach, the depositor or
the originators will
o promptly cure the breach in all material respects,
o remove each mortgage loan which has given rise to the
requirement for action by the depositor or the originators,
substitute one or more Qualified Substitute Mortgage Loans
and, if the outstanding principal balance of the Qualified
Substitute Mortgage Loans as of the date of the substitution
is less than the outstanding principal balance, plus accrued
and unpaid interest thereon, of the replaced mortgage loans as
of the date of substitution, deliver to the trust as part of
the amounts remitted by the servicer on the distribution date
the amount of the shortfall, or
o purchase the mortgage loan at a price equal to the principal
balance of the mortgage loan as of the date of purchase plus
the greater of
o all accrued and unpaid interest thereon and
o thirty days' interest thereon computed at the
mortgage interest rate, net of the servicing fee if
____________ is the servicer, plus the amount of any
unreimbursed servicing advances made by the servicer,
and deposit the purchase price into the Distribution Account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of this repurchased mortgage loan or mortgage loans and
being held in the Distribution Account for future distribution to the extent
these amounts have not yet been applied to principal or interest on the mortgage
loan. In addition, the depositor and the originators shall be obligated to
indemnify the trust, the owner trustee, the indenture trustee, the collateral
agent, the holders of the notes and the note insurer for any third-party claims
arising out of a breach by the depositor or the originators of representations
or warranties regarding the mortgage loans. The obligation of the depositor and
the originators to cure any breach or to substitute or purchase any mortgage
loan and to indemnify constitute the sole remedies respecting a material breach
of any representation or warranty to the holders of the notes, the indenture
trustee, the collateral agent and the note insurer.
PAYMENTS ON THE MORTGAGE LOANS
The Sale and Servicing Agreement provides that the servicer, for the
benefit of the holders of the notes, shall establish and maintain the Collection
Account, which will generally be (a) an account maintained with a depository
institution or trust company whose long term unsecured debt obligations are
rated by each rating agency in one of its two highest rating categories at the
time of any deposit therein or (b) trust accounts maintained with a depository
institution acceptable to each rating agency and the note insurer. The Sale and
Servicing Agreement permits the servicer to direct any depository institution
maintaining the Collection Account to invest the funds in the Collection Account
in one or more eligible investments that mature, unless payable on demand, no
later than the business day preceding the date on which the servicer is required
to transfer the servicer remittance amount from the Collection Account to the
Distribution Account, as described below.
The servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following payments
received and collections made by it after the cut-off
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date, other than in respect of monthly payments on the mortgage loans due on
each mortgage loan up to and including any due date occurring on or prior to the
cut-off date:
o all payments on account of principal, including prepayments of
principal;
o all payments on account of interest on the mortgage loans;
o all Liquidation Proceeds and all Insurance Proceeds to the
extent the proceeds are not to be applied to the restoration
of the mortgaged property or released to the borrower in
accordance with the express requirements of law or in
accordance with prudent and customary servicing practices;
o all Net REO Proceeds;
o all other amounts required to be deposited in the Collection
Account pursuant to the Sale and Servicing Agreement; and
o any amounts required to be deposited in connection with net
losses realized on investments of funds in the Collection
Account.
The indenture trustee will be obligated to set up an account for each
class of notes a distribution account into which the servicer will deposit or
cause to be deposited the servicer remittance amount on the _____ day of each
month.
The servicer remittance amount for a servicer remittance date is equal
to the sum, without duplication, of
o all collections of principal and interest on the mortgage
loans, including principal prepayments, Net REO Proceeds and
Liquidation Proceeds, if any, collected by the servicer during
the prior calendar month,
o all Periodic Advances made by the servicer with respect to
payments due to be received on the mortgage loans on the due
date and
o any other amounts required to be placed in the Collection
Account by the servicer pursuant to the Sale and Servicing
Agreement,
but excluding the following:
(a) amounts received on particular mortgage loans, for which the
servicer has previously made an unreimbursed Periodic Advance,
as late payments of interest, or as Net Liquidation Proceeds,
to the extent of the unreimbursed Periodic Advance;
(b) amounts received on a particular mortgage loan for which the
servicer has previously made an unreimbursed servicing
advance, to the extent of the unreimbursed servicing advance;
(c) for the servicer remittance date, the aggregate servicing fee;
(d) all net income from eligible investment that is held in the
Collection Account for the account of the servicer;
(e) all amounts actually recovered from the servicer in respect of
late fees, assumption fees, prepayment fees and similar fees;
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(f) Net Foreclosure Profits; and
(g) other amounts which are reimbursable to the servicer, as
provided in the Sale and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the servicer from the Collection Account on or prior to each servicer
remittance date.
OVER-COLLATERALIZATION PROVISIONS
Over-collateralization Resulting from Cash Flow Structure. The
Indenture requires that, starting with the second distribution date, the Excess
Interest for a pool of mortgage loans, if any, that is not used to make
cross-collateralization payments will be applied on each distribution date as an
accelerated payment of principal on the related class of notes, but only to the
limited extent hereafter described. The application of Excess Interest as a
payment of principal has the effect of accelerating the amortization of a class
of notes relative to the amortization of the related pool of mortgage loans. The
Excess Interest from a pool of mortgage loans will be used
o to reimburse the note insurer for any amounts due to it,
o as needed to pay Net Mortgage Loan Interest Shortfalls
relating to that class,
o as needed to make cross-collateralization payments in respect
of the other pool of mortgage loans,
o as a payment of principal to the related class of notes until
the distribution date on which the amount of
over-collateralization has reached the required level, and
o as needed to fund the Cross-collateralization Reserve Account
relating to the other pool of mortgage loans.
Notwithstanding the foregoing, in the event specified tests enumerated in the
Indenture are violated, all available Excess Interest will be used as a payment
of principal to the related class of notes to accelerate the amortization of the
notes.
The Indenture requires that, starting with the second distribution
date, Excess Interest from a pool of mortgage loans that is not used to make
cross-collateralization payments will be applied as an accelerated payment of
principal on the related class of notes until the Over-collateralized Amount has
increased to the level required by the Indenture. After this time, if it is
necessary to re-establish the required level of over-collateralization, Excess
Interest from each pool of mortgage loans that is not used to make
cross-collateralization payments will again be applied as an accelerated payment
of principal on the related class of notes. Notwithstanding the foregoing, in
the event specified tests enumerated in the Indenture are violated, all
available Excess Interest from each pool of mortgage loans will be used as a
payment of principal to accelerate the amortization of the related class of
notes. Initially, the Over-collateralized Amount of each pool of mortgage loans
will be an amount equal to approximately 0.50% of the sum of (x) the aggregate
principal balance of the mortgage loans in each pool on the closing date and (y)
the original amount on deposit in the related pre-funding account on the closing
date.
In the event that the required level of the Specified
Over-collateralized Amount for a pool of mortgage loans is permitted to decrease
or "step down" on a distribution date in the future, the Indenture provides that
a portion of the principal which would otherwise be distributed to the holders
of the related class of notes on the distribution date shall instead be
distributed in the priority described in this prospectus supplement under
"--Flow of Funds." This has the effect of decelerating the amortization of the
related class of notes relative to the amortization of that pool of mortgage
loans, and of reducing the
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Over-collateralized Amount. If, on any distribution date, the Excess
Over-collateralized Amount is, or, after taking into account all other
distributions to be made on the distribution date would be, greater than zero --
i.e., the Over-collateralized Amount is or would be greater than the related
Specified Over-collateralized Amount -- then any amounts relating to principal
which would otherwise be distributed to the holders of the related class of
notes on this distribution date shall instead be distributed in the priority
described in this prospectus supplement under "--Flow of Funds", in an amount
equal to the Over-collateralization Reduction Amount.
The Indenture provides that, on any distribution date, all amounts
collected on account of principal -- other than any such amount applied to the
payment of an Over-collateralization Reduction Amount -- for each pool of
mortgage loans during the a due period of the prior calendar month will be
distributed to the holders of the related class of notes on the distribution
date. In addition, the Sale and Servicing Agreement provides that the principal
balance of any mortgage loan which becomes a Liquidated Mortgage Loan shall then
equal zero. The Sale and Servicing Agreement does not contain any rule which
requires that the amount of any Liquidated Loan Loss be distributed to the
holders of the related class of notes on the distribution date which immediately
follows the event of loss; i.e., the Sale and Servicing Agreement does not
require the current recovery of losses. However, the occurrence of a Liquidated
Loan Loss will reduce the Over-collateralized Amount for that pool of mortgage
loans, which, to the extent that the reduction causes the Over-collateralized
Amount to be less than the Specified Over-collateralized Amount applicable to
the related distribution date, will require the payment of an
Over-collateralization Increase Amount on that distribution date, or, if
insufficient funds are available on that distribution date, on subsequent
distribution dates, until the Over-collateralized Amount equals the related
Specified Over-collateralized Amount. The effect of the foregoing is to allocate
losses to the holders of the related trust certificates by reducing, or
eliminating entirely, payments of Excess Interest and Over-collateralization
Reduction Amounts which the holders would otherwise receive.
Over-collateralization and the Note Insurance Policy. The Indenture
requires the indenture trustee to make a claim for an Insured Payment under the
note insurance policy not later than the third business day prior to any
distribution date as to which the indenture trustee has determined that an
Over-collateralization Deficit will occur for the purpose of applying the
proceeds of the Insured Payment as a payment of principal to the holders of the
related class of notes on that distribution date. The note insurer has the
option on any distribution date to make a payment of principal, including in
respect of Liquidated Loan Losses, up to the amount that would have been payable
to the holders of the notes if sufficient funds were available thereof.
Additionally, under the terms of the Indenture, the note insurer will have the
option to cause Excess Interest to be applied without regard to any limitation
upon the occurrence of particular trigger events, or in the event of an "event
of default" under the Insurance Agreement. However, investors in the notes
should realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no distributions of principal.
CROSS-COLLATERALIZATION PROVISIONS
Cross-collateralization Payments. On each distribution date, available
Excess Interest from a pool of mortgage loans, if any, will be paid to the
holders of the class of notes relating to the other pool of mortgage loans to
the extent of the Shortfall Amount for the other pool. The
cross-collateralization provisions of the transaction are limited to the payment
of specified credit losses, certain interest shortfalls and any amounts due the
note insurer. Excess Interest from one pool of mortgage loans will not be used
to build over-collateralization for the other pool of mortgage loans.
Cross-collateralization Reserve Account. Each class of notes will have
the benefit of a Cross-collateralization Reserve Account. On each distribution
date, available Excess Interest from a pool of mortgage loans, if any, will be
paid into the Cross-collateralization Reserve Account relating to the other
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pool of mortgage loans, until the amount of funds on deposit therein equals the
Specified Reserve Amount for the other pool. If the amount on deposit in the
Cross-collateralization Reserve Account for a pool of mortgage loans on any
distribution date exceeds the Specified Reserve Amount for the pool and the
distribution date, the amount of this excess shall be distributed in the
priority described in this prospectus supplement under "--Flow of Funds."
Funds on deposit in a Cross-collateralization Reserve Account will be
used on any distribution date to make payments in respect of the Shortfall
Amount for either pool, to the extent that there is no Excess Interest available
therefor on that distribution date.
FLOW OF FUNDS
On each distribution date, the indenture trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to the distribution date, shall make payments in respect of each pool of
mortgage loans to the holders of the related class of notes and reimbursement to
the note insurer under the Insurance Agreement, to the extent of funds,
including any Insured Payments, on deposit in the related Distribution Account,
as follows:
(a) to the indenture trustee, an amount equal to the fees then due
to it for the related class of notes;
(b) from amounts then on deposit in the related Distribution
Account, excluding any Insured Payments, to the note insurer
the Reimbursement Amount as of that distribution date;
(c) from amounts then on deposit in the related Distribution
Account, the Interest Distribution Amount for the related
class of notes;
(d) from amounts then on deposit in the related Distribution
Account, the Principal Distribution Amount for the related
class of notes, until the principal balance of the class of
notes is reduced to zero;
(e) from amounts then on deposit in the related Distribution
Account the amount of any Net Mortgage Loan Interest
Shortfalls for the related class of notes;
(f) from amounts then on deposit in the related Distribution
Account, to the holders of the other class of notes, the
Shortfall Amount for the other class;
(g) from amounts then on deposit in the related Distribution
Account, to the Cross-collateralization Reserve Account
relating to the other class of notes, the amount necessary for
the balance of the account to equal the Specified Reserve
Amount; and
(h) following the making by the indenture trustee of all
allocations, transfers and disbursements described above, to
the holders of the related trust certificates, the amount
remaining on the distribution date in the related Distribution
Account, if any.
EVENTS OF DEFAULT
Upon the occurrence of an event of default, the indenture trustee, upon
the direction of the majority holders -- which shall be the note insurer in the
absence of a default by the note insurer under the Insurance Agreement -- shall
declare or, with respect to an event of default described in clauses (1) through
(7) below, the occurrence shall result in the automatic declaration of,
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the aggregate outstanding principal balance of all the notes to be due and
payable together with all accrued and unpaid interest thereon without
presentment, demand, protest or other notice of any kind, all of which are
waived by the trust. An event of default, wherever used in this prospectus
supplement, means any one of the following events:
1. the trust shall fail to distribute or cause to be
distributed to the indenture trustee, for the benefit of the holders of
the notes, on any distribution date, all or part of any Interest
Distribution Amount due on the notes on the distribution date and all
or a part of any Net Mortgage Loan Interest Shortfalls due on the notes
on the distribution date;
2. the trust shall fail to distribute or cause to be
distributed to the indenture trustee, for the benefit of the holders of
the notes, (x) on any distribution date an amount equal to the
principal due on the outstanding notes on the distribution date, to the
extent that sufficient funds are on deposit in the Collection Account
or (y) on the final stated maturity date for any class of notes, the
aggregate outstanding principal balance of the related class of notes.
3. the trust shall breach or default in the due observance of
any one or more of the negative covenants under the Indenture.
4. the trust shall consent to the appointment of a custodian,
receiver, trustee or liquidator, or other similar official, of itself,
or of a substantial part of its property, or shall admit in writing its
inability to pay its debts generally as they come due, or a court of
competent jurisdiction shall determine that the trust is generally not
paying its debts as they come due, or the trust shall make a general
assignment for the benefit of creditors;
5. the trust shall file a voluntary petition in bankruptcy or
a voluntary petition or an answer seeking reorganization in a
proceeding under any bankruptcy laws, as now or hereafter in effect, or
an answer admitting the material allegation of a petition filed against
the trust in any such proceeding, or the trust shall, by voluntary
petition, answer or consent, seek relief under the provisions of any
now existing or future bankruptcy or other similar law providing for
the reorganization or winding-up of debtors, or providing for an
agreement, composition, extension or adjustment with its creditors;
6. an order, judgment or decree shall be entered in any
proceeding by any court of competent jurisdiction appointing, without
the consent, express or legally implied, of the trust, a custodian,
receiver, trustee or liquidator, or other similar official, of the
trust or any substantial part of its property, or sequestering any
substantial part of its respective property, and any such order,
judgment or decree or appointment or sequestration shall remain in
force undismissed, unstayed or unvacated for a period of ninety days
after the date of entry thereof; or
7. a petition against the trust in a proceeding under
applicable bankruptcy laws or other insolvency laws, as now or
hereafter in effect, shall be filed and shall not be stayed, withdrawn
or dismissed within ninety days thereafter, or if, under the provisions
of any law providing for reorganization or winding-up of debtors which
may apply to the trust, any court of competent jurisdiction shall
assume jurisdiction, custody or control of the trust or any substantial
part of its property, and such jurisdiction, custody or control shall
remain in force unrelinquished, unstayed or unterminated for a period
of ninety days.
REPORTS TO NOTEHOLDERS
Pursuant to the Indenture, on each distribution date the indenture
trustee will deliver to the servicer, the note insurer, the depositor and each
holder of a note or a trust certificate a written remittance report containing
information including, without limitation, the amount of the distribution on the
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distribution date, the amount of the distribution allocable to principal and
allocable to interest, the aggregate outstanding principal balance of the notes
as of the distribution date, the amount of any Insured Payment included in the
distributions on the distribution date and any other information as required by
the Indenture.
AMENDMENT
The Indenture may be amended from time to time by the trust and the
indenture trustee by written agreement, upon the prior written consent of the
note insurer, without notice to, or consent of, the holder of the notes, to cure
any ambiguity, to correct or supplement any provisions in this prospectus
supplement, to comply with any changes in the Code, or to make any other
provisions concerning matters or questions arising under the Indenture which
shall not be inconsistent with the provisions of the Indenture. This action
shall not, as evidenced by an opinion of counsel delivered to, but not obtained
at the expense of, the indenture trustee, adversely affect in any material
respect the interests of any holder of the notes. In addition, no such amendment
shall reduce in any manner the amount of, or delay the timing of, payments
received on mortgage loans which are required to be distributed on any note
without the consent of the holder of the note, or change the rights or
obligations of any other party to the Indenture without the consent of that
party.
The Indenture may be amended from time to time by the trust and the
indenture trustee with the consent of the note insurer, and the holders of the
majority of the percentage interest of the notes and trust certificates for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Indenture or of modifying in any manner the rights of
the holders. In addition, no such amendment shall reduce in any manner the
amount of, or delay the timing of, payments received on mortgage loans which are
required to be distributed on any note without the consent of the holder of the
note or reduce the percentage for each class whose holders are required to
consent to any such amendment without the consent of the holders of 100% of each
class of notes affected thereby.
The Loan Sale Agreement and the Sale and Servicing Agreement contain
substantially similar restrictions regarding amendment.
SERVICING OF THE MORTGAGE LOANS
THE SERVICER
____________ will act as the servicer of the mortgage loan pools
____________ and ____________ will act as subservicers for a portion of the
mortgage loans. See "The Originators, the Depositor, the Servicer and the
Subservicer" in this prospectus supplement. The servicer and the subservicers
will service the mortgage loans on behalf of the trust, for the benefit of the
note insurer and the holders of the notes and will be required to use the same
care as they customarily employ in servicing and administering mortgage loans
for their own account, in accordance with accepted mortgage servicing practices
of prudent lending institutions, and giving due consideration to the reliance of
the note insurer and the holders of the notes on them.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as servicer under the Sale and
Servicing Agreement, the servicer shall be entitled to a servicing fee for each
mortgage loan, which shall be payable monthly from amounts on deposit in the
Collection Account. The servicing fee shall be an amount equal to interest at
one-twelfth of the servicing fee rate for the mortgage loan on the outstanding
principal balance of the mortgage loan. The servicing fee rate for each mortgage
loan will be 0.50% per annum. In addition, the servicer shall be entitled to
receive, as additional servicing compensation, to the extent permitted by
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applicable law and the mortgage notes, any late payment charges, assumption
fees, prepayment fees or similar items. The servicer shall also be entitled to
withdraw from the Collection Account any net interest or other income earned on
deposits therein. The servicer shall pay all expenses incurred by it in
connection with its servicing activities under the Sale and Servicing Agreement
and shall not be entitled to reimbursement therefor except as specifically
provided in the Sale and Servicing Agreement.
PERIODIC ADVANCES AND SERVICER ADVANCES
Periodic Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance, the servicer is required
to make Periodic Advances on each servicer remittance date. This Periodic
Advances by the servicer are reimbursable to the servicer subject to a number of
conditions and restrictions, and are intended to provide both sufficient funds
for the payment of interest to the holders of the notes, plus an additional
amount intended to maintain a specified level of over-collateralization and to
pay the indenture trustee's fees, and the premium due the note insurer.
Notwithstanding the servicer's good faith determination that a Periodic Advance
was recoverable when made, if the Periodic Advance becomes a nonrecoverable
advance, the servicer will be entitled to reimbursement therefor from the trust
estate. See "Description of the Notes -- Payments on the Mortgage Loans" in this
prospectus supplement.
Servicing Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance and that a prudent mortgage
lender would make a like advance if it or an affiliate owned the mortgage loan,
the servicer is required to advance amounts on the mortgage loans constituting
"out-of-pocket" costs and expenses relating to
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a
first lien not included in the trust estate on the mortgaged
property, and
o other customary amounts described in the Sale and Servicing
Agreement.
These servicing advances by the servicer are reimbursable to the
servicer subject to a number of conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time the
servicing advance was made, that it would not be a nonrecoverable advance, the
servicing advance becomes a nonrecoverable advance, the servicer will be
entitled to reimbursement therefor from the trust estate.
Recovery of Advances. The servicer may recover Periodic Advances and
servicing advances to the extent permitted by the Sale and Servicing Agreement
or, if not recovered from the mortgagor on whose behalf the servicing advance or
Periodic Advance was made, from late collections on the mortgage loan, including
Liquidation Proceeds, Insurance Proceeds and any other amounts as may be
collected by the servicer from the mortgagor or otherwise relating to the
mortgage loan. In the event a Periodic Advance or a servicing advance becomes a
nonrecoverable advance, the servicer may be reimbursed for the advance from the
Distribution Account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable servicing advance. A Periodic Advance or servicing advance is
"nonrecoverable" if in the good faith judgment of the servicer, the Periodic
Advance or servicing advance would not ultimately be recoverable.
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PREPAYMENT INTEREST SHORTFALLS
Not later than the close of business on the _____ day of each month,
the servicer is required to remit to the indenture trustee a payment of
Compensating Interest in respect of Prepayment Interest Shortfalls and shall not
have the right to reimbursement therefor. Insured Payments do not cover
Prepayment Interest Shortfalls.
CIVIL RELIEF ACT INTEREST SHORTFALLS
The reduction, if any, in interest payable on the mortgage loans in the
applicable pool attributable to the application of the Civil Relief Act will not
reduce the amount of Current Interest due to the holders of the class A-1 notes
or class A-2 notes, respectively. However, in the event the full amount of
Current Interest is not available on any distribution date due to Civil Relief
Act interest shortfalls in the applicable pool, the amount of this shortfall
will not be covered by the note insurance policy. These shortfalls in Current
Interest will be paid from the Excess Interest, if any, otherwise payable in
respect of over-collateralization, cross-collateralization or to the holder of
the trust certificate relating to the applicable pool. See "Risk Factors --
Legal Considerations" in this prospectus supplement.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The depositor, or any affiliate of the depositor, has the option, but
is not obligated, to purchase from the trust any mortgage loan ninety days or
more delinquent at a purchase price equal to the outstanding principal balance
thereof as of the date of purchase, plus all accrued and unpaid interest on the
principal balance, computed at the mortgage interest rate -- net of the
servicing fee, if ________ is the servicer -- plus the amount of any
unreimbursed Periodic Advances and servicing advances made by the servicer for
the mortgage loan in accordance with the provisions specified in the Sale and
Servicing Agreement.
SERVICER REPORTS
On each servicer remittance date, the servicer is required to deliver
to the note insurer, the indenture trustee, and the collateral agent, a servicer
remittance report setting forth the information necessary for the indenture
trustee to make the distributions described under "--Flow of Funds" in this
prospectus supplement and containing the information to be included in the
indenture trustee's remittance report for that distribution date.
The servicer is required to deliver to the note insurer, the indenture
trustee, the collateral agent, S&P and Moody's, not later than April 30th of
each year, starting in ___________, an officer's certificate stating that
o the servicer has fully complied with the servicing provisions
of the Sale and Servicing Agreement,
o a review of the activities of the servicer during the
preceding calendar year and of performance under the Sale and
Servicing Agreement has been made under the officer's
supervision, and
o to the best of the officer's knowledge, based on that review,
the servicer has fulfilled all its obligations under the Sale
and Servicing Agreement for that year, or, if there has been a
default in the fulfillment of any obligation, specifying each
default known to that officer and the nature and status
thereof including the steps being taken by the servicer to
remedy the default.
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Not later than April 30th of each year, the servicer, at its expense,
is required to cause to be delivered to the note insurer, the indenture trustee,
the collateral agent, S&P and Moody's from a firm of independent certified
public accountants, who may also render other services to the servicer, a
statement to the effect that the firm has examined certain documents and records
relating to the servicing of the mortgage loans during the preceding calendar
year, or any longer period from the closing date to the end of the following
calendar year, and that, on the basis of the examination conducted substantially
in compliance with generally accepted auditing standards and the requirements of
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for Freddie Mac, the servicing has been conducted in
compliance with the Sale and Servicing Agreement except for any significant
exceptions or errors in records that, in the opinion of the firm, generally
accepted auditing standards and the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for Freddie Mac
require it to report, in which case the exceptions and errors shall be so
reported.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and will, consistent
with the Sale and Servicing Agreement, follow the collection procedures as it
follows for loans held for its own account which are comparable to the mortgage
loans. Consistent with the above, the servicer may, in its discretion, (a) waive
any late payment charge and (b) arrange with a mortgagor a schedule for the
liquidation of delinquencies, subject to the provisions of the Sale and
Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing any "due-on-sale"
clause, the servicer may enter into an assumption and modification agreement
with the person to whom the property has been or is about to be conveyed,
pursuant to which that person becomes liable under the mortgage note.
Any fee collected by the servicer for entering into an assumption
agreement will be retained by the servicer as additional servicing compensation.
In connection with any assumption, the mortgage interest rate borne by the
mortgage note relating to each mortgage loan may not be decreased. For a
description of circumstances in which the servicer may be unable to enforce
"due-on-sale" clauses, see "Servicing -- Enforcement of Due-on-Sale Clauses" in
the accompanying prospectus.
HAZARD INSURANCE
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of the mortgaged property or (b) the principal balance of the mortgage
loan plus the outstanding balance of any mortgage loan senior to the mortgage
loan, but in no event may this amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As stated above, all amounts
collected by the servicer under any hazard policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the servicer's normal servicing procedures, to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the related Distribution Account. The ability of the
servicer to assure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy, or upon the extent to which information in this regard is
furnished to the servicer by a borrower. The Sale and Servicing Agreement
provides that the servicer may satisfy its obligation to cause hazard policies
to be maintained by maintaining a blanket policy issued by an insurer acceptable
to the rating agencies insuring against losses
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on the mortgage loans. If this blanket policy contains a deductible clause, the
servicer is obligated to deposit in the related Distribution Account the sums
which would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most of these policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. The foregoing list is
merely indicative of the types of uninsured risks and is not intended to be
all-inclusive.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, that clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(a) the replacement cost of the improvements less physical depreciation or (b)
this proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of these improvements.
Since residential and commercial properties, generally, have
historically appreciated in value over time, if the amount of hazard insurance
maintained on the improvements securing the mortgage loans were to decline as
the principal balances owing thereon decreased, hazard insurance proceeds could
be insufficient to restore fully the damaged property in the event of a partial
loss.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the mortgage loans as come into
default when, in the opinion of the servicer, no satisfactory arrangements can
be made for the collection of delinquent payments. In connection with the
foreclosure or other conversion, the servicer will follow the practices as it
deems necessary or advisable and as are in keeping with the servicer's general
loan servicing activities and the Sale and Servicing Agreement; although the
servicer will not expend its own funds in connection with foreclosure or other
conversion, correction of a default on a senior mortgage or restoration of any
property unless the foreclosure, correction or restoration is determined to
increase Net Liquidation Proceeds.
REMOVAL AND RESIGNATION OF THE SERVICER
The note insurer may, pursuant to the Sale and Servicing Agreement,
remove the servicer upon the occurrence and continuation beyond the applicable
cure period of an event described in clauses (g), (h) or (i) below and the
indenture trustee, only at the direction of the note insurer or the majority
holders of notes, with the consent of the note insurer, in the case of any
direction of the majority holders, may remove the servicer upon the occurrence
and continuation beyond the applicable cure period of an event described in
clause (a), (b), (c), (d), (e) or (f) below. Each of the following constitutes a
servicer event of default:
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(a) any failure by the servicer to remit to the indenture trustee
any payment required to be made by the servicer under the
terms of the Sale and Servicing Agreement, other than
servicing advances covered by clause (b) below, which
continues unremedied for one business day after the date upon
which written notice of any failure, requiring the same to be
remedied, shall have been given to the servicer and the note
insurer by the indenture trustee or to the servicer and the
indenture trustee by the note insurer or the holders of notes
evidencing percentage interests of at least 25%;
(b) the failure by the servicer to make any required servicing
advance which failure continues unremedied for a period of
thirty days after the date on which written notice of any
failure, requiring the same to be remedied, shall have been
given to the servicer by the indenture trustee or to the
servicer and the indenture trustee by any holder of a note or
the note insurer;
(c) any failure on the part of the servicer duly to observe or
perform in any material respect any other of the covenants or
agreements on the part of the servicer contained in the Sale
and Servicing Agreement, or the failure of any representation
and warranty enumerated in the Sale and Servicing Agreement,
which continues unremedied for a period of thirty days after
the date on which written notice of any failure, requiring the
same to be remedied, shall have been given to the servicer by
the indenture trustee, or to the servicer and the indenture
trustee by any holder of a note or the note insurer;
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any
present or future federal or state bankruptcy, insolvency or
similar law or for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the servicer and this
decree or order shall have remained in force, undischarged or
unstayed for a period of sixty days;
(e) the servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings of or relating to the servicer or of or relating
to all or substantially all of the servicer's property;
(f) the servicer shall admit in writing its inability generally to
pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations;
(g) the delinquency or loss experience of the mortgage loans
exceeds levels specified in the Sale and Servicing Agreement;
(h) the note insurer shall notify the indenture trustee of any
"event of default" under the Insurance Agreement; or
(i) the occurrence of an event of default under the Indenture.
The servicer may not assign its obligations under the Sale and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the servicer, _______, if _______ is not the
servicer, the note insurer, the collateral agent and the indenture trustee, or
upon the
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determination that the servicer's duties thereunder are no longer permissible
under applicable law and such incapacity cannot be cured by the servicer without
the incurrence, in the reasonable judgment of the note insurer, of unreasonable
expense. No such resignation shall become effective until a successor has
assumed the servicer's responsibilities and obligations in accordance with the
Sale and Servicing Agreement.
Upon removal or resignation of the servicer, the indenture trustee will
be the successor servicer. The indenture trustee, as successor servicer, will be
obligated to make Periodic Advances and servicing advances and other advances
unless it determines reasonably and in good faith that the advances would not be
recoverable. If, however, the indenture trustee is unwilling or unable to act as
successor servicer, or if the majority holders, with the consent of the note
insurer, or the note insurer so requests, the indenture trustee shall appoint,
or petition a court of competent jurisdiction to appoint, in accordance with the
provisions of the Sale and Servicing Agreement and subject to the approval of
the note insurer, any established mortgage loan servicing institution acceptable
to the note insurer having a net worth of not less than $____________ as the
successor servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the servicer.
Pursuant to the Sale and Servicing Agreement, the servicer covenants
and agrees to act as the servicer for an initial term from the closing date to
____________, which term will be extendable by the note insurer by notice to the
indenture trustee for successive terms of three calendar months each, until the
termination of the trust estate. The servicer will, upon its receipt of each
notice of extension, become bound for the duration of the term covered by the
extension notice to continue as the servicer subject to and in accordance with
the other provisions of the Sale and Servicing Agreement. If as of the fifteenth
day prior to the last day of any term of the servicer the indenture trustee
shall not have received any extension notice from the note insurer, the
indenture trustee will, within five days thereafter, give written notice of
non-receipt to the note insurer and the servicer. The note insurer has agreed to
extend each three month term of the servicer, in the absence of a servicer event
of default under the Sale and Servicing Agreement.
The indenture trustee and any other successor servicer in that capacity
is entitled to the same reimbursement for advances and no more than the same
servicing compensation as the servicer. See "--Servicing and Other Compensation
and Payment of Expenses" in this prospectus supplement.
OPTIONAL CLEAN-UP CALL ON THE NOTES
The servicer may, at its option, call the class A-1 notes or the class
A-2 notes, separately, on the Note Clean-up Call Date by depositing an amount
equal to the aggregate outstanding principal balance of the class of notes on
that distribution date, plus accrued and unpaid interest thereon, and any unpaid
amounts due the note insurer in respect of the class of notes into the related
Distribution Account. The mortgage loans relating to the redeemed class will
remain pledged to the indenture trustee, for the benefit of the holders of the
notes, to secure the cross-collateralization obligations of the trust with
regard to the other class.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Indenture will terminate upon notice to the indenture trustee of
either: (a) the later of the distribution to noteholders of the final payment or
collection on the last mortgage loan, or Periodic Advances of same by the
servicer, or the disposition of all funds from the last mortgage loan and the
remittance of all funds due under the Indenture and the payment of all amounts
due and payable to the note insurer, the collateral agent and the indenture
trustee or (b) mutual consent of the servicer, the note insurer and all holders
in writing. In no event will the trust terminate later than twenty-one years
after the death of the last surviving lineal descendant of the person named in
the Trust Agreement.
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Subject to provisions in the Indenture concerning adopting a plan of
complete liquidation, the servicer may, at its option and at its sole cost and
expense, terminate the Indenture on any date on which the aggregate principal
balance of the mortgage loans is less than 10% of the sum of (x) the aggregate
original principal balance of the mortgage loans purchased on the closing date
and (y) the original amount on deposit in the pre-funding accounts, by
purchasing, on the next succeeding distribution date, all of the outstanding
mortgage loans and REO Properties at a price equal to the sum of
o 100% of the principal balance of each outstanding mortgage
loan and each REO property,
o the greater of (a) the aggregate amount of accrued and unpaid
interest on the mortgage loans through the due period and (b)
thirty days' accrued interest thereon computed at a rate equal
to the mortgage interest rate, in each case net of the
servicing fee,
o any unreimbursed amounts due to the note insurer under the
Indenture, the Sale and Servicing Agreement, the Insurance
Agreement and, without duplication, accrued and unpaid Insured
Payments, and
o the indenture trustee's fees.
Any such purchase shall be accomplished by depositing into each Distribution
Account the portion of the purchase price specified above which relates to the
class of notes. No such termination is permitted without the prior written
consent of the note insurer if it would result in a draw on the note insurance
policy.
THE NOTE INSURANCE POLICY
The following summary of the terms of the note insurance policy does
not purport to be complete and is qualified in its entirety by reference to the
note insurance policy. A form of the note insurance policy may be obtained, upon
request, from the depositor.
Simultaneously with the issuance of the notes, the note insurer will
deliver the note insurance policy to the indenture trustee, for the benefit of
the holders of the notes. Under the note insurance policy, the note insurer will
irrevocably and unconditionally guarantee payment on each distribution date to
the indenture trustee, for the benefit of the holders of the notes, of the
Insured Distribution Amounts for the related class of notes calculated in
accordance with the original terms of the notes when issued and without regard
to any amendment or modification of the notes or the Indenture except amendments
or modifications to which the note insurer has given its prior written consent.
In addition, for any distribution date occurring on a date when an event of
default under the Insurance Agreement, as described below, has occurred and is
continuing or a date on or after the first date on which a claim is made under
the note insurance policy, the note insurer at its sole option, may pay any or
all of the outstanding principal balance of the notes. Mortgage Loan Interest
Shortfalls will not be covered by payments under the note insurance policy.
Payment of claims under the note insurance policy will be made by the
note insurer following receipt by the note insurer of the appropriate notice for
payment on the later to occur of (a) 12:00 noon, New York City time, on the
second business day following receipt of notice for payment, and (b) 12:00 noon,
New York City time, on the relevant distribution date.
If any payment of an amount guaranteed by the note insurer pursuant to
the note insurance policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law the note insurer will pay
the amount out of the funds of the note insurer on the later of
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o the date when due to be paid pursuant to the bankruptcy order
referred to below or
o the first to occur of
o the fourth business day following receipt by the note
insurer from the indenture trustee of (A) a certified
copy of the order of the court or other governmental
body which exercised jurisdiction to the effect that
a holder is required to return principal or interest
distributed on a note during the term of the note
insurance policy because these distributions were
avoidable preferences under applicable bankruptcy
law, (B) a certificate of the holder(s) that the
bankruptcy order has been entered and is not subject
to any stay, and (C) an assignment duly executed and
delivered by the holder(s), in such form as is
reasonably required by the note insurer and provided
to the holder(s) by the note insurer, irrevocably
assigning to the note insurer all rights and claims
of the holder(s) relating to or arising under the
notes against the debtor which made the preference
payment or otherwise concerning the preference
payment, or
o the date of receipt by the note insurer from the
indenture trustee of the items referred to in clauses
(A), (B) and (C) above if, at least four business
days prior to the date of receipt, the note insurer
shall have received written notice from the indenture
trustee that these items were to be delivered on that
date and that date was specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the bankruptcy order and
not to the indenture trustee or any holder directly -- unless a holder has
previously paid the amount to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the bankruptcy order, in which case the payment
shall be disbursed to the indenture trustee for distribution to the holder upon
proof of the payment reasonably satisfactory to the note insurer.
The terms "receipt" and "received," with respect to the note insurance
policy, means actual delivery to the note insurer and to its fiscal agent
appointed by the note insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a business day; delivery either on a day that is not a
business day or after 12:00 p.m., New York City time, shall be deemed to be
receipt on the next succeeding business day. If any notice or certificate given
under the note insurance policy by the indenture trustee is not in proper form
or is not properly completed, executed or delivered, it shall be deemed not to
have been received, and the note insurer or the fiscal agent shall promptly so
advise the indenture trustee and the indenture trustee may submit an amended
notice.
Under the note insurance policy, "business day" means any day other
than a Saturday or Sunday or a day on which banking institutions in the City of
New York, New York or the State of New York, are authorized or obligated by law
or executive order to be closed. The note insurer's obligations under the note
insurance policy to make Insured Payments shall be discharged to the extent
funds are transferred to the indenture trustee as provided in the note insurance
policy, whether or not the funds are properly applied by the indenture trustee.
The note insurer shall be subrogated to the rights of each holder to
receive payments of principal and interest, as applicable, with respect to
distributions on the notes to the extent of any payment by the note insurer
under the note insurance policy. To the extent the note insurer makes Insured
Payments, either directly or indirectly, as by paying through the indenture
trustee, to the holders of notes, the note insurer will be subrogated to the
rights of the holders, as applicable, with respect to this Insured Payment
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and shall be deemed to the extent of the payments so made to be a registered
holder for purposes of payment.
Claims under the note insurance policy will rank equally with any other
unsecured debt and unsubordinated obligations of the note insurer except for
particular obligations in respect of tax and other payments to which preference
is or may become afforded by statute. Claims against the note insurer under the
note insurance policy constitute pari passu claims against the general assets of
the note insurer. The terms of the note insurance policy cannot be modified or
altered by any other agreement or instrument, or by the merger, consolidation or
dissolution of the trust. The note insurance policy is governed by the laws of
the State of New York. The note insurance policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
To the fullest extent permitted by applicable law, the note insurer
agrees under the note insurance policy not to assert, and waives, for the
benefit of each holder, all its rights, whether by counterclaim, setoff or
otherwise, and defenses, including, without limitation, the defense of fraud,
whether acquired by subrogation, assignment or otherwise, to the extent that
these rights and defenses may be available to the note insurer to avoid payment
of its obligations under the note insurance policy in accordance with the
express provisions of the note insurance policy.
Pursuant to the terms of the Indenture, unless a note insurer default
exists, the note insurer shall be deemed to be the holder of the notes for all
purposes, other than for payment on the notes, will be entitled to exercise all
rights of the holders thereunder, without the consent of the holders, and the
holders may exercise these rights only with the prior written consent of the
note insurer. In addition, the note insurer will, as a third-party beneficiary
to the Indenture, the Sale and Servicing Agreement and the Loan Sale Agreement,
have, among others, the following rights:
o the right to give notices of breach or to terminate the rights
and obligations of the servicer under the Sale and Servicing
Agreement in the event of a servicer event of default and to
institute proceedings against the servicer;
o the right to consent to or direct any waivers of defaults by
the servicer;
o the right to remove the indenture trustee pursuant to the
Indenture;
o the right to direct the actions of the indenture trustee
during the continuation of a servicer default;
o the right to require the depositor to repurchase mortgage
loans for breach of representation and warranty or defect in
documentation;
o the right to direct foreclosures upon the failure of the
servicer to do so in accordance with the Sale and Servicing
Agreement;
o the right to direct all matters relating to a bankruptcy or
other insolvency proceeding involving the depositor; and
o the right to direct the indenture trustee to investigate
specified matters.
The note insurer's consent will be required prior to, among other
things, (x) the removal of the indenture trustee, (y) the appointment of any
successor indenture trustee or servicer or (z) any amendment to the Indenture or
the Sale and Servicing Agreement.
The trust, the depositor, the servicer, the originators and the note
insurer will enter into the Insurance Agreement pursuant to which the trust, the
depositor, the servicer and the originators will agree to reimburse, with
interest, the note insurer for amounts paid pursuant to claims under the note
insurance
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policy. The payment obligations shall be non-recourse obligations of the
depositor, the originators, the trust and the servicer and shall be payable only
from monies available for the payment in accordance with the provisions of the
Indenture. The servicer will further agree to pay the note insurer all
reasonable charges and expenses which the note insurer may pay or incur relative
to any amounts paid under the note insurance policy or otherwise in connection
with the transaction and to indemnify the note insurer against specified
liabilities. Except to the extent provided therein, amounts owing under the
Insurance Agreement will be payable solely from the trust estate. An "event of
default" under the Insurance Agreement will constitute an event of default under
the Indenture and a servicer event of default under the Sale and Servicing
Agreement and allow the note insurer, among other things, to direct the
indenture trustee to terminate the servicer. An "event of default" under the
Insurance Agreement includes:
o the originators', the depositor's or the servicer's failure to
pay when due any amount owed under the Insurance Agreement or
other documents,
o the inaccuracy or incompleteness in any material respect of
any representation or warranty of the originators, the
depositor or the servicer in the Insurance Agreement, the Sale
and Servicing Agreement, the Indenture or other documents,
o the originators', the depositor's or the servicer's failure to
perform or to comply with any covenant or agreement in the
Insurance Agreement, the Sale and Servicing Agreement, the
Indenture and other documents,
o a finding or ruling by a governmental authority or agency that
the Insurance Agreement, the Sale and Servicing Agreement, the
Indenture or other documents are not binding on the
originators, the depositor or the servicer,
o the originators', the depositor's or the servicer's failure to
pay its debts in general or the occurrence of specified events
of insolvency or bankruptcy with respect to the depositor or
the servicer, and
o the occurrence of specified "performance test violations"
designed to measure the performance of the mortgage loans.
THE NOTE INSURER
The following information has been obtained from _____________________
and has not been verified by the originators, the servicer, the depositor or the
underwriter. No representation or warranty is made by the depositor, the
originators, the servicer, the depositor or the underwriter with respect
thereto.
THE NOTE INSURER
____________ is a monoline insurance company incorporated in ______
under the laws of the State of ____________. ________________________ is
licensed to engage in the financial guaranty insurance business in all 50
states, the District of Columbia and Puerto Rico.
___________ and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's securities --
thereby enhancing the credit rating of those securities -- in consideration for
the payment of a premium to the insurer. ____________ and its subsidiaries
principally insure asset-backed, collateralized and municipal securities.
Asset-backed securities are generally supported by residential or commercial
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage
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bonds and sale/leaseback obligation bonds. Municipal securities consist largely
of general obligation bonds, special revenue bonds and other special obligations
of state and local governments. ____________ insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy ____________ underwriting criteria.
The principal executive offices of ____________ are located at
________________________, and its telephone number at that location is
____________.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by ____________ or
any of its domestic operating insurance company subsidiaries are generally
reinsured among these companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, ____________ reinsures a
portion of its liabilities under some of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. This reinsurance is utilized by ____________
as a risk management device and to comply with statutory and rating agency
requirements; it does not alter or limit ____________ obligations under any
financial guaranty insurance policy.
RATINGS
____________ insurance financial strength is rated "Aaa" by Moody's and
____________ insurer financial strength is rated "AAA" by Standard & Poor's and
Standard & Poor's (Australia) Pty. Ltd. ____________ claims-paying ability is
rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment Information,
Inc. These ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by the rating agencies.
CAPITALIZATION
The following table sets forth the capitalization of ____________ and
its wholly owned subsidiaries on ____________ the basis of generally accepted
accounting principles as of ____________:
[Note insurer to provide]
For further information concerning ____________, see the Consolidated
Financial Statements of ____________, and the notes thereto, incorporated by
reference in this prospectus supplement. ____________ financial statements are
included as exhibits to the annual report on Form 10-K and Quarterly Reports on
Form 10-Q filed with the Commission by ____________ and may be reviewed at the
EDGAR website maintained by the Commission. Copies of the statutory quarterly
and annual statements filed with the State of ____________ Insurance Department
by ____________ are available upon request to the State of ____________
Insurance Department.
INSURANCE REGULATION
____________ is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of ____________, its
state of domicile. In addition, ____________ and its insurance subsidiaries are
subject to regulation by insurance laws of the various other jurisdictions in
which they are licensed to do business. As a financial guaranty insurance
corporation licensed to do business in the State of ____________, ____________
is subject to Article __ of the ____________ Insurance Law which, among other
things, limits the business of each such insurer to financial guaranty insurance
and related lines, requires that each such insurer maintain a minimum surplus to
policyholders,
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establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions -- "single risks"
-- and the volume of transactions -- "aggregate risks" -- that may be
underwritten by each such insurer. Other provisions of the ____________
Insurance Law, applicable to non-life insurance companies such as ____________,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a note will be directly related to the rate of payment of
principal of the mortgage loans, including for this purpose voluntary payment in
full of mortgage loans prior to stated maturity, liquidations due to defaults,
casualties and condemnations, and repurchases of or substitutions for mortgage
loans by ____________ or an affiliate of ____________ as required or permitted
under the Indenture, the Sale and Servicing Agreement or the Loan Sale
Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in these properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments on conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing interest rates fall
significantly below the interest rates of some mortgage loans at the time of
origination, these mortgage loans may be subject to higher prepayment rates than
if prevailing rates remain at or above those at the time these mortgage loans
were originated. Conversely, if prevailing interest rates rise appreciably above
the interest rates of some mortgage loans at the time of origination, these
mortgage loans may experience a lower prepayment rate than if prevailing rates
remain at or below those at the time these mortgage loans were originated.
However, there can be no assurance that the mortgage loans will conform to the
prepayment experience of conventional mortgage loans or to any past prepayment
experience or any published prepayment forecast. No assurance can be given as to
the level of prepayments on mortgage loans that the trust estate will
experience.
As indicated above, if purchased at other than par, the yield to
maturity on a note will be affected by the rate of the payment of principal on
the mortgage loans. If the actual rate of payments on the mortgage loans is
slower than the rate anticipated by an investor who purchases a note at a
discount, the actual yield to the investor will be lower than the investor's
anticipated yield. If the actual rate of payments on the mortgage loans is
faster than the rate anticipated by an investor who purchases a note at a
premium, the actual yield to the investor will be lower than the investor's
anticipated yield.
The final stated maturity date is expected to be ____________ for the
class A-1 notes and the class A-2 notes. Each final stated maturity date was
calculated using the assumption that the final stated maturity date is thirteen
months after the final stated maturity date of the mortgage loan having the
latest maturity date in each pool and assuming a subsequent mortgage loan having
a final stated maturity date of ____________ is purchased by the trust and
included in each pool. The weighted average life of the notes is likely to be
shorter than would be the case if payments actually made on the mortgage loans
conformed to the foregoing assumptions, and the final distribution date for any
class of the notes could occur significantly earlier than the final stated
maturity date because:
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o prepayments, including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the
like, on mortgage loans are likely to occur,
o thirteen months have been added to obtain the final stated
maturity date above,
o the over-collateralization provisions of the transaction
result in the application of Excess Interest to the payment of
principal;
o the servicer may cause a liquidation of the trust estate when
the aggregate outstanding principal amount of the mortgage
loans is less than 10% of the sum of (a) the aggregate
principal balance of the mortgage loans purchased on the
closing date and (b) the original amount on deposit in the
pre-funding accounts; and
o the servicer may, at its option, call the class A-1 notes or
the class A-2 notes, separately, when the aggregate
outstanding principal balance of the class A-1 notes or the
class A-2 notes, respectively, is equal to or less than 10% of
the aggregate original principal balance of the class A-1
notes or the class A-2 notes, respectively.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
the security is scheduled to be repaid to an investor. The weighted average life
of the notes will be influenced by the rate at which principal of the mortgage
loans is paid, which may be in the form of scheduled amortization or prepayments
-- for this purpose, the term "prepayment" includes liquidations due to default.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this prospectus supplement, Home
Equity Prepayment or HEP, is a prepayment assumption which represents an assumed
rate of prepayment each month relative to the then outstanding principal balance
of a pool of mortgage loans for the life of the mortgage loans. For example, 25%
HEP assumes a constant prepayment rate of 2.5% per annum of the then outstanding
principal balance of the mortgage loans in the first month of the life of the
mortgage loans and an additional 2.5% per annum in each month thereafter up to
and including the tenth month. Beginning in the eleventh month and in each month
thereafter during the life of the mortgage loans, 25% HEP assumes a constant
prepayment rate of 25% per annum. As used in the table below, 0% prepayment
assumption assumes prepayment rates equal to 0% of the prepayment assumption --
i.e., no prepayments on the mortgage loans having the characteristics described
below. The prepayment assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the mortgage loans.
The following table has been prepared on the basis of the following
modeling assumptions:
o The mortgage loans prepay at the indicated percentage of the
prepayment assumption,
o distributions on the notes are received in cash on the ____
day of each month commencing in ____________,
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payment by the mortgagors of
principal and interest on the mortgage loans occur,
o scheduled payments are assumed to be received on the last day
of each month commencing in ____________, or as presented in
the following table, and prepayments represent payments in
full of individual mortgage loans and are assumed to be
received on the last day of each month, commencing in
____________, or as presented in the following table, and
include thirty (30) days' interest thereon,
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o the notes are purchased on ____________,
o the Specified Over-collateralized Amount is as enumerated in
the Indenture,
o on each distribution date, all Excess Interest for each pool
is applied to build up over-collateralization necessary to
satisfy the Specified Over-Collateralized Amount for each
pool, except for the first distribution date, on which the
amount of Excess Interest applied to build up
over-collateralization is zero,
o the mortgage loans in pool I consist of ____________ mortgage
loans having the following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Amortizing Remaining Amortizing Remaining Term to
Balance($) Interest Rate(%) Interest Rate(%) Term (in months) Term (in months) Maturity (in months)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
o The mortgage loans in pool II consists of ____________
mortgage loans having the following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Amortizing Remaining Amortizing Remaining Term to
Balance($) Interest Rate(%) Interest Rate(%) Term (in months) Term (in months) Maturity (in months)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
The foregoing modeling assumptions are assumptions and are not
necessarily indicative of actual performance.
Based upon the foregoing modeling assumptions, the tables below
indicate the weighted average life and earliest retirement date of the notes
assuming that the mortgage loans prepay according to the indicated percentages
of the prepayment assumption.
WEIGHTED AVERAGE LIVES
Class A-1 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years( Retirement Date
--------------------------------------------------------------------------------
Class A-2 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
--------------------------------------------------------------------------------
The foregoing tables were prepared assuming that:
o the weighted average life of each class of notes is determined
by
o multiplying the amount of each principal payment used
to retire the related class of notes by the number of
years from the closing date to the final distribution
date when the related class of notes is fully
retired,
o adding the results, and
o dividing the sum by the original principal balance of
that class; and
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o the call of the class A-1 notes or the class A-2 notes,
respectively, occurs as stated in this prospectus supplement.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
The Indenture provides that none of the note insurer, the trust, the
owner trustee, the indenture trustee, the depositor, the depositor, the
originators or the servicer will be liable to any holder for any loss or damage
incurred by the holder as a result of any difference in the rate of return
received by the holder as compared to the applicable note rate, with respect to
any holder of notes upon reinvestment of the funds received in connection with
any premature repayment of principal on the notes, including any such repayment
resulting from any prepayment by the mortgagor, any liquidation of the mortgage
loan, or any repurchase of or substitution for any mortgage loan by the
depositor or the servicer.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the notes is to be
considered only in connection with "Material Federal Income Tax Consequences" in
the accompanying prospectus. The discussion in this 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 notes.
TREATMENT OF THE NOTES
The originators, the depositor and the trust agree, and the holders of
the notes will agree by their purchase of the notes, to treat the notes as
indebtedness for all federal, state and local income tax purposes. There are no
regulations, published rulings or judicial decisions involving the
characterization for federal income tax purpose of securities with terms
substantially the same as the notes. In general, whether instruments such as the
notes constitute indebtedness for federal income tax purposes is a question of
fact, the resolution of which is based primarily upon the economic substance of
the instruments and the transaction pursuant to which they are issued rather
than merely upon the form of the transaction or the manner in which the
instruments are labeled. The Internal Revenue Service and the courts have stated
various factors to be taken into account in determining, for federal income tax
purposes, whether an instrument constitutes indebtedness and whether a transfer
of property is a sale because the transferor has relinquished substantial
incidents of ownership in the property or whether the transfer is a borrowing
secured by the property. On the basis of its analysis of these factors as
applied to the facts and its analysis of the economic substance of the
contemplated transaction, ________________________, special tax counsel to the
depositor, is of the opinion that, for federal income tax purposes, the notes
will be treated as indebtedness, and not as an ownership interest in the
mortgage loans, or an equity interest in the sub-trust of the trust consisting
of the pool I mortgage loans or the pool II mortgage loans, as the case may be,
or in a separate association taxable as a corporation or other taxable entity.
See "Material Federal Income Tax Consequences -- Debt Securities" in the
accompanying prospectus.
If the notes are characterized as indebtedness, interest paid or
accrued on a note will be treated as ordinary income to holders of the notes and
principal payments on a note will be treated as a return of
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capital to the extent of the holder's basis in the note allocable thereto. An
accrual method taxpayer will be required to include in income interest on the
notes when earned, even if not paid, unless it is determined to be
uncollectible. The indenture trustee, on behalf of the trust, will report to the
holders of the notes of record and the IRS the amount of interest paid and
original issue discount, if any, accrued on the notes to the extent required by
law.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS OF THE NOTES. Although, as
described above, it is the opinion of special tax counsel that for federal
income tax purposes, the notes will be characterized as indebtedness, this
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the notes
did not represent indebtedness for federal income tax purposes, holders of the
notes would likely be treated as owning an interest in a partnership and not an
interest in an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool. If the holders of the notes were treated
as owing an equitable interest in a partnership, the partnership itself would
not be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's income,
gain, loss, deductions and credits. The amount, timing and characterization of
items of income and deduction for a holder of a note would differ if the notes
were held to constitute partnership interests, rather than indebtedness. Since
the parties will treat the notes as indebtedness for federal income tax
purposes, none of the servicer, the indenture trustee or the owner trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the notes. Investors that are foreign persons
are strongly advised to consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the notes.
SPECIAL TAX ATTRIBUTES. The notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ... secured
by an interest in real property" within the meaning of Section 7701(a)(19)(C) of
the Code.
DISCOUNT AND PREMIUM. It is not anticipated that the notes will be
issued with any original issue discount. See "Material Federal Income Tax
Consequences -- Discount and Premium -- Original Issue Discount" in the
accompanying prospectus. The prepayment assumption that will be used for
purposes of computing original issue discount, if any, for federal income tax
purposes is the prepayment assumption. See "Prepayment and Yield Considerations"
in this prospectus supplement. In addition, a subsequent purchaser who buys a
note for less than its principal amount may be subject to the "market discount"
rules of the Code. See "Material Federal Income Tax Consequences -- Discount and
Premium -- Market Discount" in the accompanying prospectus. A subsequent
purchaser who buys a note for more than its principal amount may be subject to
the "market premium" rules of the Code. See "Material Federal Income Tax
Consequences -- Discount and Premium -- Securities Purchased at a Premium" in
the accompanying prospectus.
SALE OR REDEMPTION OF THE NOTES. If a note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and that holder's adjusted basis in the note. See "Material
Federal Income Tax Consequences -- Debt Securities -- Sale or Exchange" in the
accompanying prospectus.
OTHER MATTERS. For a discussion of backup withholding and taxation of
foreign investors in the notes, see "Material Federal Income Tax Consequences --
Backup Withholding" and " --Foreign Investors -- Grantor Trust Securities and
REMIC Regular Securities" in the accompanying prospectus.
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TREATMENT OF THE TRUST
Tax counsel is of the opinion that neither the sub-trust of the trust
consisting of the pool I mortgage loans nor the sub-trust of the trust
consisting of the pool II mortgage loans will be characterized as an
association, or a publicly traded partnership, taxable as a corporation or a
taxable mortgage pool.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on
o employee benefit plans -- as defined in Section 3(3) of ERISA,
o plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans,
o any entities whose underlying assets include plan assets by
reason of a plan's investment in such entities and
o persons who have specified relationships to such plans --
"Parties-in-Interest" under ERISA and "Disqualified Persons"
under the Code.
Section 406 of ERISA prohibits plans from engaging in particular
transactions involving the assets of such plans with Parties-in-Interest with
respect to such plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on plan
fiduciaries and Parties-in-Interest, or Disqualified Persons, that engage in
"prohibited transactions" involving assets of a plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and Disqualified Persons with respect to these
arrangements and plans, also may be subject to excise taxes and other penalties
if they engage in prohibited transactions. Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account --
e.g., through the purchase of an annuity contract. ERISA also imposes specified
duties on persons who are fiduciaries of Plans subject to ERISA.
Some transactions involving the purchase, holding or transfer of the
notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the trust were deemed to be assets of a plan. Under a
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 Code only if the plan acquires an "equity interest" in the trust and none of
the exceptions contained in this plan assets regulation is 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. Although there is little guidance on
the subject, the depositor believes that the notes should be treated as
indebtedness without substantial equity features for purposes of the plan assets
regulation. This determination is based in part on the traditional debt features
of the notes, including the reasonable expectation of purchasers of the notes
that the notes will be repaid when due, as well as the absence of conversion
rights, warrants and other typical equity features. The debt treatment of the
notes could change if the trust incurs losses. However, even if the notes are
treated as debt for such purposes, the acquisition or holding of notes by or on
behalf of a plan could be considered to give rise to a prohibited transaction if
the trust or any of its affiliates is or becomes a Party-in-Interest or a
Disqualified Person with respect to such plan. In this case, particular
exemptions from the prohibited transaction rules could be applicable depending
on the type and circumstances of the plan fiduciary making the decision to
acquire a note. Included among these exemptions are: PTCE 90-1, regarding
investments by insurance
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company pooled separate accounts; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers." Each investor using the assets of a plan which
acquires the notes, or to whom the notes are transferred, will be deemed to have
represented that the acquisition and continued holding of the notes will be
covered by one of the exemptions listed above or by another Department of Labor
Class Exemption.
LEGAL INVESTMENT
The notes will [not] constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
____________ between the depositor and First Union Securities, Inc., as
underwriter, the depositor has agreed to sell to the underwriter and the
underwriter has agreed to purchase from the depositor the notes. The depositor
is obligated to sell, and the underwriter is obligated to purchase, all of the
notes offered hereby if any are purchased.
The underwriter has advised the depositor that it proposes to offer the
notes purchased by the underwriter for sale from time to time in one or more
negotiated transactions or otherwise, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
underwriter may effect these transactions by selling these notes to or through
dealers, and these dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the underwriter or purchasers of the
notes for whom they may act as agent. Any dealers that participate with the
underwriter in the distribution of the notes purchased by the underwriter may be
deemed to be underwriters, and any discounts or commissions received by them or
the underwriter and any profit on the resale of notes by them or the underwriter
may be deemed to be underwriting discounts or commissions under the Securities
Act of 1933.
In connection with the offering of the notes, the underwriter and its
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the notes. These transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M,
pursuant to which that person may bid for or purchase the notes for the purpose
of stabilizing its market price. Any of the transactions described in this
paragraph may result in the maintenance of the price of the notes at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are taken,
may be discontinued at any time without notice.
[This prospectus supplement and the accompanying prospectus may be used
by us, First Union Securities, Inc., our affiliate, and any of our other
affiliates when required under the federal securities laws in connection with
offers and sales of offered notes in furtherance of market-making activities in
offered notes. First Union Securities, Inc. or any other such affiliate may act
as principal or agent in such transactions. Sales will be made at prices related
to prevailing market prices at the time of sale or otherwise.]
For further information regarding any offer or sale of the notes
pursuant to this prospectus supplement and the accompanying prospectus, see
"Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the depositor will indemnify
the underwriter or contribute to losses arising out of specified liabilities,
including liabilities under the Securities Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by
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referring you to those documents. This information is considered part of this
prospectus supplement, and later information that is filed will automatically
update and supersede this information. We incorporate by reference all of the
documents listed in the accompanying prospectus under the heading "Incorporation
of Documents by Reference" and the financial statements of
________________________ included in, or as exhibits to, the following
documents:
o the Annual Report on Form 10-K for the year ended
____________; and
o the Quarterly Report on Form 10-Q for the quarter ended
__________.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
ADDITIONAL INFORMATION
Residential Asset Funding Corporation has filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
for the notes offered pursuant to this prospectus supplement. This prospectus
supplement and the accompanying prospectus, which form a part of the
registration statement, omit certain information contained in such registration
statement pursuant to the rules and regulations of the Securities and Exchange
Commission. You may read and copy the registration statement at the Public
Reference Room at the Securities and Exchange Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. and at the Securities and Exchange
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the Public Reference
Rooms. In addition, the Securities and Exchange Commission maintains a site on
the World Wide Web containing reports, proxy materials, information statements
and other items. The address is http://www.sec.gov.
EXPERTS
The consolidated balance sheets of ____________ and subsidiaries as of
____________ and the related consolidated statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended ________________________, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance on
the report of ____________, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the notes will be passed upon
for the originators, the depositor and the servicer by ____________,
____________, for the trust by ____________, ____________, and for the depositor
and the underwriter by ____________, ____________.
RATINGS
It is a condition to the original issuance of the notes that they will
receive ratings of "[ ]" by _________ and "[ ]" by ___________. The ratings
assigned to the notes will take into account the
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claims-paying ability of the note insurer. Explanations of the significance of
these ratings may be obtained from ______________________________________ and
____________________________. These ratings will be the views only of the rating
agencies. There is no assurance that any such ratings will continue for any
period of time or that these ratings will not be revised or withdrawn. Any such
revision or withdrawal of these ratings may have an adverse effect on the market
price of the notes.
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GLOSSARY
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount means, for any pool of mortgage loans and any
distribution date, the amount on deposit in the related Distribution Account,
exclusive of the amount of any Insured Payment and the Servicing Fee, on that
distribution date.
Class A-1 Interest Distribution Amount means, for any distribution
date, an amount equal to the sum of the Current Interest for the class A-1 notes
on that distribution date, less the amount of any Class A-1 Mortgage Loan
Interest Shortfalls relating to that distribution date.
Class A-1 Mortgage Loan Interest Shortfalls means, for any distribution
date, the aggregate of the Mortgage Loan Interest Shortfalls in pool I, if any,
for that distribution date, to the extent any Mortgage Loan Interest Shortfalls
are not paid by the servicer as Compensating Interest.
Class A-1 Note Rate means, with respect to any distribution date, the
per annum rate equal to ____%. On any distribution date after the Note Clean-Up
Call Date for the class A-1 notes, the Class A-1 Note Rate will be __________%.
Class A-2 Interest Distribution Amount for any distribution date will
be an amount equal to the sum of the Current Interest for the class A-2 notes on
that distribution date, less the amount of any Class A-2 Mortgage Loan Interest
Shortfalls relating to that distribution date.
Class A-2 Mortgage Loan Interest Shortfalls for any distribution date
will be the aggregate of the Mortgage Loan Interest Shortfalls in pool II, if
any, for that distribution date, to the extent any Mortgage Loan Interest
Shortfalls are not paid by the servicer as Compensating Interest.
Class A-2 Note Rate means, for any distribution date, the per annum
rate equal to _____%. On any distribution date after the Note Clean-up Call Date
for the class A-2 notes, the Class A-2 Note Rate will be _________%.
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related distribution
date resulting from principal prepayments in full during the related due period
and (b) its aggregate servicing fees received in the related due period
Current Interest for any pool of mortgage loans and any distribution
date is the interest that will accrue on the related class of notes at the
applicable note rate on the aggregate outstanding principal balance of such
class during the accrual period.
Excess Interest for any pool of mortgage loans and any distribution
date is equal to the excess of (x) the Available Amount for that pool and that
distribution date over (y) the sum of
o the Interest Distribution Amount for that pool and that
distribution date,
o Principal Distribution Amount for that pool and that
distribution date -- calculated for this purpose without
regard to any Over-collateralization Increase Amount or
portion thereof included therein,
o any Reimbursement Amount or other amount owed to the note
insurer relating to that pool and
S-55
<PAGE>
o the indenture trustee's fees for that pool and that
distribution date.
Excess Over-collateralized Amount means, for each pool of mortgage
loans and a distribution date, the difference, if any, between (a) the
Over-collateralized Amount that would apply on that distribution date after
taking into account all distributions to be made on that distribution date,
except for any distributions of related Over-collateralization Reduction
Amounts, and (b) the Specified Over-collateralized Amount.
Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (a) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of that servicer remittance date over (b) the sum of the unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
Insurance Proceeds are proceeds paid by any insurer pursuant to any
insurance policy covering a mortgage loan to the extent these proceeds are not
applied to the restoration of the mortgaged property or released to the
mortgagor. "Insurance Proceeds" do not include "Insured Payments."
Insured Distribution Amount for any pool of mortgage loans and any
distribution date, is the sum of:
o the Interest Distribution Amount for that pool and that
distribution date,
o the amount of the Over-collateralization Deficit applicable to
that pool and that distribution date, if any, and
o on the distribution date which is a final stated maturity
date, the aggregate outstanding principal balance for the
related class of notes.
Insured Payment for any pool of mortgage loans and any distribution
date will equal the amount by which the Insured Distribution Amount for that
pool and that distribution date exceeds the Available Amount less the indenture
trustee's fees for that pool and that distribution date.
Interest Distribution Amount means the Class A-1 Interest Distribution
Amount or the Class A-2 Interest Distribution Amount, as applicable.
Liquidation Expenses as to any Liquidated Mortgage Loan are all
expenses incurred by the servicer in connection with the liquidation of the
mortgage loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed servicing advances. In no event may Liquidation
Expenses on a Liquidated Mortgage Loan exceed the Liquidation Proceeds.
Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess,
if any, of (a) the unpaid principal balance of that Liquidated Mortgage Loan
plus accrued and unpaid interest on the unpaid principal balance from the due
date to which interest was last paid by the Mortgagor over (b) the sum of the
Net Liquidation Proceeds and the amount of any previously unreimbursed Periodic
Advances in respect of the mortgage loan.
Liquidation Proceeds are amounts, other than Insurance Proceeds,
received by the servicer in connection with (a) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(b) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO Disposition or otherwise.
Mortgage Loan Interest Shortfalls means Civil Relief Act interest
shortfalls and Prepayment Interest Shortfalls.
S-56
<PAGE>
Net Foreclosure Profits as to any servicer remittance date, are the
excess, if any, of (a) the aggregate Foreclosure Profits on that servicer
remittance date over (b) Liquidated Loan Losses on that servicer remittance
date.
Net Liquidation Proceeds as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the servicer.
Net Mortgage Loan Interest Shortfalls means the Class A-1 Mortgage Loan
Interest Shortfalls or the Class A-2 Mortgage Loan Interest Shortfalls, as
applicable.
Net REO Proceeds as to any REO property, are REO Proceeds net of any
expenses of the servicer.
Note Clean-up Call Date means the first distribution date on which the
aggregate outstanding principal balance of the related class of notes is equal
to or less than 10% of the aggregate original principal balance of such class of
notes
Over-collateralized Amount means, for any distribution date and a pool
of mortgage loans, the excess, if any, of (x) the sum of (a) the aggregate
principal balances of the mortgage loans in that pool as of the close of
business on the last day of the preceding calendar month and (b) the amounts, if
any, on deposit in the pre-funding accounts, over (y) the aggregate principal
balance of the related class of notes as of that distribution date --following
the making of all distributions on that distribution date, other than any
Over-collateralization Increase Amount for that distribution date.
Over-collateralization Deficit for any distribution date, is the amount
by which the aggregate outstanding principal balance of the notes exceeds the
sum of
o the aggregate principal balance of the mortgage loans,
o any amount on deposit in the pre-funding accounts on that
distribution date, and
o any amounts on deposit in the Cross-collateralization Reserve
Accounts on that distribution date, after application of all
amounts due on that distribution date.
Over-collateralization Increase Amount for any pool of mortgage loans
and any distribution date is the amount of Excess Interest to be applied as an
accelerated payment of principal on the related class of notes until the
over-collateralization for that pool reaches the Specified Over-collateralized
Amount. This payment is limited to the extent of the Available Amount as
described in the definition of "Principal Distribution Amount.
Over-collateralization Reduction Amount for any pool of mortgage loans
and any distribution date, is the difference, if any, between (a) the
Over-collateralized Amount for that pool that would apply on that distribution
date after taking into account all distributions to be made on that distribution
date -- except for any distributions of related Over-collateralization Reduction
Amounts -- and (b) the Specified Over-collateralized Amount for that pool and
that distribution date to the extent of principal available for distribution.
Periodic Advances means advances made by the servicer on each
distribution date for delinquent payments of interest on the mortgage loans, at
a rate equal to the interest rate on the mortgage note, less the servicing fee
rate.
Prepayment Interest Shortfall means, for any distribution date, an
amount equal to the excess, if any, of (a) thirty days' interest on the
outstanding principal balance of these mortgage loans at a per
S-57
<PAGE>
annum rate equal to the mortgage interest rate -- or at any lower rate as may be
in effect for these mortgage loan because of application of the Civil Relief
Act, any reduction as a result of a bankruptcy proceeding and/or any reduction
by a court of the monthly payment due on these mortgage loan -- minus the rate
at which the servicing fee is calculated, over (b) the amount of interest
actually remitted by the mortgagor in connection with the principal prepayment
in full, less the servicing fee for such mortgage loan in such month.
Principal Distribution Amount for any pool of mortgage loans and any
distribution date will be the lesser of:
(a) the excess of (x) the sum, as of that distribution date,
of (A) the Available Amount for that pool and (B) any Insured Payment
on the related class of notes over (y) the sum of Interest Distribution
Amount for that pool, the indenture trustee's fees, and the
Reimbursement Amount allocable to the related class of notes; and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage
loans in that pool actually collected during
the related due period;
(2) the principal balance of each mortgage loan
that either was repurchased by the depositor
or purchased by the servicer on the servicer
remittance date from that pool, to the
extent the principal balance is actually
received by the indenture trustee;
(3) any substitution adjustments delivered by
the depositor on the servicer remittance
date in connection with a substitution of a
mortgage loan in that pool, to the extent
the substitution adjustments are actually
received by the indenture trustee;
(4) the Net Liquidation Proceeds actually
collected by the servicer of all mortgage
loans in that pool during the prior calendar
month, to the extent the Net Liquidation
Proceeds relate to principal;
(5) on the ____________ or ____________
distribution dates, moneys released from the
related pre-funding account, if any;
(6) the proceeds received by the indenture
trustee upon the exercise by the servicer of
its option to call the related class of
notes, to the extent those proceeds relate
to principal;
(7) the amount of any Over-collateralization
Deficit for that pool for that distribution
date;
(8) the proceeds received by the indenture
trustee on any termination of the trust, to
the extent those proceeds relate to
principal, allocable to that pool;
(9) the amount of any Over-collateralization
Increase Amount for that pool for that
distribution date, to the extent of any
Excess Interest for that pool available for
that purpose, exclusive of the amount of
Excess Interest for
S-58
<PAGE>
that pool necessary to make the payment of
(A) any Net Mortgage Loan Interest
Shortfalls for that pool and that
distribution date and (B) the Shortfall
Amount for the other pool and that
distribution date;
(10) if the note insurer shall so elect, an
amount of principal, including Liquidated
Loan Losses, that would have been payable
pursuant to clauses (1) through (9) above if
sufficient funds were available therefor;
minus
-----
(11) the amount of any Over-collateralization
Reduction Amount for that pool for that
distribution date.
In no event will the Principal Distribution Amount for a pool for any
distribution date be (x) less than zero or (y) greater than the then outstanding
aggregate principal balance for the notes.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o relates or relate to a detached one-family residence or to the
same type of residential dwelling or commercial property as
the deleted mortgage loan and, has or have the same or a
better lien priority as the deleted mortgage loan and has or
have the same occupancy status as the deleted mortgage loan or
is or are owner-occupied mortgaged property or properties,
o matures or mature no later than, and not more than one year
earlier than, the deleted mortgage loan,
o has or have a LTV or LTV at the time of the substitution no
higher than the LTV of the deleted mortgage loan,
o has or have a CLTV or CLTVs at the time of the substitution no
higher than the CLTV of the deleted mortgage loan,
o has or have a principal balance or principal balances, after
application of all payments received on or prior to the date
of substitution, not substantially less and not more than the
principal balance of the deleted mortgage loan as of that
date,
o has or have a mortgage interest rate of at least the same
interest rate as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty enumerated in the Loan Sale
Agreement.
Reimbursement Amount means, for each pool of mortgage loans and each
distribution date, the lesser of (x) the excess of (a) the amount then on
deposit in the Distribution Account over (b) the Insured Distribution Amounts
for that pool and that distribution date and (y) the amount of all Insured
Payments and other amounts due to the note insurer for that pool pursuant to the
Insurance Agreement, including the premium amount, which have not been
previously paid.
REO Proceeds are monies received from any REO property, including,
without limitation, proceeds from the rental of the mortgaged property.
Shortfall Amount means, for a pool of mortgage loans and any
distribution date, the sum of
S-59
<PAGE>
o any shortfall in the amount of the Interest Distribution
Amount for that pool actually distributed to the holders of
the related class of notes,
o any shortfall in the amount of the Net Mortgage Loan Interest
Shortfalls for that pool actually distributed to the holders
of the related class of notes,
o the amount of any Over-collateralization Deficit for that pool
and that distribution date and
o any shortfall in the payment of any amounts owed the note
insurer.
Specified Over-collateralized Amount for a pool of mortgage loans and
any distribution date will be the amount of Over-collateralization which the
note insurer requires for that pool and that distribution date.
Specified Reserve Amount means, for each pool of mortgage loans and any
distribution date, the difference between (x) the Specified Over-collateralized
Amount for that pool and that distribution date and (y) the Over-collateralized
Amount for that pool on that distribution date.
S-60
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriter. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making the offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer or
solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information in this prospectus supplement or in the prospectus
is correct as of any time since the date of this prospectus supplement or the
prospectus.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Table of Contents...........................................................S-ii
Summary.....................................................................S-1
Risk Factors................................................................S-3
Transaction Overview........................................................S-7
The Mortgage Loan Pools.....................................................S-8
The Originators, the Depositor, the Servicer and the
Subservicer.............................................................S-17
The Owner Trustee...........................................................S-19
The Indenture Trustee.......................................................S-19
The Collateral Agent........................................................S-19
Description of the Notes and the Trust Certificates.........................S-19
Servicing of the Mortgage Loans.............................................S-34
The Note Insurance Policy...................................................S-41
The Note Insurer............................................................S-44
Prepayment and Yield Considerations.........................................S-46
Certain Federal Income Tax Considerations...................................S-49
ERISA Considerations........................................................S-51
Legal Investment............................................................S-52
Plan of Distribution........................................................S-52
Experts.....................................................................S-53
Ratings.....................................................................S-53
Legal Matters...............................................................S-53
Glossary....................................................................S-55
PROSPECTUS
Summary of Prospectus..........................................................1
Risk Factors...................................................................3
The Sponsor....................................................................6
Use of Proceeds................................................................6
Description of the Securities..................................................6
The Trust Funds...............................................................11
Credit Enhancement............................................................19
Servicing.....................................................................21
The Agreements................................................................27
Legal Aspects of Loans........................................................33
Material Federal Income Tax Consequences......................................44
State Tax Considerations......................................................63
ERISA Considerations..........................................................63
Legal Investment..............................................................66
Available Information.........................................................66
Incorporation of Documents by Reference.......................................67
Plan of Distribution..........................................................67
Legal Matters.................................................................67
Financial Information.........................................................67
================================================================================
$_______________
______________________
Issuer
_________________________
Servicer
Residential Asset Funding Corporation
Sponsor
$__________
Class A-1 Notes
$__________
Class A-2 Notes
Mortgage-Backed Notes,
Series _______
------------------
PROSPECTUS SUPPLEMENT
------------------
-------------------
----------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
Securities and Exchange Commission registration fee $ 250
Printing expenses 35,000
Accounting fees and expenses 30,000
Legal fees and expenses 200,000
Fees and expenses (including legal fees) for qualifications
under state securities laws 10,000
Trustee's fees and expenses 5,000
Rating Agency fees and expenses 40,000
Miscellaneous 200,000
--------
Total $520,250
========
All amounts except the Securities and Exchange Commission registration
fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in his defense of a proceeding to which he
is a party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if he
is not wholly successful in such defense, if it is determined as provided in the
statute that the director or officer meets a certain standard of conduct,
provided when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise, and
the court may order indemnification under certain circumstances set forth in the
statute. The statute further provides that a corporation may in its articles of
incorporation, by contract or by resolution provide indemnification in addition
to that provided by the statute, subject to certain conditions set forth in the
statute.
The articles of incorporation of the registrant provide that the
personal liability of each director of the corporation is eliminated to the
fullest extent permitted by the provisions of the NCBCA, as presently in effect
or as amended. No amendment, modification or repeal of this provision of the
articles of incorporation shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
First Union Corporation maintains directors and officers liability
insurance for the benefit of its subsidiaries, subject to certain deductible
amounts. In general, the policy insures (i) the registrant's directors and, in
certain cases, its officers against loss by reason of any of their wrongful
acts, and/or (ii) the registrant against loss arising from claims against the
2
<PAGE>
directors and officers by reason of their wrongful acts, all subject to the
terms and conditions contained in the policy.
In connection with an agreement between the registrant and Peter H.
Sorensen, an independent director of the registrant, the registrant has agreed
to indemnify and hold harmless Peter H. Sorensen from any and all loss, claim,
damage or cause of action, including reasonable attorneys' fees related thereto
(collectively, "Claims"), incurred by Peter H. Sorensen in the performance of
his duties as a director; provided, however, that Peter H. Sorensen shall not be
so indemnified for such Claims if they arise from his own negligence or willful
misconduct.
Under agreements which may be entered into by the registrant, certain
controlling persons, directors and officers of the registrant may be entitled to
indemnification by underwriters and agents who participate in the distribution
of Securities covered by the registration statement against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBIT SCHEDULE
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the registrant and the
underwriter named therein, relating to the distribution of the
Securities*
3.1 Certificate of Incorporation of Residential Asset Funding
Corporation*
3.2 By-laws of Residential Asset Funding Corporation*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.3 Form of Sale and Servicing Agreement*
4.4 Form of Mortgage Loan Purchase Agreement*
4.5 Form of Trust Agreement*
4.6 Form of Securitization Sponsorship Agreement**
5.1 Opinion of Dewey Ballantine LLP as to legality of the
Securities
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters
23.1 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on signature page)
* Incorporated by reference to the registrant's prior
registration statement, no. 333-64775.
** Incorporated by reference to the registrant's prior
registration statement, no. 333-81721.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
3
<PAGE>
(ii) To reflect in the prospectus any facts
or events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high and of the estimated
maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent
change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information
with respect to the plan of distribution not
previously disclosed in the registration statement or
any material change to such information in the
registration statement;
provided, however, that paragraphs (i) and (ii) do
not apply if the information required to be included
in the post-effective amendment is contained in
periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
4
<PAGE>
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to
the securities offered therein, and the offering of
such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the Commission under section
305(b)(2) of the Act.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Charlotte, North Carolina on the 4th day of
January, 2001.
RESIDENTIAL ASSET FUNDING CORPORATION
By: /s/ Brian E. Simpson
--------------------------------
NAME: Brian E. Simpson
TITLE President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated on January 4, 2001.
SIGNATURE TITLE
--------- -----
By: /s/ Brian E. Simpson
----------------------------------
Name: Brian E. Simpson Chairman, President and Director
By: /s/ Michael Warden
----------------------------------
Name: Michael Warden Director
By: /s/ Peter H. Sorensen
----------------------------------
Name: Peter H. Sorensen Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
above constitutes and appoints each of James F. Powers, Timothy F. Danello, Eric
Kaplan and Bruce Hurwitz his true and lawful attorney-in-fact and agent, acting
alone, with full power of substitution and resubstitution, for him and his name,
place and stead, in any and all capacities, to sign any or all amendments to
this registration statement, including post-effective amendments, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all his said attorney-in-fact and
agent, acting alone, or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
6
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the registrant and the
underwriter named therein, relating to the distribution of the
Securities*
3.1 Certificate of Incorporation of Residential Asset Funding
Corporation*
3.2 By-laws of Residential Asset Funding Corporation*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.3 Form of Sale and Servicing Agreement*
4.4 Form of Mortgage Loan Purchase Agreement*
4.5 Form of Trust Agreement*
4.6 Form of Securitization Sponsorship Agreement**
5.1 Opinion of Dewey Ballantine LLP as to legality of the
Securities
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters
23.1 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on signature page)
* Incorporated by reference to the registrant's prior
registration statement, no. 333-64775.
** Incorporated by reference to the registrant's prior
registration statement, no. 333-81721.
7
