<PAGE> 1
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED MARCH 18, 1999
$332,350,000 CLASS A-1 BONDS (APPROXIMATE)
$61,750,000 CLASS A-2 BONDS (APPROXIMATE)
AMERICAN RESIDENTIAL EAGLE BOND TRUST 1999-2
BOND ISSUER
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
COLLATERALIZED HOME EQUITY BONDS, SERIES 1999-2
[AMERICAN RESIDENTIAL LOGO]
-------------------------
CONSIDER CAREFULLY THE
RISK FACTORS STARTING ON
PAGE S-15 OF THIS
PROSPECTUS SUPPLEMENT WHICH
INCLUDE, AMONG OTHERS:
- Yield, Prepayment and
Maturity Risks;
- Cash Flow Considerations;
- Limited Recourse;
- Limited Liquidity of
Investments; and
- Bankruptcy and Insolvency
Risks.
The Bonds are
redeemable only under
circumstances described in
this prospectus supplement.
The Bonds represent
obligations of the Bond
Issuer and are secured
solely by the mortgage
loans held by the trust.
The Bonds do not represent
an interest in, or
obligation of, AmREIT,
American Residential Eagle,
Inc. or any of their
affiliates.
This prospectus
supplement may be used to
offer and sell the Bonds
only if accompanied by a
prospectus.
THE BOND ISSUER
- American Residential Eagle Bond Trust 1999-2 is a
Delaware business trust formed specifically for this
transaction pursuant to a trust agreement between
American Residential Eagle, Inc., as depositor, and
Wilmington Trust Company, as owner trustee. The
assets of the trust will consist primarily of a pool
of adjustable rate residential mortgage loans and a
pool of fixed rate residential mortgage loans.
THE BONDS
- The Bond Issuer will issue two classes of Bonds
offered for sale by this prospectus supplement. As
described in this prospectus supplement, the Class
A-1 Bonds will bear a variable interest rate based
on one-month LIBOR (subject to an available funds
limitation described in this prospectus supplement);
their primary source of payment will be the
principal and interest collections received from the
pool of adjustable rate residential mortgage loans.
The Class A-2 Bonds will initially bear a fixed
interest rate of 7.09% per annum (subject to an
available funds limitation described herein); their
primary source of payment will be the principal and
interest collections received from the pool of fixed
rate residential mortgage loans.
- Interest and principal on the Bonds is scheduled to
be paid monthly on the 25th day of each month or, if
such day is not a business day, the immediately
following business day. The first scheduled payment
date is September 27, 1999.
THE MORTGAGE POOLS
- The mortgage loans were originated pursuant to
underwriting guidelines which generally are less
stringent than those applied by Fannie Mae and
Freddie Mac. As a consequence, it is likely that the
mortgage loans will experience higher rates of
delinquency, foreclosure and bankruptcy than those
experienced by mortgage loans underwritten under
Fannie Mae or Freddie Mac guidelines. See "Risk
Factors" herein.
CREDIT ENHANCEMENT
- Over-collateralization. On the closing date, the
principal balance of each mortgage pool will exceed
the aggregate principal balance of the related class
of Bonds resulting in over-collateralization which
will be available to absorb losses. Thereafter,
principal payments on the Bonds will be made to
maintain over-collateralization at specified levels.
- Cross-collateralization. To the extent described in
this Prospectus Supplement, excess cash generated by
one mortgage pool may be applied to absorb losses
with respect to the class of Bonds relating to the
other mortgage pool or to fund a reserve fund for
future losses.
- Financial Guaranty Insurance Policy. Each class of
Bonds will be unconditionally and irrevocably
guaranteed as to the timely payment of scheduled
interest and ultimate payment of principal pursuant
to the terms of a financial guaranty insurance
policy issued by:
[FINANCIAL SECURITY ASSURANCE LOGO]
The underwriters named below will offer the Bonds to the public from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. The underwriters will pay the depositor an amount equal to
approximately 99.74% of the aggregate principal balance of the Bonds, plus
accrued interest (in case of the Class A-2 Bonds) from August 1, 1999, before
deducting issuance expenses payable by the depositor. The Bonds will be issued
in book-entry form only on or about August 5, 1999 through the facilities of The
Depository Trust Company, Cedelbank or the Euroclear system.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE BONDS OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
MORGAN STANLEY DEAN WITTER
July 21, 1999
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the Bonds in two separate documents that progressively
provide more detail: (1) the accompanying prospectus, which provides general
information, some of which may not apply to the Bonds, and (2) this prospectus
supplement which describes the specific terms of the Bonds and which may contain
information that varies from the information in the prospectus.
IF THE TERMS OF THE BONDS AND ANY OTHER INFORMATION CONTAINED HEREIN VARY
BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under "INDEX OF CERTAIN DEFINITIONS" in this prospectus
supplement and under the caption "INDEX OF CERTAIN DEFINITIONS" in the accompany
prospectus. The table of contents which follows provides the pages on which
these captions are located.
---------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Bonds and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the Bonds will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
---------------
This prospectus supplement and the accompanying prospectus are part of a
registration statement filed with the SEC (Registration No. 333-70189). You may
request a free copy of this filing (and any other documents incorporated by
reference therein) by writing or calling:
American Residential Eagle Inc.
445 Marine View Avenue, Suite 100
Del Mar, California 92014
(858) 259-6082
You should rely only on the information provided in this prospectus
supplement or the accompanying prospectus or the information incorporated by
reference therein as described at "Where You Can Find More Information". We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or in 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.
S-2
<PAGE> 3
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
<TABLE>
<S> <C>
Northeast Regional Office Midwest Regional Office
Seven World Trade Center 500 West Madison Street, Suite 1400
New York, New York 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filing are also available to the public on the SEC's web
site at http://www.sec.gov/.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus supplement, and later
information that we file with the SEC will automatically update and supersede
this information. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
In addition to the documents described in the accompanying prospectus under
"Where You Can Find More Information," the consolidated financial statements of
Financial Security Assurance Inc. included in, or as exhibits to, the following
documents, which have been filed by Financial Security Assurance Holdings Ltd.
with the SEC, are incorporated by reference:
- Annual report on Form 10-K for the year ended December 31, 1998, and
- Quarterly reports on Form 10-Q for the quarter ended March 31, 1999.
All financial statements of the Bond Issuer included in documents filed by
the depositor pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the filing of this prospectus supplement and prior to
the termination of the offering of the Bonds shall be deemed to be incorporated
by reference into this prospectus supplement and to be a part thereof.
The depositor on behalf of the Bond Issuer undertakes that, for the
purposes of determining any liability under the Securities Act of 1933, each
filing of the Bond Issuer's annual report and the financial statements of
Financial Security Assurance Inc. pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement (referred to in the accompanying prospectus) shall be
deemed to be a new registration statement relating to the Bonds offered hereby,
and the offering of such Bonds at that time shall be deemed to be the initial
bona fide offering thereof.
Neither the depositor, the master servicer, any servicer nor any trustee
intend to file with the SEC periodic reports with respect to the Bond Issuer
following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Securities Exchange Act of 1934. However, the Bond
Issuer may elect to continue reporting in its sole discretion.
S-3
<PAGE> 4
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................. S-5
Risk Factors........................ S-15
Overview of the Transaction......... S-20
The Mortgage Pools.................. S-22
Servicing of the Mortgage Loans..... S-40
The Bond Issuer..................... S-54
The Depositor....................... S-55
The Seller.......................... S-55
Description of the Bonds............ S-55
The Insurance Policy................ S-77
The Bond Insurer.................... S-79
Certain Prepayment and Yield
Considerations.................... S-82
Use of Proceeds..................... S-91
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Federal Income Tax
Considerations.................... S-91
State Tax Considerations............ S-93
ERISA Considerations................ S-93
Legal Investment Considerations..... S-95
Underwriting........................ S-95
Experts............................. S-96
Legal Matters....................... S-96
Ratings............................. S-97
Index of Certain Definitions........ S-98
ANNEX A............................. A-1
Global Clearance, Settlement and
Tax Documentation Procedures... A-1
</TABLE>
S-4
<PAGE> 5
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 BONDS, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THE PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS. WE REFER
YOU TO "INDEX OF CERTAIN DEFINITIONS" ON PAGE S-98 OF THIS PROSPECTUS SUPPLEMENT
AND PAGE 120 OF THE PROSPECTUS FOR THE LOCATION OF THE DEFINITIONS OF CERTAIN
CAPITALIZED TERMS.
PARTIES
THE BOND ISSUER
The bond issuer, American Residential Eagle Bond Trust 1999-2, is a
statutory business trust established under the laws of the State of Delaware by
a deposit trust agreement for the sole purpose of issuing the Bonds and the
investor certificate, as described below.
See "The Bond Issuer" in this Prospectus Supplement.
THE SELLER
American Residential Investment Trust, Inc. ("AmREIT"), a Maryland
corporation operating as a real estate investment trust. The seller acquired the
mortgage loans from the originators, primarily Countrywide Home Loans, Inc. and
Option One Mortgage Corporation.
See "The Seller" in this Prospectus Supplement.
THE DEPOSITOR
On the closing date of this transaction, American Residential Eagle, Inc.,
a Delaware corporation and wholly owned subsidiary of AmREIT, will acquire the
mortgage loans from AmREIT. It will, in turn, convey all of its interest in the
mortgage loans to the bond issuer. The depositor is the settlor and, as sole
holder of the investor certificate described below, the sole beneficial owner of
the bond issuer.
See "The Depositor" in this Prospectus Supplement.
THE OWNER TRUSTEE
Wilmington Trust Company, a Delaware banking corporation, will act as the
owner trustee of the bond issuer.
THE MASTER SERVICER
The mortgage loans will be master serviced by Norwest Bank Minnesota,
National Association. As master servicer, it will monitor the servicing of the
mortgage loans by the primary servicers and perform certain collection and
bondholder reporting functions under a master servicing agreement. If a servicer
fails to fulfill its obligations under the related servicing agreement, the
master servicer is obligated to terminate such servicer and appoint a successor
servicer.
See "Servicing of the Mortgage Loans" in this Prospectus Supplement.
THE SERVICERS
Countrywide Home Loans, Inc. and Option One Mortgage Corporation will each
act as the primary servicer of the mortgage loans initially originated by them
and held by the bond issuer as trust assets.
See "Servicing of the Mortgage Loans" in this Prospectus Supplement.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, will act as indenture trustee
on behalf of the bondholders pursuant to an indenture between itself and the
bond issuer.
See "Description of the Bonds -- The Indenture Trustee" in this Prospectus
Supplement.
S-5
<PAGE> 6
THE MANAGER
AmREIT, Inc. will perform certain administrative and ministerial duties for
the bond issuer required under the indenture and master servicing agreement.
THE BOND INSURER
Each class of Bonds will be covered by a financial guaranty insurance
policy issued by Financial Security Assurance Inc., a New York stock insurance
company. The policy will guarantee the payment of scheduled interest and
ultimate payment of principal of each class.
See "The Bond Insurer" in this Prospectus Supplement.
THE BONDS
GENERAL
The trust will issue its mortgage-backed bonds, designated as the "American
Residential Eagle Bond Trust 1999-2, Collateralized Home Equity Bonds, Series
1999-2". There will be two classes of Bonds: the Class A-1 Bonds and the Class
A-2 Bonds. The initial principal amount of the Class A-1 Bonds will be
approximately $332,350,000 and of the Class A-2 Bonds will be approximately
$61,750,000. The initial principal balance of each class, as indicated above, is
subject to a variance of plus or minus 5%.
SECURITY FOR THE BONDS
The Bonds will be backed solely by a pledge of the assets of the trust. The
assets of the trust will consist of:
(i) two separate pools of mortgage loans secured by first liens on one-to
four- family residential properties and with original terms to maturity of not
more than 30 years: "pool 1" consisting solely of adjustable rate mortgage loans
and "pool 2" consisting solely of fixed rate mortgage loans;
(ii) principal and interest payments (but not including prepayment charges)
on the mortgage loans due after a July 1, 1999 cut-off-date;
(iii) a security interest in the related underlying residential property
(and in certain hazard insurance policies covering the property);
(iv) amounts on deposit in certain accounts described in this prospectus
supplement;
(v) the trust's rights under a mortgage loan purchase agreement and master
servicing agreement;
(vi) a primary mortgage insurance policy covering substantially all those
mortgage loans in either mortgage pool with loan-to-value ratios in excess of
80%; and
(vii) certain other property.
In addition, the bondholders of each class of Bonds will have the benefit
of a financial guaranty insurance policy to be issued by Financial Security
Assurance Inc.
See "The Bond Issuer," "Description of the Bonds -- General" and "The
Insurance Policy" in this Prospectus Supplement.
STATED MATURITY OF THE BONDS
The stated maturity date for both classes of Bonds, on which the final
payment of principal must ultimately be made, is July 25, 2029, which is the
payment date that coincides with the month in which the last maturity date of
any mortgage loan conveyed to the trust is scheduled to occur. The depositor
anticipates, however, that the actual final payment of principal on the Bonds
will occur significantly earlier.
See "Certain Prepayment and Yield Considerations" in this Prospectus
Supplement.
REGISTRATION OF THE BONDS
The trust will issue the Bonds in book-entry form in minimum denominations
of $50,000 and multiples of $1 in excess thereof. You will hold your interests
in the Bonds either through The Depository Trust Company in the United States or
through Cedelbank or the Euroclear system in Europe. For as long as the Bonds
are in book-entry form, they will be
S-6
<PAGE> 7
registered in the name of the applicable depository, or in the name of the
depository's nominee. The limited circumstances under which definitive
certificated Bonds will replace book-entry Bonds are described in this
prospectus supplement.
See "Description of the Bonds -- Book-Entry Registration and Definitive
Bonds" in this Prospectus Supplement.
PAYMENT ON THE BONDS
CUT-OFF DATE
The close of business on July 1, 1999.
CLOSING DATE
On or about August 5, 1999.
PAYMENT DATES
Principal and interest is scheduled to be paid to the bondholders on the
25th day of each month, or, if such day is not a business day, on the following
business day, commencing on September 27, 1999.
RECORD DATES
The indenture trustee will make payments to the bondholders of record
determined, in the case of the Class A-1 Bonds, as of the last business day
immediately prior to the payment date and, in the case of the Class A2 Bonds
(or, in the event Bonds are issued in definitive form), the last day of the
calendar month immediately prior to the payment date.
DUE PERIODS AND COLLECTION PERIODS
Generally, payments made to bondholders on each payment date will relate to
collections of principal and interest received on the mortgage loans in the
related mortgage pool in the due period with respect to all scheduled
collections of principal and interest, or the collection period, with respect to
all unscheduled collections. The "due period" commences on the second day of the
calendar month immediately before the month in which the related payment date
occurs (or, in the case of the first payment date, on July 2, 1999) and ends on
the first day of the month in which the related payment date occurs. The
"collection period" is the calendar month before the calendar month in which the
related payment date occurs.
FUNDS AVAILABLE FOR PAYMENT OF INTEREST AND PRINCIPAL
The following funds will generally be available for payment of interest and
principal on a class of Bonds:
- - scheduled collections on the mortgage loans in the related mortgage pool
received during the related due period, net of (i) servicing fees, (ii)
reimbursement of previous advances made by a primary servicer or the master
servicer in respect of delinquent payments of interest on the mortgage loans
in the related mortgage pool, (iii) reimbursement of previous protective
advances made by a primary servicer or the master servicer in respect of real
estate taxes, assessments, insurance premiums and other costs and expenses to
preserve the priority of the mortgage loans in the related mortgage pool, and
(iv) other transactional expenses including, without limitation, premiums on
insurance policies and fees and expenses of the indenture trustee, the owner
trustee, the master servicer and the manager;
- - unscheduled collections on the mortgage loans in the related mortgage pool
received during the related collection period including, among other items,
(i) partial and full prepayments, (ii) net proceeds from insurance policies
covering a mortgaged property in the related mortgage pool and (iii) any other
proceeds, net of expenses, received in connection with a defaulted mortgage
loan, as a result of the sale, foreclosure, condemnation or other disposition
of the related mortgaged property;
- - any advances made by the a primary servicer or the master servicer in respect
of delinquent payments of interest or principal on the mortgage loans in the
related mortgage pool for the related due period;
- - interest payments made by a primary servicer or the master servicer to
compensate the
S-7
<PAGE> 8
bondholders in part for any shortfall in interest payments on the Bonds caused
by a mortgagor prepaying a mortgage loan in the related mortgage pool in whole
or in part during the related collection period;
- - any amounts resulting from the repurchase, release, removal or substitution of
a mortgage loan in the related mortgage pool during the related collection
period;
- - as described herein, excess amounts available from the other pool of mortgage
loans; and
- - in the event that the Bonds are redeemed in the manner described herein,
amounts deposited in the Bond payment account (as described herein) in
connection with such redemption.
See "Description of the Bonds -- Payment on the Bonds" in this Prospectus
Supplement.
INTEREST PAYMENTS
Calculation of the Class A-1 Bond Interest Rate. The interest rate for the
Class A-1 Bonds on each payment date up to and including the payment date on
which the trust is first permitted to redeem the Bonds (see "-- Redemption of
the Bonds" below) will be equal to the lesser of (i) a per annum floating rate
equal to one-month LIBOR for the related interest accrual period plus 0.34% and
(ii) 15.00% per annum. Thereafter, if the trust does not exercise its optional
redemption rights when first permitted to do so, the Class A-1 Bond interest
rate will be equal to the lesser of (i) a per annum floating rate equal to one-
month LIBOR for the related interest accrual period plus 0.68% and (ii) 15.00%
per annum. One-month LIBOR for each interest accrual period will be determined
by the indenture trustee according to the formula described in this prospectus
supplement. For the Class A-1 Bonds, an interest accrual period will be the
period commencing on the prior payment date (or in the case of the first payment
date, beginning on the closing date) and ending on the day immediately preceding
such payment date. The indenture trustee will calculate interest on the Class
A-1 Bonds based upon the actual number of days in the interest accrual period
and a year assumed to consist of 360 days.
Overall Limitation on the Class A-1 Bond Interest Rate. Because all of the
adjustable rate mortgage loans securing payment of the Class A-1 Bonds have
interest rates (i) which adjust based on changes in the six-month LIBOR index
and, therefore, less frequently than the Class A-1 Bond interest rate which
adjusts monthly based on one-month LIBOR, (ii) have delayed adjustment dates
ranging from two to three years after their origination date, and (iii) are
subject to limitations on periodic interest rate increases and maximum interest
rates over the life of the loan which may be less than one-month LIBOR, the
amount of interest collections on the mortgage loans in pool 1 for the related
interest accrual period may be less than interest accrued on the Class A-1 Bonds
at the interest rate as calculated above. In addition, a higher than expected
rate of prepayment of mortgage loans in pool 1 with relatively higher mortgage
rates would contribute to this shortfall. For the above reasons, as an overall
limitation on the Class A-1 Bond interest rate, if as of any payment date the
Class A-1 Bond interest rate as calculated above exceeds the weighted average
net mortgage rate (calculated as described in this prospectus supplement) of the
pool 1 mortgage loans for the related due period, then the Class A-1 Bond
interest rate for the related interest accrual period will be limited to such
weighted average net mortgage rate for pool 1.
Calculation of the Class A-2 Bond Interest Rate. The interest rate for the
Class A-2 Bonds will initially be 7.09% per annum and will increase to 7.59% per
annum after the payment date on which the bond issuer is first permitted to
exercise its optional redemption rights as described at "-- Redemption of the
Bonds" below. However, because a higher than expected rate of prepayment of
mortgage loans in pool 2 with relatively higher Mortgage Rates could result in
interest collections on the mortgage loans in pool 2 for the related interest
accrual period being less than interest accrued on the Class A-2 Bonds at the
stated fixed interest rate above, as an overall limitation, the
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<PAGE> 9
Class A-2 Bond interest rate may never exceed the weighted average net mortgage
rate (calculated as described in this prospectus supplement) of the pool 2
mortgage loans for the related due period. Generally, the interest accrual
period for the Class A-2 Bonds will be the calendar month preceding a payment
date. Interest on the Class A-2 Bonds will be calculated on the basis of a year
of 360 days and twelve 30 day months.
See "Description of the Bonds -- Bond Interest Rate" in this Prospectus
Supplement.
PRINCIPAL PAYMENTS
On each payment date, to the extent that funds are available, you will be
entitled to payments of principal as described in this prospectus supplement.
The maximum amount of payment of principal to a class of Bonds on any payment
date will generally be equal to the sum of:
- - all scheduled payments of principal made on the mortgage loans of the related
pool and all unscheduled payments of principal collected, received or
otherwise recovered on the mortgage loans of the related pool as described
above under "-- Funds Available for Payment of Interest and Principal";
- - plus, the amount of any excess receipts of interest required to be distributed
as principal to satisfy the required level of over-collateralization with
respect to such class. This will increase the difference between the principal
balance of the class and the principal balance of the mortgage loans in the
related mortgage pool, thereby increasing the level of over-collateralization
with respect to such class; and
- - minus, the amount, if any, necessary to reduce the required level of
over-collateralization with respect to such class. This will reduce the
difference between the principal balance of the class and the principal
balance of the mortgage loans in the related mortgage pool, thereby decreasing
the level of over-collateralization.
Shortfalls in collections on the mortgage loans in the related mortgage pool
(which are not otherwise covered by collections on the mortgage loans in the
other pool through the limited cross-collateralization feature described below)
and the failure of the bond insurer to perform its obligations under the
insurance policy may result in bondholders receiving less principal than what is
owed to them.
See "Description of the Bonds -- Payment on the Bonds -- Priority of
Payments" in this Prospectus Supplement.
MONTHLY ADVANCES
The servicers will be required to make monthly advances in respect of real
estate taxes, assessments, insurance premiums and other reasonable costs and
expenses associated with pursuing judicial proceedings relating to the mortgages
and managing and liquidating the mortgaged properties. The servicers will also
be required to make advances with respect to delinquent monthly payments of
principal and interest (net of related servicing fees) on the mortgage loans
they service. A servicer is required to make such advances, however, only if it
believes it can recover the advance from later proceeds or collections on the
related mortgage loan. Each servicer may recover both types of advances
described above out of other amounts such servicer may collect with respect to
the mortgage loans it services.
The master servicer will be required to make monthly advances with respect
to delinquent payments of principal and interest on the mortgage loans only if
the related servicer fails to make such advance and only if it believes it can
recover such advance from later proceeds or collections on the related mortgage
loan. The master servicer will be entitled to reimburse itself for any such
advances from future payments and collections (including insurance payments or
liquidation proceeds) with respect to the mortgage loans. If either the
servicers or the master servicer make advances which are nonrecoverable from
future payments and collections, they will be entitled to reimbursement for such
advances prior to any payments to bondholders.
S-9
<PAGE> 10
See "Risk Factors" and "Servicing of the Mortgage Loans -- Advances" in
this Prospectus Supplement.
PREPAYMENT INTEREST SHORTFALLS
Each servicer will also make interest payments to compensate in part for
any shortfall in interest payments on the Bonds which result from a mortgagor
prepaying a mortgage loan in whole or in part, but only to the extent that such
amounts do not exceed the aggregate of the servicing fees on the mortgage loans
serviced by it for the applicable payment date. However, the servicers will not
be obligated to pay any amounts due to the application of the Soldier's and
Sailor's Relief Act of 1940. The financial guaranty insurance policy does not
cover shortfalls in interest arising from prepayments.
See "Servicing of the Mortgage Loans -- Prepayment Interest Shortfalls" in
this Prospectus Supplement.
REDEMPTION OF THE BONDS
The bond issuer, at the direction of the holder of the investor certificate
in the trust, will have the option to redeem all, but not less than all, the
Bonds on any payment date after which the aggregate outstanding principal
balance of the mortgage loans is 20% or less of the aggregate principal balance
of the mortgage loans as of the July 1, 1999 Cut-off Date (determined in
aggregate rather than by pool).
The redemption price generally must equal 100% of the unpaid principal
balance of the Bonds, plus (i) accrued and unpaid interest thereon at the
applicable Bond interest rate, (ii) any unpaid interest carryover amounts on the
Class A-1 Bonds due to the available funds limitation on LIBOR as described
above, (iii) any unreimbursed servicing fees and advances owed to the master
servicer or the servicers and (iv) any amounts owed to the bond insurer, the
indenture trustee and the owner trustee. If the trust does not exercise its
mandatory redemption rights on the payment date on which it is first permitted
to do so, on such payment date and all succeeding payment dates the applicable
Bond interest rate will increase as described at "-- Interest
Payments -- Calculations of the Class A-1 Bond Interest Rate" and
"-- Calculation of the Class A-2 Bond Interest Rate" above. However, in either
case, the Bond interest rate will be limited to the available funds limitations
described above at "-- Interest Payments."
See "Description of the Bonds -- Redemption of the Bonds" in this
Prospectus Supplement.
TERMINATION OF THE MORTGAGE POOLS
After the payment date upon which the aggregate outstanding principal
balance of the mortgage loans (on an aggregate rather than a pool-by-pool basis)
is equal to 10% or less of the aggregate principal balance of the mortgage loans
as of the July 1, 1999 Cut-off Date, the indenture trustee will solicit bids to
purchase the remaining mortgage loans at their market value.
The indenture trustee, with the prior consent of the bond insurer, will
sell the mortgage loans only if (i) the indenture trustee receives at least
three bids on the mortgage loans, (ii) the highest bid is equal to or greater
than the fair market value of the mortgage loans and (iii) the highest bid, when
added to any amounts available on such payment date, equals or exceeds the sum
of (a) all interest due on the Bonds (including any unpaid interest carryover
amounts on the Class A-1 Bonds due to the available funds limitation on LIBOR as
described above), (b) the aggregate remaining Bond balance, and (c) any accrued
and unpaid amounts due to the bond insurer, the master servicer, the servicers,
the indenture trustee and the owner trustee, and (d) the indenture trustee
receives an opinion of counsel stating that the sale will not result in adverse
tax consequences to the issuer, the bondholders and the tax characterization of
the trust. Any such proposed purchase of the mortgage loans by the highest
bidder will be subject to the right of first refusal of the depositor (or the
master servicer or the servicers, if the depositor does not exercise its first
refusal right) to purchase the mortgage loans at such bid price.
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If the indenture trustee sells the mortgage loans, the proceeds of the sale
will be used to redeem the Bonds in full, and any excess (after payment of the
amounts described in clause (c) above) will be distributed to the holder of the
investor certificate. See "-- Investor Certificate" herein. The indenture
trustee will solicit bids on a quarterly basis if the requirements for a sale
listed above are not met.
See "Description of the Bonds -- Termination of the Trust" in this
Prospectus Supplement.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement is designed to protect bondholders from shortfalls in
collections received and losses incurred on the mortgage loans. The credit
enhancement available to bondholders will consist of (a) excess cash, (b)
over-collateralization, (c) cross-collateralization and (d) the insurance policy
issued by Financial Security Assurance Inc., the bond insurer, with respect to
each class of Bonds.
EXCESS CASH
Generally, the payments of interest and principal on the mortgage loans in
each pool are expected to exceed trust expenses (i.e., fees to the servicers,
the trustees, the managers and insurance premiums relating or allocable to such
pool) and the payments of monthly interest and principal to the bondholders with
respect to a class of Bonds. As needed, such excess cash will be applied to
absorb losses with respect to either class of Bonds and to pay down the Bond
balance of the related class of Bonds in order to maintain the required level of
over-collateralization. After reaching the required level of
over-collateralization, any excess cash remaining after payment of the related
class of Bonds and payment to the bond insurer will be released to the holder of
the investor certificate and will not be available for any subsequent payments
to the bondholders or the bond insurer.
OVER-COLLATERALIZATION
Credit support for the Bonds will be provided through limited
over-collateralization, i.e., the pledge of mortgage loans to a mortgage pool by
the bond issuer having an aggregate stated principal balance in excess of the
principal balance of the related class of Bonds. The purpose of
over-collateralization is to ensure that there are excess funds available to pay
interest and principal on the Bonds so that bondholders will have some
protection against payment shortfalls and so that the Bond balances will be
reduced to zero no later than the date the Bonds are scheduled to mature. After
the closing date, the indenture trustee will make principal payments with
respect to each class of Bonds on each payment date, to the extent of excess
funds available therefor, in an amount up to the amount necessary to achieve or
maintain over-collateralization at specified levels with respect to such class.
Once a required level of over-collateralization is reached on a class of Bonds,
the application of excess funds to pay down principal on such class will cease,
until such application is again needed to maintain the required level of
over-collateralization.
The required amount of over-collateralization is based on certain minimum
and maximum levels of over-collateralization and on the performance of the
mortgage loans in the related mortgage pool. As a result, the level of required
over-collateralization will increase and decrease over time. An increase in the
required level of over-collateralization with respect to a class of Bonds will
result if the delinquency or default experience on the mortgage loans in the
aggregate exceeds certain specified levels or if certain other triggers
specified by the bond insurance documents are met. In that event, payment of
principal on the related class of Bonds would be accelerated until the level of
over-collateralization for such class reached its required level.
See "Description of the Bonds -- Over-collateralization" in this Prospectus
Supplement.
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CROSS-COLLATERALIZATION
Amounts available, including excess cash (as described above) collected
with respect to one mortgage pool may, under certain circumstances, be used to
fund interest shortfalls and over-collateralization deficits with respect to the
class of Bonds related to the other mortgage pool, to reimburse the bond insurer
and to fund the reserve fund as described herein.
See "Description of the Bonds -- Priority of Payments" and
"-- Cross-collateralization" in this Prospectus Supplement.
THE INSURANCE POLICY
General. Financial Security Assurance Inc. will issue a financial guaranty
insurance policy with respect to each class of Bonds to the indenture trustee
for the benefit of bondholders. Such party will unconditionally guarantee the
payment, to the extent not covered by principal and interest collections, of:
- - accrued and unpaid interest due on the related class of Bonds;
- - principal losses on the related pool mortgage loans, to the extent not covered
by over-collateralization or cross-collateralization;
- - any principal amount still owing to bondholders on the maturity date of the
Bonds; and
- - any amounts previously distributed on the related class of Bonds to
bondholders that are recoverable and sought to be recovered as a voidable
preference payment by a bankruptcy court.
Payments Not Insured by the Insurance Policy. The insurance policy WILL
NOT insure the payment of the following:
- - any shortfall arising because the trust or the indenture trustee incurred
liability for withholding taxes;
- - any shortfall in interest as a result of prepayments on the mortgage loans in
the related mortgage pool;
- - shortfalls in interest due to the application of the Soldier's and Sailors'
Relief Act of 1940, as amended;
- - shortfalls in monthly interest payments on the Bonds due to the applicability
of the available funds limitation on the Bond interest rate; and
- - any shortfalls created when the liquidation of a mortgaged property in the
related mortgage pool yields less than the principal amount owed on the loan,
except to the extent that such shortfall is not covered by
over-collateralization or cross-collateralization.
See "The Insurance Policy" in this Prospectus Supplement.
MORTGAGE LOAN POOLS
STATISTICAL INFORMATION
The statistical information on the mortgage loans presented in this
prospectus supplement is based on two pools of mortgage loans as of the close of
business on June 30, 1999. Such information does not take into account
amortization, defaults, delinquencies and prepayments that may have occurred
with respect to the mortgage loans after such date, as well as any deletions of
mortgage loans due to failure to meet the eligibility requirements for inclusion
in their respective mortgage pools (or possible substitutions of loans as a
result thereof). As a result, the statistical distribution of the
characteristics in a final mortgage pool as of the July 1, 1999 Cut-off Date and
as of the closing date, will vary as presented in this prospectus supplement,
although such variance is not expected to be material.
MORTGAGE LOAN DATA
As of the close of business on June 30, 1999, there were 3,097 mortgage
loans in pool 1 having an aggregate principal balance of approximately
$345,651,778 and 866 mortgage loans in pool 2 having an aggregate principal
balance of approximately $67,356,415. All of the mortgage loans in either
mortgage pool are secured by first liens on one- to four-family residential
properties. All of the mortgage loans in pool 1 are adjustable rate mortgage
loans. All
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of the mortgage loans in pool 2 are fixed rate mortgage loans.
A. POOL 1: ADJUSTABLE RATE MORTGAGE LOANS:
<TABLE>
<S> <C>
Number of Loans...... 3,097
Principal Balance:
Aggregate Principal
Balance............ $345,651,778
Range of Principal
Balances........... $9,992 to
$695,619
Average Principal
Balance............ $111,609
Interest Rate:
Range of Interest
Rates.............. 5.750% to 14.200%
Weighted Average
Interest Rate...... 9.502%
Range of Gross
Margins............ 4.000% to 10.125%
Weighted Average
Gross Margin....... 5.816%
Range of Maximum
Rates.............. 8.380% to
21.050%
Weighted Average
Maximum Rate....... 15.886%
Range of Minimum
Rates.............. 5.750% to 14.200%
Weighted Average
Minimum Rate....... 9.502%
Loan to Value Ratios:
Range of LTVs........ 7.89% to 100.00%
Weighted Average
LTV................ 77.73%
Terms to Maturity (in
months):
Range of Original
Terms to
Maturity........... 180 to 360
Weighted Average
Original Term to
Maturity........... 360
Range of Remaining
Terms to
Maturity........... 179 to 359
Weighted Average
Remaining Term to
Maturity........... 358
</TABLE>
B. POOL 2: FIXED RATE MORTGAGE LOANS:
<TABLE>
<S> <C>
Number of Loans.......... 866
Principal Balance:
Aggregate Principal
Balance................ $67,356,415
Range of Principal
Balances............... $9,892 to
$569,107
Average Principal
Balance................ $77,779
Interest Rate:
Range of Interest
Rates.................. 6.500% to
15.000%
Weighted Average Interest
Rate................... 9.729%
Loan to Value Ratios:
Range of LTVs............ 12.20% to 90.00%
Weighted Average LTV..... 73.21%
Terms to Maturity (in
months):
Range of Original Terms
to Stated Maturity..... 120 to 360
Weighted Average Original
Term to Stated
Maturity............... 295
Range of Original Terms
to Amortization........ 120 to 360
Weighted Average Original
Term to Amortization... 303
Range of Remaining Terms
to Stated Maturity..... 110 to 359
Weighted Average
Remaining Term to
Stated Maturity........ 293
Range of Remaining Terms
to Amortization........ 110 to 359
Weighted Average
Remaining Term to
Amortization........... 301
</TABLE>
See "The Mortgage Pools" in this Prospectus Supplement.
INVESTOR CERTIFICATE
On the same day as the issue date of the Bonds, the trust will also issue
an investor certificate or residual interest which represents an ownership
interest in the mortgage loans and other assets of the trust, but which is
subordinate in priority to payment of the Bonds. American Residential Eagle,
Inc., the depositor, will retain the investor certificate. The investor
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certificate is not offered by this prospectus supplement and the accompanying
prospectus.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Jeffers, Wilson, Shaff & Falk, LLP, special tax counsel
to the depositor, the Bonds will be characterized as debt for federal income tax
purposes and the trust will not be characterized as an association (or a
publicly traded partnership) taxable as a corporation or as a taxable mortgage
pool. The bond issuer and the depositor agree and each bondholder, by acceptance
of a Bond, will agree to treat the Bonds as indebtedness for federal, state and
local income tax and franchise tax purposes.
See "Certain Federal Income Tax Considerations" in this Prospectus
Supplement.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations"
herein, the Bonds may be acquired and held by employee benefit plans and other
retirement plans and arrangements subject to the provisions of The Employee
Retirement Income Security Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code of 1986, as amended.
See "ERISA Considerations" in this Prospectus Supplement.
LEGAL INVESTMENT CONSIDERATIONS
The Bonds will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended. There may be
other restrictions on the ability of certain types of investors to purchase the
Bonds that investors should consider.
See "Legal Investment Considerations" in this Prospectus Supplement.
RATING OF THE BONDS
Before the trust can issue the Bonds, each class of Bonds must receive a
rating of "AAA" from Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and a rating of "Aaa" from Moody's Investors Service, Inc. Such ratings
are primarily based upon the creditworthiness of the bond insurer, Financial
Security Assurance Inc.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. A security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to investors. In addition, a
security rating does not address the likelihood of payment of any interest
shortfall to the investors caused by the applicability of the available funds
limitation on the Bond interest rate.
See "Ratings" in this Prospectus Supplement.
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RISK FACTORS
Prospective investors in the Bonds should consider the following risk
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Bonds. Any statistical
information presented below is based upon the characteristics of the mortgage
loans as of the close of business on June 30, 1999 (referred to herein as the
"Statistical Cut-off Date") and, accordingly, such information does not take
into account amortization, defaults, delinquencies, prepayments, deletions, and
substitutions that may have occurred with respect to the mortgage loans in
either mortgage pool since such date.
THE BONDS ARE NOT A SUITABLE INVESTMENT FOR ALL INVESTORS.
The Bonds are not suitable investments for any investor that requires a
regular or predictable schedule of payments or payments on a specific date. The
Bonds are complex investments that should be considered only by investors who,
either alone or with their financial, tax and legal advisors, have the expertise
to analyze the prepayment, reinvestment default and market risk, the tax
consequences of an investment, and the interaction of these factors.
AS A RESULT OF THE UNDERWRITING STANDARDS, THE MORTGAGE LOANS ARE LIKELY TO
EXPERIENCE HIGHER RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY THAN THOSE
UNDERWRITTEN IN A MORE TRADITIONAL MANNER.
Substantially all of mortgage loans included in the mortgage pools were
originated either by Countrywide Home Loans, Inc. or Option One Mortgage
Corporation and purchased by AmREIT either directly from such originators or in
the secondary market. Although the underwriting criteria applied by such
originators varies, a significant consideration in underwriting a mortgage loan
under their respective underwriting guidelines is not only to assess the credit
profile of the prospective borrower, but also the value of the related mortgaged
property and the adequacy of such property as collateral for a mortgage loan.
Such mortgage loans were made primarily to borrowers whose income and credit
history at the time did not qualify for loans under the more stringent
underwriting standards applied by other mortgage loan purchase programs such as
those run by Fannie Mae and Freddie Mac, but who, nevertheless, had equity in
their property. For example, the mortgage loans may have been made to mortgagors
having imperfect credit histories, ranging from minor delinquencies to
bankruptcies, or mortgagors with higher ratios of monthly mortgage payments to
income or higher ratios of total monthly credit payments to income.
Given the profile of the borrowers as described above, the mortgage loans
are likely to experience rates of delinquency, foreclosure and bankruptcy that
are higher, and that may be substantially higher, than those experienced by
mortgage loans underwritten in a more traditional manner. Furthermore, changes
in the values of mortgaged properties may have a greater effect on the
delinquency, foreclosure, bankruptcy and loss experience of the mortgage loans
in either mortgage pool than on mortgage loans originated under stricter
guidelines. There also can be no certainty that the values of the underlying
mortgaged properties have remained or will remain at the levels in effect on the
dates the related mortgage loans were originated.
THE RATE OF PREPAYMENT ON THE MORTGAGE LOANS OR THE MOVEMENT OF ONE-MONTH LIBOR
IN RELATION TO THE MORTGAGE RATES ON THE POOL 1 MORTGAGE LOANS MAY ADVERSELY
AFFECT THE AMOUNT OF INTEREST PAID ON THE RELATED BONDS.
The calculation of the Class A-1 Bond interest rate is based primarily upon
the value of one-month LIBOR, but subject to a maximum rate based upon the
weighted average of the mortgage rates (net of servicing fees, administrative
fees, other transactional expenses and a minimum spread as described herein) of
the mortgage loans included in pool 1. The Class A-2 Bond interest rate will
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initially be a fixed rate of 7.09% per annum, but is also subject to a maximum
rate based upon the weighted average of the mortgage rates of the mortgage loans
included in pool 2, similarly calculated. Thus, if the mortgage loans in either
mortgage pool with relatively higher mortgage rates prepay, the maximum interest
rate on the related class of Bonds will be lower than otherwise would be the
case.
It is highly unlikely that changes in the weighted average of the net
mortgage rates of the pool 1 mortgage loans will move in correlation with
changes in the value of one-month LIBOR. For example, the adjustable rate
mortgage loans in pool 1 adjust their interest rate at six-month intervals based
upon six-month LIBOR whereas the Class A-1 Bond interest rate is adjusted
monthly based upon one-month LIBOR as described under "Description of the Bonds"
herein. In addition, all of the adjustable rate mortgage loans in pool 1 have
delayed adjustment dates from two to three years after the origination date of
the loan and are subject to limitations on periodic interest rate increases and
maximum and minimum interest rates over the life of the mortgage loan,
irrespective of the movement of six-month LIBOR. Consequently, interest paid on
the Class A-1 Bonds on any payment date may not equal interest that would accrue
during the related due period at the Class A-1 Bond interest rate (without
giving effect to the available funds limitation thereon imposed by the weighted
average net mortgage rates on the mortgage loans in pool 1). Depending upon the
performance of the mortgage loans in pool 1, the relationship of the movement of
one-month LIBOR (as calculated for determining the Class A-1 Bond interest rate)
and six month LIBOR (as calculated for determining interest on the pool 1
mortgage loans), the available funds limitation may limit increases in the Class
A-1 Bond interest rate for extended periods in a rising interest rate
environment, thereby adversely affecting an investor's anticipated yield to
maturity of the Bonds.
PREPAYMENT OF THE MORTGAGE LOANS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF
THE BONDS.
The mortgage loans may be prepaid by the related mortgagors in whole or in
part, at any time. However, approximately 85.36% of the mortgage loans in pool 1
and approximately 87.48% of the mortgage loans in pool 2 by principal balance as
of the Statistical Cut-off Date require the payment of a fee in connection with
certain prepayments, which may discourage prepayments. Conversely, most of the
adjustable rate mortgage loans in pool 1 are likely to have higher prepayments
as they approach their first adjustment dates because borrowers may want to
avoid periodic changes to their monthly payment.
The rate of prepayments of the mortgage loans cannot be predicted and may
be affected by a wide variety of general economic, social, competitive and other
factors, including state and federal income tax policies, interest rates, the
availability of alternative financing and homeowner mobility. Therefore, no
assurance can be given as to the level of prepayments that the mortgage loans
will experience.
The average life of the Bonds, and, if purchased at other than par, the
yields realized by bondholders will be sensitive to levels of payment, including
prepayments, on the mortgage loans. In general, the yield on Bonds purchased at
a premium from the outstanding principal amount thereof will be adversely
affected by a higher than anticipated level of prepayments and enhanced by a
lower than anticipated level. Conversely, the yield on Bonds purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of prepayments and adversely affected by a lower
than anticipated level.
PAYMENTS OF EXCESS CASH MAY AFFECT THE YIELD TO MATURITY ON THE BONDS.
Excess cash with respect to a loss of Bonds will be paid to reduce the
outstanding principal balance of such class on any payment date if the level of
over-collateralization required at the time in question exceeds the actual level
of over-collateralization on such payment date. The rate at which excess cash is
paid to bondholders will affect the yield to maturity on a Bond, if purchased at
a
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premium or a discount. If the actual rate of such excess cash payments is slower
than the rate anticipated by an investor who purchases a Bond at a discount, the
actual yield to such investor will be lower than the investor's anticipated
yield. If the actual rate of excess cash payments is faster than the rate
anticipated by an investor who purchases a Bond at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield.
The amount of excess cash on any payment date depends on the actual amount
of interest collected on the mortgage loans during the related collection
period. Collections of interest on the mortgage loans will be influenced by
changes in the weighted average of the mortgage rates on the mortgage loans
resulting from prepayments and liquidations of such mortgage loans in such pool
as well as, in the case of pool 1, adjustments of mortgage rates on the
adjustable rate mortgage loans included in such pool. The amount of excess cash
payments paid to reduce the Bond balance of a class of Bonds on each payment
date will be based on the level of over-collateralization required at the time
in question. The required level of over-collateralization for such class may
increase or decrease over time. Any increase may result in an accelerated
amortization of such class of Bonds until the required level is reached. Any
decrease will result in slower amortization of such class until the required
level is reached.
THE BOND ISSUER'S EXERCISE OF ITS OPTION TO REDEEM THE BONDS MAY ADVERSELY
AFFECT THE YIELD TO MATURITY OF THE BONDS.
Investors in the Bonds should also consider what effect the bond issuer's
option to redeem the Bonds may have on such investor's anticipated yield to
maturity of the Bonds. Because the bond issuer's option to redeem the Bonds will
become exercisable when a substantial portion of the principal amount of the
Bonds will be outstanding, the bond issuer's decision whether or not to redeem
the Bonds may have a significant impact on a bondholder's yield. The bond
issuer's decision whether or not to redeem the Bonds will depend upon a number
of factors at the time the Bonds first become redeemable and thereafter, which
factors are impossible to predict at the time of issuance of the Bonds.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE BONDS.
The Bonds will be non-recourse obligations solely of the bond issuer and
will not represent an obligation of or interest in Financial Security Assurance
Inc., Countrywide Home Loan Inc., Option One Mortgage Corporation, Norwest Bank
Minnesota, National Association, Wilmington Trust Company, American Residential
Eagle, Inc., AmREIT or any of their respective affiliates, except as described
herein. The assets included in the trust and the payments under the insurance
policy will be the sole source of payments on the Bonds, and there will be no
recourse to Financial Security Assurance, Inc. (other than as provided in the
financial guaranty insurance policy), Countrywide Home Loan Inc., Option One
Mortgage Corporation, Norwest Bank Minnesota, National Association, Wilmington
Trust Company, American Residential Eagle, Inc. or AmREIT or any of their
respective affiliates, or any other entity, in the event that such assets or
payments are insufficient or otherwise unavailable to make all payments provided
for under the Bonds.
THE GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES
IN PARTICULAR REGIONS EXPERIENCING ECONOMIC DOWNTURNS.
Approximately 21.87% of the mortgage loans in pool 1 and 17.10% of the
mortgage loans in pool 2 (by principal balance as of the Statistical Cut-off
Date) are secured by mortgaged properties located in California, approximately
5.35% of the mortgage loans in pool 1 and 15.65% of the mortgage loans in pool 2
(by principal balance as of the Statistical Cut-off Date) are secured by
mortgaged properties located in Michigan, and approximately 4.93% of the
mortgage loans in pool 1 and 11.26% of the mortgage loans in pool 2 (by
principal balance as of the Statistical Cut-off Date)
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are secured by mortgaged properties located in Florida. In general, declines in
the residential real estate market in any such state may adversely affect the
values of the mortgaged properties securing such mortgage loans such that the
aggregate principal balance of such mortgage loans will equal or exceed the
value of such mortgaged properties. In addition, adverse economic conditions in
any such state (which may or may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
such mortgage loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses on such mortgage loans could be higher than those
currently experienced in the mortgage lending industry in general. Mortgaged
properties located in California may also be more susceptible to certain types
of hazards, such as wildfires and mudslides, and certain types of special
hazards not covered by insurance, such as earthquakes, while mortgaged
properties in Florida may be more susceptible to flood and hurricane damage,
than properties located in other parts of the country.
BALLOON LOANS IN POOL 2 PRESENT SPECIAL PAYMENT RISKS.
Balloon loans pose a special payment risk because the borrower must pay a
large lump sum payment of principal at the end of the loan term. If the borrower
is unable to pay the lump sum or refinance such amount, you will suffer a loss
if the collateral for such loan is insufficient, the other forms of credit
enhancement are insufficient to cover the loss and the insurer fails to perform
its obligations under the insurance policy. Approximately 4.48% of the mortgage
loans in pool 2 (by aggregate principal balance as of the Statistical Cut-off
Date) are balloon loans.
THERE MAY BE DELAYS IN RECEIPT OF LIQUIDATION PROCEEDS OR LIQUIDATION PROCEEDS
MAY BE LESS THAN THE RELATED MORTGAGE LOAN BALANCE.
Substantial delays may be encountered in connection with the liquidation of
delinquent mortgage loans. Further, liquidation expenses such as legal fees,
real estate taxes and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged property is
liquidated for an amount that is less than the balance of the mortgage loan and
expenses associated with the liquidation and preservation of the related
mortgaged property, you will incur a loss on your investment if the bond insurer
fails to perform its obligations under the insurance policy and the other form
of credit enhancements are insufficient to cover the loss.
THE BOND RATING IS BASED PRIMARILY ON THE FINANCIAL STRENGTH OF THE BOND
INSURER.
The ratings on the Bonds depend primarily on an assessment by the rating
agencies of the mortgage loans in each mortgage pool and upon the financial
strength of the bond insurer. Any reduction of the rating assigned to the
financial strength of the bond insurer may cause a corresponding reduction in
the ratings assigned to the Bonds. A reduction in the ratings assigned to the
Bonds will reduce the market value of the Bonds and may affect your ability to
sell them. In general, the ratings on your Bonds address credit risk, but do not
address the likelihood of prepayments.
PAYMENTS TO AND RIGHTS OF INVESTORS MAY BE ADVERSELY AFFECTED BY THE INSOLVENCY
OF AMREIT.
The sale of the mortgage loans from AmREIT, the seller, to American
Residential Eagle, Inc., the depositor, will be treated by the seller, the
depositor and the bond issuer as a sale of the mortgage loans. If the seller
were to become insolvent, a receiver or conservator for, or a creditor of, the
seller may argue that the transaction between the seller and the depositor was a
pledge of mortgage loans as security for a borrowing rather than a sale. Such an
attempt, even if unsuccessful, could result in delays in payments to you.
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CERTAIN SHORTFALLS ARE NOT COVERED BY THE SERVICERS, THE MASTER SERVICER OR THE
BOND INSURER.
The Soldiers' and Sailors' Civil Relief Act of 1940 permits certain
modifications to the payment terms for mortgage loans, including a reduction in
the amount of interest paid by the borrower, under certain circumstances.
Neither the primary servicers, master servicer nor the bond insurer will pay for
any interest shortfalls created by application of the Soldiers' and Sailors'
Civil Relief Act of 1940. In addition, the financial guaranty insurance policy
issued for either class of Bonds will not cover shortfalls in interest arising
from prepayments of the mortgage loans in the related mortgage pool in the event
that such shortfalls are not covered by the servicers' compensatory interest
payments for prepayment interest shortfalls.
INVESTORS MAY HAVE DIFFICULTY SELLING THEIR BONDS.
The Bonds will not be listed on any securities exchange. As a result, if
you wish to sell your Bonds, you will have to find a purchaser that is willing
to purchase your Bonds. The underwriters intend to make a secondary market for
the Bonds. The underwriters will do so by offering to buy the Bonds from
investors that wish to sell them. However, the underwriters will not be
obligated to make offers to buy the Bonds and may stop making offers at any
time. In addition, the prices offered, if any, may not reflect prices that other
potential purchasers, were they to be given the opportunity, would be willing to
pay. There have been times in the past where there have been very few buyers of
asset backed securities (i.e., there has been a lack of liquidity), and there
may be such times in the future. As a result, you may not be able to sell your
Bonds when you wish to do so or you may not be able to obtain the price you wish
to receive.
Issuance of the Bonds in book-entry form may also adversely affect the
liquidity of your Bonds in the secondary trading market because investors may be
unwilling to purchase Bonds for which they cannot obtain physical certificates.
Because transactions in the Bonds can only be effected through the Depository
Trust Company, Cedelbank, the Euroclear system, participating organizations,
indirect participants and certain banks, the ability of an investor having a
beneficial interest in the Bonds to pledge such Bond to persons or entities that
do not participate in the Depository Trust Company, Cedelbank or Euroclear
system, or otherwise to take actions in respect of such Bond, may be limited due
to a lack of a physical certificate representing such Bond.
Beneficial owners of book-entry Bonds may also experience some delay in
their receipt of payments of interest of and principal on the Bonds because such
payments will be forwarded by the indenture trustee to the Depository Trust
Company and the Depository Trust Company will credit such payments to the
accounts of its participants, which will thereafter credit them to the accounts
of beneficial owners either directly or indirectly through indirect
participants.
YOU WILL BEAR ALL REINVESTMENT RISK.
Asset backed securities, like the Bonds, usually produce more returns of
principal to investors when market interest rates fall below the interest rates
on the mortgage loans and produce less returns of principal when market interest
rates are above the interest rates on the mortgage loans. As a result, you are
likely to receive more money to reinvest at a time when other investments
generally are producing a lower yield than that on the Bonds, and are likely to
receive less money to reinvest when other investments generally are producing a
higher yield than that on the Bonds. You will bear the risk that the timing and
amount of distributions on your Bonds will prevent you from attaining your
desired yield.
YEAR 2000 ISSUE MAY ADVERSELY AFFECT THE DISTRIBUTIONS TO BONDHOLDERS.
As is the case with most companies using computers in their operations,
each of the servicers, the master servicer, the indenture trustee, the bond
insurer and The Depository Trust Company is
S-19
<PAGE> 20
faced with the task of completing its compliance goals in connection with the
year 2000 issue. The year 2000 issue is the result of prior computer programs
being written using two digits, rather than four digits, to define the
applicable year. Any of these parties' computer programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. Any such occurrence could result in major computer system failure
or miscalculations. Each of these parties is expected to be engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that the servicers, the master servicer, the
indenture trustee, the bond insurer, The Depository Trust Company or any of
their suppliers, customers, brokers or agents do not successfully achieve year
2000 compliance on a timely basis, the performance of their obligations under
the basic documents described herein could be materially adversely affected.
In July 1999, Congress approved legislation that would limit legal
liability for losses due to year 2000 computer-related errors. If signed by the
President and enacted into law, this legislation would, among other things,
protect borrowers from foreclosure if their residential mortgage loans become
delinquent because an actual year 2000 failure results in the inability to
accurately or timely process their mortgage payments.
This legislation is not intended to extinguish or otherwise affect a
borrower's payment obligations but would instead delay the enforcement of
obligations on an otherwise defaulted mortgage loan. Borrowers seeking
foreclosure protection under this legislation must provide timely written notice
and documentation of that failure to the servicer. Absent an extension from the
lender, borrowers will then have four weeks to make up late payments on their
loans. This legislation would not apply to mortgage loans for which a default
occurs before December 15, 1999, or for which an imminent default is foreseeable
before that date. Moreover, this legislation would not protect borrowers who
deliver notice of a year 2000 failure after March 15, 2000. Mortgage loans that
remain in default after the applicable grace period will be subject to
foreclosure or other enforcement.
If enacted, this legislation could delay the servicer's ability to
foreclose on some mortgages during the first quarter of the year 2000. These
delays could consequently affect the timing of payment on the Bonds.
OVERVIEW OF THE TRANSACTION
American Residential Eagle Bond Trust 1999-2 (the "Bond Issuer" or the
"Trust") is a Delaware statutory business trust created pursuant to a deposit
trust agreement (the "Trust Agreement"), dated as of July 1, 1999, by and
between American Residential Eagle, Inc. (the "Depositor"), a Delaware
corporation and wholly owned special purpose subsidiary of AmREIT, and
Wilmington Trust Company, a Delaware banking corporation (the "Owner Trustee").
The primary assets of the Trust will consist of two pools (each a "Mortgage
Pool") of mortgage loans (the "Mortgage Loans") with original terms to maturity
of not more than 30 years, secured by first liens on one-to four-family
residential properties (the "Mortgaged Properties"). The Mortgage Loans in one
pool ("Pool 1") will consist solely of Mortgage Loans with adjustable interest
rates (the "Adjustable Rate Mortgage Loans" or the "Pool 1 Mortgage Loans"),
while the Mortgage Loans in the other pool ("Pool 2") will consist solely of
Mortgage Loans with fixed interest rates (the "Fixed Rate Mortgage Loans" or the
"Pool 2 Mortgage Loans"). See "The Mortgage Pools."
Substantially all of the Mortgage Loans were initially acquired by AmREIT
(the "Seller") in the ordinary course of business directly from Countrywide Home
Loans, Inc. or Option One Mortgage Corporation (each, an "Originator" and
collectively, the "Originators") or in the secondary market.
S-20
<PAGE> 21
On the issuance date of the Bonds (the "Closing Date") or one day prior
thereto, the Seller will enter into a Mortgage Loan Purchase Agreement, dated as
of July 1, 1999 (the "Mortgage Loan Purchase Agreement"), with the Depositor,
pursuant to which the Seller will convey to the Depositor, without recourse, all
of its right, title and interest in the Mortgage Loans, together with all
principal and interest collections on or with respect to the Mortgage Loans due
(whether or not received) after July 1, 1999 (the "Cut-off Date"), exclusive of
principal and interest due or prior to the Cut-off Date.
Under the Mortgage Loan Purchase Agreement, the Seller will make certain
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Mortgage Loan Purchase
Agreement and certain characteristics of the Mortgage Loans and, subject to
certain limitations described below under "Description of the Bonds --
Assignment of the Mortgage Loans", the Seller will be obligated to purchase or
substitute a similar mortgage for any Mortgage Loan as to which there exists
deficient documentation or an uncured material breach of any such
representation, warranty or covenant. Pursuant to the Mortgage Loan Purchase
Agreement, on the Closing Date, the Depositor will, in turn, assign all of its
right, title and interest in the Mortgage Loans and under the Mortgage Loan
Purchase Agreement to the Bond Issuer in consideration of the Bond Issuer's
issuance to the order of the Depositor of its Collateralized Home Equity Bonds,
Series 1999-2, Class A-1 and Class A-2 (the "Bonds"), and a trust certificate
(the "Investor Certificate") representing an equity ownership interest in the
assets of the Trust. See "Descriptions of the Bonds -- Assignment of the
Mortgage Loans".
The Bonds will be issued pursuant to an Indenture (the "Indenture"), dated
as of July 1, 1999, by and between the Bond Issuer and Norwest Bank Minnesota,
National Association, as indenture trustee (the "Indenture Trustee"). Pursuant
to the Indenture, on the Closing Date, the Issuer will pledge, transfer and
assign, without recourse, to the Indenture Trustee, in trust for the benefit of
the holders of the Bonds (the "Bondholders"), all right, title and interest of
the Issuer in and to the Mortgage Loans (including collections received on or
with respect to the Mortgage Loans on or after the Cut-off Date but excluding
prepayment charges), all of its rights under the Mortgage Loan Purchase
Agreement (including the Seller's repurchase or substitution obligations as
described above) and all other assets pledged as collateral under the Indenture
as security for the payment of the Bonds (collectively, the "Trust Estate").
AmREIT will perform certain administrative and ministerial duties required under
the Master Servicing Agreement with respect to the Mortgage Loans and under the
Indenture with respect to the Bonds on behalf of the Bond Issuer pursuant to a
Management Agreement, dated as of July 1, 1999 (the "Management Agreement"),
between AmREIT and the Bond Issuer.
Countrywide Home Loans, Inc., a New York corporation, and Option One
Mortgage Corporation, a California corporation (each a "Servicer" and
collectively, the "Servicers"), will be responsible for the primary servicing of
the Mortgage Loans originated by them and held by the Bond Issuer under the
supervision of Norwest Bank Minnesota, National Association (the "Master
Servicer"), in accordance with the provisions of their respective servicing
agreements and a Master Servicing Agreement, dated as of July 1, 1999 by and
among the Bond Issuer, the Indenture Trustee and the Master Servicer. The
Servicers will be responsible for performing all servicing obligations with
respect to the Mortgage Loans, including, but not limited to, all collection,
reporting and advancing obligations. The Master Servicer will not be ultimately
responsible for the performance of the servicing activities of the Servicers,
except as described under "Servicing of the Mortgage Loans -- Monthly Advances".
If either Servicer fails to fulfill its obligations under its related servicing
agreement, the Master Servicer is obligated to terminate such Servicer and
appoint a successor servicer.
S-21
<PAGE> 22
The Depositor and AmREIT will enter into an underwriting agreement (the
"Underwriting Agreement") with Bear, Stearns & Co. Inc., Morgan Stanley & Co.
Incorporated and First Union Capital Markets Corp. (collectively, the
"Underwriters"), with respect to the offering and sale of the Bonds. See
"Underwriting" herein. In connection with such Underwriting Agreement, AmREIT
and the Depositor will indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "1933 Act").
It is a condition of issuance of the Bonds that they receive a rating of
"AAA" from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), and a rating of "Aaa" from Moody's Investors Service, Inc. ("Moody's"
and, together with S&P, the "Rating Agencies"). See "Ratings" herein.
The Depositor will apply the net proceeds received from the sale of the
Bonds by the Underwriters, as payment to the Seller of the purchase price of the
Mortgage Loans under the Mortgage Loan Purchase Agreement. The Depositor will
retain the Investor Certificate.
Each class of Bonds will have the benefit of an irrevocable and
unconditional financial guaranty insurance policy (the "Insurance Policy")
issued by Financial Security Assurance Inc., a New York stock insurance company
(the "Bond Insurer"). See "The Insurance Policy" and "The Bond Insurer" herein.
For purposes of the discussion that follows, the Mortgage Loan Purchase
Agreement, the Trust Agreement, the Indenture, the Master Servicing Agreement,
the Insurance Policy, the insurance and indemnification agreement (the
"Insurance Agreement") issued in connection with the Insurance Policies, the
Management Agreement and the Underwriting Agreement are collectively referred to
as the "Basic Documents".
THE MORTGAGE POOLS
GENERAL
The following is a summary description of certain characteristics of the
Mortgage Loans in the Mortgage Pools as of the Statistical Cut-off Date.
The information presented herein does not take into account any scheduled
amortization of the Mortgage Loans which will occur after the Statistical
Cut-off Date and prior to the Closing Date or any Mortgage Loans which have or
may prepay in full or have or may be removed because of incomplete documentation
or otherwise for the period from the Statistical Cut-off Date to the Closing
Date or other Mortgage Loans that may be substituted therefor. AS A RESULT, THE
INFORMATION REGARDING THE MORTGAGE LOANS SET FORTH HEREIN MAY VARY FROM
COMPARABLE INFORMATION BASED UPON THE ACTUAL COMPOSITION OF THE MORTGAGE POOLS
AT THE CLOSING DATE, ALTHOUGH SUCH VARIANCE WILL NOT BE MATERIAL. The final
composition of the Mortgage Pools will be filed as an exhibit to the final form
of Basic Documents filed on Form 8-K with the Commission following the Closing
Date.
WHENEVER REFERENCE IS MADE HEREIN TO A PERCENTAGE OF SOME OR ALL OF THE
MORTGAGE LOANS, UNLESS OTHERWISE SPECIFIED, SUCH PERCENTAGE IS DETERMINED ON THE
BASIS OF THE AGGREGATE PRINCIPAL BALANCE OF THE MORTGAGE LOANS AS OF THE
STATISTICAL CUT-OFF DATE (THE "STATISTICAL CUT-OFF DATE PRINCIPAL BALANCE").
The Mortgage Loans to be included in the Trust will consist, in the
aggregate, of approximately 3,097 Adjustable Rate Mortgage Loans and 866 Fixed
Rate Mortgage Loans with a Statistical Cut-off Date Principal Balance of
approximately $345,651,778 and $67,356,415, respectively. The Mortgage Loans
have been originated using underwriting standards that are significantly less
stringent than the underwriting standards applied by other mortgage loan
purchase programs such as those
S-22
<PAGE> 23
administered by Fannie Mae or by Freddie Mac. See "Servicing of the Mortgage
Loans" and "Risk Factors" herein.
All of the Mortgage Loans are secured by first mortgages or deeds of trust
or similar security instruments creating first liens on one- to four-family
residential properties consisting of one-to four-family dwelling units,
individual condominium units, manufactured housing, mixed use or individual
units in planned unit developments. None of the Mortgage Loans will have a
remaining term to maturity greater than 359 months. The Mortgage Loans are
generally not assumable pursuant to the terms of the related Mortgage Note.
None of the Mortgage Loans are or will be insured or guaranteed by the
Seller, the Depositor, the Bond Issuer, the Master Servicer, either Servicer,
the Indenture Trustee, the Bond Insurer, any Originator, or any of their
respective affiliates or by any governmental agency or other person, except to
the extent described herein.
The Mortgage Loans included in the Trust will be segregated into a mortgage
pool of Adjustable Rate Mortgage Loans (also referred to as the "Pool 1 Mortgage
Loans") and a pool of Fixed Rate Mortgage Loans (also referred to as the "Pool 2
Mortgage Loans"). The specific characteristics and summary statistical
information regarding the Pool 1 Mortgage Loans and the Pool 2 Mortgage Loans
are described below at "-- Mortgage Loan Characteristics -- Pool 1" and
"-- Mortgage Loan Characteristics -- Pool 2." Principal and interest collections
on Pool 1 Mortgage Loans will be the primary source of payment of the Class A-1
Bond. Principal and interest collections on Pool 2 Mortgage Loans will be the
primary source of payment of the Class A-2 Bond.
Approximately 85.36% of the Pool 1 Mortgage Loans and approximately 87.48%
of the Pool 2 Mortgage Loans provide for payment by the mortgagor of a
prepayment premium in connection with certain full or partial prepayments of
principal. Generally, each such Mortgage Loan provides for payment of a
prepayment premium in connection with certain partial prepayments and
prepayments in full made within the period of time specified in the related
Mortgage Note, ranging from one to five years from the date of origination of
such Mortgage Loan, as described herein. The amount of the applicable prepayment
premium, to the extent permitted under applicable state law, is as provided in
the related Mortgage Note; generally, such amount is equal to six months'
interest on any amounts prepaid in excess of 20% of the then original principal
balance of the related Mortgage Loan during any twelve-month period. See
"Certain Prepayment and Yield Considerations" herein. Prepayment premiums
received on the Mortgage Loans will not be included in available funds for the
related class of Bonds for the related Collection Period, but instead will be
retained by the Depositor.
Approximately 26.47% of the Pool 1 Mortgage Loans and 19.57% of the Pool 2
Mortgage Loans had original Loan-to-Value Ratios in excess of 80%. Substantially
all such Mortgage Loans are covered by a primary mortgage insurance policy (the
"Mortgage Insurance Policy") issued by Radian Guaranty Inc. insuring first in
the principal balance of such Mortgage Loans. See "Primary Mortgage Insurance"
herein. For this purpose, the "Loan-to-Value Ratio" of a Mortgage Loan at any
time is the ratio of the principal balance of the Mortgage Loan at the date of
determination to (a) in the case of a purchase, the lesser of the sales price of
the Mortgaged Property and its appraised value at the time of sale, or (b) in
the case of a refinance or modification, the appraised value of the Mortgaged
Property at the time of such refinancing or modification.
POOL 1 MORTGAGE LOAN CHARACTERISTICS
Pool 1 will consist of approximately 3,097 Adjustable Rate Mortgage Loans
having an aggregate Principal Balance as of the Statistical Cut-off Date of
approximately $345,651,778. Each Pool 1 Mortgage Loan provides for semi-annual
adjustment of the applicable interest rate as specified in the related Mortgage
Note based on the Six-Month LIBOR Index (as described at "-- The Index"
S-23
<PAGE> 24
below) and for corresponding adjustments to the monthly payment amount due
thereon, in each case on the adjustment date applicable thereto (each such date,
an "Adjustment Date"), but subject to the limitations described hereunder;
provided that the first Adjustment Date will occur after an initial period of
two years following origination, in the case of approximately 77.28% of the Pool
1 Mortgage Loans ("2/28 Loans"), and three years following origination, in the
case of approximately 22.72% of the Pool 1 Mortgage Loans ("3/27 loans") (2/28
loans and 3/27 loans are collectively referred to as "Delayed Adjustment
Mortgage Loans"). On each Adjustment Date for each Pool 1 Mortgage Loan, the
Mortgage Rate thereon will be adjusted to equal the sum, rounded generally to
the nearest multiple of 0.125%, of the Index (as described below) and a fixed
percentage amount (the "Gross Margin"), provided that in the substantial
majority of cases the Mortgage Rate on each such Mortgage Loan generally will
not increase or decrease by more than a fixed percentage specified in the
related Mortgage Note (the "Periodic Cap") on any related Adjustment Date,
except in the case of the first such adjustment with respect to a Delayed
Adjustment Mortgage Loan, and will not exceed a specified maximum Mortgage Rate
over the life of such Mortgage Loan (the "Maximum Rate") or be less than a
specified minimum Mortgage Rate over the life of such Mortgage Loan (the
"Minimum Rate"). The Mortgage Rate on a Delayed Adjustment Mortgage Loan
generally will not increase or decrease on the first Adjustment Rate by more
than a fixed percentage specified in the related Mortgage Note (the "Initial
Cap"); the weighted average of the Initial Caps is approximately 2.414% per
annum. Effective with the first monthly payment due on each Pool 1 Mortgage Loan
after each related Adjustment Date, the monthly payment amount will be adjusted
to an amount that will amortize fully the outstanding Principal Balance of the
related Mortgage Loan over its remaining term, and pay interest at the Mortgage
Rate as so adjusted. Due to the application of the Initial Caps, Periodic Caps
and Maximum Rates, the Mortgage Rate on each Pool 1 Mortgage Loan, as adjusted
on any related Adjustment Date, may be less than the sum of the Index and the
related Gross Margin, rounded as described herein. The Pool 1 Mortgage Loans
generally do not permit the related mortgagor to convert the adjustable Mortgage
Rate thereon to a fixed Mortgage Rate. See "Certain Prepayment and Yield
Considerations" herein.
As of the Statistical Cut-off Date, approximately 0.16% of the Pool 1
Mortgage Loans were at least 30, but not more than 59 days delinquent. None of
the Pool 1 Mortgage Loans were 60 days or more delinquent.
THE INDEX
The Six-Month LIBOR Index. The Index applicable to the determination of
the Mortgage Rates for the Pool 1 Mortgage Loans will be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market, calculated as provided in the related Mortgage Note and as most
recently available either (i) as of the first business day of a specified period
of time prior to such Adjustment Date, (ii) as of the business day of the month
preceding the month of such Adjustment Date or (iii) the last Business Day of
the second month preceding the month in which such Adjustment Date occurs, as
specified in the related Mortgage Note.
The Six-Month LIBOR Index is referred to herein as the "Index". In the
event that the Index becomes unavailable or otherwise unpublished, the Master
Servicer will select a comparable alternative index over which it has no direct
control and which is readily verifiable.
SUMMARY STATISTICAL INFORMATION -- POOL 1
The following tables set forth as of the Statistical Cut-off Date, the
number, aggregate Principal Balance and percentage of the Pool 1 Mortgage Loans
having the stated characteristics shown in the tables in each range. The sum of
the amounts of the aggregate Principal Balances and the percentages in the
following tables may not equal 100% due to rounding.
S-24
<PAGE> 25
PRINCIPAL BALANCES OF POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
PRINCIPAL BALANCE ($) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
up to $25,000.00.... 37 $ 777,539.18 0.22%
$25,000.01 to $50,000.00..... 422 16,777,755.55 4.85
$50,000.01 to $75,000.00..... 693 43,836,351.46 12.68
$75,000.01 to $100,000.00..... 604 52,930,757.60 15.31
$100,000.01 to $125,000.00..... 418 46,574,571.39 13.47
$125,000.01 to $150,000.00..... 301 41,025,445.36 11.87
$150,000.01 to $175,000.00..... 184 29,686,051.22 8.59
$175,000.01 to $200,000.00..... 103 19,354,398.25 5.60
$200,000.01 to $225,000.00..... 83 17,656,436.97 5.11
$225,000.01 to $250,000.00..... 66 15,688,041.96 4.54
$250,000.01 to $275,000.00..... 52 13,567,233.70 3.93
$275,000.01 to $300,000.00..... 26 7,469,917.73 2.16
$300,000.01 to $325,000.00..... 32 9,948,996.91 2.88
$325,000.01 to $350,000.00..... 30 10,317,741.64 2.99
$350,000.01 to $375,000.00..... 7 2,568,252.74 0.74
$375,000.01 to $400,000.00..... 10 3,901,817.56 1.13
$400,000.01 to $425,000.00..... 9 3,725,883.96 1.08
$425,000.01 to $450,000.00..... 7 3,066,272.05 0.89
greater than $450,000.00....... 13 6,778,312.97 1.96
----- --------------- ------
Total................ 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
RANGE OF ORIGINAL TERMS TO STATED MATURITY OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
RANGE OF ORIGINAL NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
TERMS TO STATED MATURITY (MONTHS) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
121 to 180........................... 11 $ 738,225.49 0.21%
301 to 360........................... 3,086 344,913,552.71 99.79
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
RANGE OF REMAINING TERMS TO MATURITY OF THE POOL 1
MORTGAGE LOANS AS OF THE STATISTICAL CUT-OFF DATE
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
RANGE OF REMAINING NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
TERMS TO MATURITY (MONTHS) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
-------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
121 to 180........................... 11 $ 738,225.49 0.21%
301 to 360........................... 3,086 344,913,552.71 99.79
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
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<PAGE> 26
RANGE OF REMAINING AMORTIZATION TERMS OF THE POOL 1
MORTGAGE LOANS AS OF THE STATISTICAL CUT-OFF DATE
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
RANGE OF REMAINING NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
AMORTIZATION (MONTHS) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
121 to 180............................. 12 $ 771,903.66 0.22%
181 to 240............................. 1 129,947.22 0.04
301 to 360............................. 3,084 344,749,927.32 99.74
----- --------------- ------
Total........................ 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
PROPERTY TYPES OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
PROPERTY TYPE OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Single Family Detached............... 2,612 $289,621,954.09 83.79%
PUD.................................. 164 23,849,592.40 6.90
2-4 Family........................... 48 6,504,984.75 1.88
Low Rise Condo....................... 166 17,211,286.42 4.98
Manufactured Housing................. 107 8,463,960.54 2.45
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
OCCUPANCY STATUS OF THE POOL 1 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
OCCUPANCY STATUS OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
---------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Owner-occupied....................... 2,894 $330,089,800.33 95.50%
Non Owner-Occupied................... 179 13,125,605.71 3.80
Second Home.......................... 24 2,436,372.16 0.70
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
- -------------------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-26
<PAGE> 27
RANGE OF MORTGAGE RATES OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
MORTGAGE RATES (%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------------ -------- ------------------------ ------------------------
<S> <C> <C> <C>
5.501 to 6.000..................... 3 $ 286,108.45 0.08%
6.001 to 6.500..................... 5 516,306.66 0.15
6.501 to 7.000..................... 15 1,938,142.55 0.56
7.001 to 7.500..................... 47 5,348,528.55 1.55
7.501 to 8.000..................... 151 20,176,170.43 5.84
8.001 to 8.500..................... 294 37,030,872.34 10.71
8.501 to 9.000..................... 516 68,142,013.98 19.71
9.001 to 9.500..................... 485 59,061,535.65 17.09
9.501 to 10.000..................... 520 58,044,423.19 16.79
10.001 to 10.500..................... 359 35,031,146.67 10.13
10.501 to 11.000..................... 313 30,134,294.14 8.72
11.001 to 11.500..................... 160 14,169,895.58 4.10
11.501 to 12.000..................... 118 8,923,576.80 2.58
12.001 to 12.500..................... 53 3,581,752.59 1.04
12.501 to 13.000..................... 31 1,912,945.41 0.55
13.001 to 13.500..................... 16 774,300.93 0.22
13.501 to 14.000..................... 9 520,673.13 0.15
14.001 to 14.500..................... 2 59,091.15 0.02
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
RANGE OF MAXIMUM MORTGAGE RATES OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
MAXIMUM MORTGAGE RATES (%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
-------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
8.001 to 9.000..................... 1 $ 58,307.58 0.02%
11.001 to 12.000..................... 1 118,400.00 0.03
12.001 to 13.000..................... 13 1,904,045.45 0.55
13.001 to 14.000..................... 91 12,732,065.53 3.68
14.001 to 15.000..................... 482 67,073,176.65 19.40
15.001 to 16.000..................... 1,051 124,271,240.28 35.95
16.001 to 17.000..................... 891 92,670,247.69 26.81
17.001 to 18.000..................... 403 35,487,457.29 10.27
18.001 to 19.000..................... 128 9,162,384.96 2.65
19.001 to 20.000..................... 34 2,115,361.62 0.61
20.001 to 21.000..................... 1 26,645.37 0.01
greater than 21.000.................. 1 32,445.78 0.01
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
S-27
<PAGE> 28
RANGE OF MINIMUM MORTGAGE RATES OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
MINIMUM MORTGAGE RATES (%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
-------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
5.001 to 6.000..................... 3 $ 286,108.45 0.08%
6.001 to 7.000..................... 20 2,454,449.21 0.71
7.001 to 8.000..................... 198 25,524,698.98 7.38
8.001 to 9.000..................... 810 105,172,886.32 30.43
9.001 to 10.000..................... 1,005 117,105,958.84 33.88
10.001 to 11.000..................... 672 65,165,440.81 18.85
11.001 to 12.000..................... 278 23,093,472.38 6.68
12.001 to 13.000..................... 84 5,494,698.00 1.59
13.001 to 14.000..................... 25 1,294,974.06 0.37
14.001 to 15.000..................... 2 59,091.15 0.02
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
RANGE OF GROSS MARGINS OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
GROSS MARGINS (%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
----------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
3.001 to 4.000..................... 1 $ 49,932.68 0.01%
4.001 to 5.000..................... 257 25,996,951.59 7.52
5.001 to 6.000..................... 1,887 213,348,171.24 61.72
6.001 to 7.000..................... 830 92,524,614.12 26.77
7.001 to 8.000..................... 117 13,022,052.83 3.77
8.001 to 9.000..................... 2 352,551.47 0.10
9.001 to 10.000..................... 2 338,667.72 0.10
10.001 to 11.000..................... 1 18,836.55 0.01
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
S-28
<PAGE> 29
NEXT ADJUSTMENT DATE FOR THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
NEXT ADJUSTMENT DATE (MONTH-YEAR) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
July-00.............................. 1 $ 44,796.97 0.01%
August-00............................ 3 438,004.30 0.13
September-00......................... 7 842,810.51 0.24
October-00........................... 7 544,563.22 0.16
November-00.......................... 7 1,583,401.71 0.46
December-00.......................... 16 2,218,095.54 0.64
January-01........................... 3 628,155.60 0.18
February-01.......................... 6 872,530.42 0.25
March-01............................. 194 22,270,091.84 6.44
April-01............................. 302 37,246,280.30 10.78
May-01............................... 1,459 161,717,905.36 46.79
June-01.............................. 327 37,099,487.94 10.73
July-01.............................. 12 1,548,577.00 0.45
November-01.......................... 3 367,164.12 0.11
December-01.......................... 8 1,079,002.04 0.31
January-02........................... 6 593,359.17 0.17
February-02.......................... 6 1,135,504.48 0.33
March-02............................. 279 28,600,167.02 8.27
April-02............................. 251 24,690,586.87 7.14
May-02............................... 104 10,429,845.84 3.02
June-02.............................. 83 10,508,077.95 3.04
July-02.............................. 13 1,193,370.00 0.35
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL FIXED TERM/ NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
SUBSEQUENT ADJUSTABLE RATE TERM OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Two Years/Twenty-Eight Years......... 2,345 $267,124,283.30 77.28%
Three Years/Twenty-Seven Years....... 752 78,527,494.90 22.72
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
S-29
<PAGE> 30
INITIAL PERIODIC RATE ADJUSTMENT CAPS OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
INITIAL PERIODIC RATE ADJUSTMENT CAPS (%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
- ----------------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
1.000 to 1.499......................... 20 $ 2,990,788.36 0.87%
1.500 to 1.999......................... 1,195 130,552,653.17 37.77
2.000 to 2.499......................... 3 628,088.58 0.18
3.000 to 3.499......................... 1,879 211,480,248.09 61.18
----- --------------- ------
Total........................ 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
ORIGINAL LOAN-TO-VALUE RATIOS (%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
5.001 to 10.000..................... 1 $ 30,000.00 0.01%
10.001 to 15.000..................... 1 49,927.58 0.01
15.001 to 20.000..................... 3 192,333.49 0.06
20.001 to 25.000..................... 4 167,875.14 0.05
25.001 to 30.000..................... 7 383,726.97 0.11
30.001 to 35.000..................... 13 608,346.78 0.18
35.001 to 40.000..................... 15 1,010,118.07 0.29
40.001 to 45.000..................... 20 2,162,719.92 0.63
45.001 to 50.000..................... 38 3,161,467.79 0.91
50.001 to 55.000..................... 41 3,262,932.70 0.94
55.001 to 60.000..................... 82 8,657,759.21 2.50
60.001 to 65.000..................... 192 18,209,054.74 5.27
65.001 to 70.000..................... 294 28,907,994.30 8.36
70.001 to 75.000..................... 482 51,841,951.62 15.00
75.001 to 80.000..................... 1,171 135,500,673.43 39.20
80.001 to 85.000..................... 250 29,553,979.61 8.55
85.001 to 90.000..................... 480 61,599,735.21 17.82
90.001 to 95.000..................... 2 255,675.57 0.07
95.001 to 100.000.................... 1 95,506.07 0.03
----- --------------- ------
Total...................... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
S-30
<PAGE> 31
GEOGRAPHIC DISTRIBUTION OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
LOCATION OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
-------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Alaska........................... 2 $ 279,372.15 0.08%
Arizona.......................... 111 11,207,279.23 3.24
Arkansas......................... 5 504,063.04 0.15
California....................... 393 75,586,665.58 21.87
Colorado......................... 79 10,437,597.74 3.02
Connecticut...................... 74 8,856,294.14 2.56
Delaware......................... 8 655,958.71 0.19
District of Columbia............. 6 925,913.97 0.27
Florida.......................... 192 17,032,493.61 4.93
Georgia.......................... 54 5,691,051.49 1.65
Hawaii........................... 6 1,045,686.39 0.30
Idaho............................ 25 2,182,616.27 0.63
Illinois......................... 232 23,038,808.74 6.67
Indiana.......................... 92 6,214,312.28 1.80
Iowa............................. 12 646,027.62 0.19
Kansas........................... 7 439,894.73 0.13
Kentucky......................... 46 3,161,313.66 0.91
Louisiana........................ 15 1,283,925.19 0.37
Maine............................ 19 1,480,697.87 0.43
Maryland......................... 62 6,465,054.75 1.87
Massachusetts.................... 129 16,350,020.45 4.73
Michigan......................... 211 18,475,287.27 5.35
Minnesota........................ 52 4,713,355.61 1.36
Mississippi...................... 14 1,001,113.29 0.29
Missouri......................... 78 5,504,262.56 1.59
Montana.......................... 4 522,624.02 0.15
Nebraska......................... 4 429,748.26 0.12
Nevada........................... 28 3,320,236.21 0.96
New Hampshire.................... 32 3,853,803.34 1.11
New Jersey....................... 89 11,895,564.40 3.44
New Mexico....................... 23 2,277,607.49 0.66
New York......................... 68 7,836,138.72 2.27
North Carolina................... 95 8,205,008.63 2.37
Ohio............................. 184 16,398,696.94 4.74
Oklahoma......................... 20 1,084,333.54 0.31
Oregon........................... 43 4,626,793.08 1.34
Pennsylvania..................... 75 7,252,999.73 2.10
Rhode Island..................... 18 1,638,578.73 0.47
South Carolina................... 15 1,800,776.21 0.52
South Dakota..................... 1 48,661.33 0.01
Tennessee........................ 67 7,153,871.74 2.07
Texas............................ 96 9,805,117.22 2.84
Utah............................. 41 6,108,708.11 1.77
Vermont.......................... 1 39,890.28 0.01
Virginia......................... 64 6,447,499.68 1.87
Washington....................... 100 12,602,581.82 3.65
West Virginia.................... 8 582,002.42 0.17
Wisconsin........................ 95 8,279,600.33 2.40
Wyoming.......................... 2 261,869.63 0.08
----- --------------- ------
Total.................. 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
S-31
<PAGE> 32
DOCUMENTATION LEVELS OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF THE OUTSTANDING AS OF THE
DOCUMENTATION LEVEL LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Full Documentation..................... 2,344 $257,466,670.64 74.49%
Stated Income or No Documentation...... 697 79,937,592.68 23.13
Limited or Lite Documentation.......... 56 8,247,514.88 2.39
----- --------------- ------
Total........................ 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
PREPAYMENT CHARGES(1) OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
PERIOD(1)(2) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------ -------- ------------------------ ------------------------
<S> <C> <C> <C>
0 to 5............................... 468 $ 50,604,709.79 14.64%
6 to 11............................... 1 31,462.68 0.01
12 to 17............................... 69 9,731,862.36 2.82
18 to 23............................... 3 331,842.25 0.10
24 to 29............................... 1,432 171,086,764.47 49.50
30 to 35............................... 6 799,855.62 0.23
36 to 41............................... 754 80,135,700.39 23.18
Greater than 47........................ 364 32,929,580.64 9.53
----- --------------- ------
Total........................ 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) Prepayment charges are assessed on any Pool 1 Mortgage Loan prepaid in full
or in part within the specified period.
(2) Periods are in months.
S-32
<PAGE> 33
DISTRIBUTION BY CREDIT GRADE OF THE POOL 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
CREDIT GRADES OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------- -------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
Countrywide A......................... 610 $ 73,600,299.88 21.29%
A-........................ 301 31,918,728.11 9.23
B......................... 202 21,413,503.14 6.20
C......................... 83 6,563,068.35 1.90
C-........................ 23 1,453,817.04 0.42
D......................... 9 1,140,626.56 0.33
----- --------------- ------
Total........... 1,228 $136,090,043.08 39.37%
===== =============== ======
Option One A......................... 613 $ 72,829,966.34 21.07%
AA........................ 535 66,558,368.43 19.26
B......................... 477 45,931,933.05 13.29
C......................... 155 13,368,372.75 3.87
CC........................ 58 4,888,655.97 1.41
----- --------------- ------
Total........... 1,838 $203,577,296.54 58.90%
===== =============== ======
Provident A......................... 2 $ 411,924.86 0.12%
A-........................ 8 1,785,971.83 0.52
A1........................ 2 502,141.13 0.15
AA........................ 4 889,599.43 0.26
B......................... 9 1,327,761.07 0.38
C......................... 4 527,562.92 0.15
C-........................ 2 539,477.34 0.16
----- --------------- ------
Total........... 31 $ 5,984,438.58 1.73%
===== =============== ======
TOTAL... 3,097 $345,651,778.20 100.00%
===== =============== ======
</TABLE>
- ---------------
Credit grades are based on the Originator's underwriting guidelines as described
in "Servicing of the Mortgage Loans" herein.
POOL 2 MORTGAGE LOAN CHARACTERISTICS
Pool 2 will consist of approximately 866 Fixed Rate Mortgage Loans having
an aggregate Principal Balance as of the Statistical Cut-off Date of
approximately $67,356,415. Approximately 95.89% of such Fixed Rate Loans are
fully amortizing loans over their original term to maturity, while approximately
4.11% have an amortization term that exceeds the original term to maturity (15
years) of such Mortgage Loans ("Balloon Loans"), leaving a substantially larger
payment ("Balloon Payment") due at the maturity of such loans.
As of the Statistical Cut-off Date, approximately 0.20% of the Pool 2
Mortgage Loans were at least 30, but not more than 59 days delinquent. None of
the Pool 2 Mortgage Loans were 60 days or more delinquent.
SUMMARY STATISTICAL INFORMATION -- POOL 2
The following tables set forth as of the Statistical Cut-off Date, the
number, the aggregate Principal Balance and the percentage of Pool 2 Mortgage
Loans having the stated characteristics shown in the tables in each range. The
sum of the amounts of the aggregate Principal Balances and the percentages in
the following tables may not equal 100% due to rounding.
S-33
<PAGE> 34
PRINCIPAL BALANCES OF POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
PRINCIPAL BALANCE ($) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
up to $25,000.00...................... 52 $ 1,065,346.62 1.58%
$25,000.01 to $50,000.00............ 269 10,466,550.69 15.54
$50,000.01 to $75,000.00............ 250 15,469,857.19 22.97
$75,000.01 to $100,000.00............ 119 10,351,748.02 15.37
$100,000.01 to $125,000.00............ 52 5,766,004.22 8.56
$125,000.01 to $150,000.00............ 45 6,160,744.53 9.15
$150,000.01 to $175,000.00............ 18 2,905,617.55 4.31
$175,000.01 to $200,000.00............ 20 3,747,509.95 5.56
$200,000.01 to $225,000.00............ 10 2,121,268.77 3.15
$225,000.01 to $250,000.00............ 12 2,865,006.70 4.25
$250,000.01 to $275,000.00............ 6 1,566,432.81 2.33
$275,000.01 to $300,000.00............ 3 868,952.98 1.29
$300,000.01 to $325,000.00............ 2 623,076.74 0.93
$325,000.01 to $350,000.00............ 2 686,036.61 1.02
$350,000.01 to $375,000.00............ 1 366,588.48 0.54
$375,000.01 to $400,000.00............ 1 399,474.64 0.59
$400,000.01 to $425,000.00............ 1 406,000.00 0.60
Greater than $450,000.00.............. 3 1,520,198.82 2.26
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
RANGE OF ORIGINAL TERMS TO STATED MATURITY OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
RANGE OF ORIGINAL NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
TERMS TO STATED MATURITY (MONTHS) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
61 to 120............................ 5 $ 276,061.25 0.41%
121 to 180............................ 344 23,601,026.74 35.04
181 to 240............................ 9 356,293.88 0.53
301 to 360............................ 508 43,123,033.45 64.02
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
S-34
<PAGE> 35
RANGE OF REMAINING TERMS TO STATED MATURITY OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
RANGE OF ORIGINAL NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
TERMS TO STATED MATURITY (MONTHS) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
61 to 120............................ 5 $ 276,061.25 0.41%
121 to 180............................ 344 23,601,026.74 35.04
181 to 240............................ 9 356,293.88 3.53
301 to 360............................ 508 43,123,033.45 64.02
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
RANGE OF REMAINING AMORTIZATION TERMS OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
RANGE OF ORIGINAL NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
TERMS TO STATED MATURITY (MONTHS) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
61 to 120............................ 5 $ 276,061.25 0.41%
121 to 180............................ 310 20,830,957.15 30.93
181 to 240............................ 9 356,293.88 0.53
301 to 360............................ 542 45,893,103.04 68.13
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
PROPERTY TYPES OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
PROPERTY TYPE OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Single Family Detached................ 765 $59,907,142.28 88.94%
PUD................................... 22 2,700,121.24 4.01
2-4 Family............................ 25 1,804,387.38 2.68
Low Rise Condo........................ 33 1,929,476.59 2.86
Manufactured Housing.................. 21 1,015,287.83 1.51
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
OCCUPANCY STATUS OF THE POOL 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
OCCUPANCY STATUS OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
---------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Owner-Occupied........................ 785 $63,245,260.15 93.90%
Non Owner-Occupied.................... 74 3,624,897.65 5.38
Second Home........................... 7 486,257.52 0.72
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
- ---------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-35
<PAGE> 36
RANGE OF MORTGAGE RATES OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
MORTGAGE RATES(%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
----------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
6.001 to 6.500...................... 2 $ 51,226.41 0.08%
6.501 to 7.000...................... 6 383,959.33 0.57
7.001 to 7.500...................... 18 1,638,698.87 2.43
7.501 to 8.000...................... 32 3,580,742.78 5.32
8.001 to 8.500...................... 64 7,584,758.46 11.26
8.501 to 9.000...................... 112 9,572,666.38 14.21
9.001 to 9.500...................... 112 9,294,335.71 13.80
9.501 to 10.000...................... 131 9,475,007.21 14.07
10.001 to 10.500...................... 110 7,792,953.90 11.57
10.501 to 11.000...................... 130 8,754,728.15 13.00
11.001 to 11.500...................... 59 4,365,657.88 6.48
11.501 to 12.000...................... 35 2,258,034.79 3.35
12.001 to 12.500...................... 28 1,511,050.01 2.24
12.501 to 13.000...................... 11 457,520.10 0.68
13.001 to 13.500...................... 9 406,533.00 0.60
13.501 to 14.000...................... 5 177,581.72 0.26
14.001 to 14.500...................... 1 12,646.87 0.02
14.501 to 15.000...................... 1 38,303.75 0.06
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
ORIGINAL LOAN-TO-VALUE RATIOS(%) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
-------------------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
10.001 to 15.000...................... 1 $ 9,891.92 0.01%
15.001 to 20.000...................... 2 76,874.99 0.11
20.001 to 25.000...................... 4 121,592.45 0.18
25.001 to 30.000...................... 10 374,489.38 0.56
30.001 to 35.000...................... 11 406,521.88 0.60
35.001 to 40.000...................... 15 846,663.89 1.26
40.001 to 45.000...................... 12 410,200.10 0.61
45.001 to 50.000...................... 36 1,741,900.63 2.59
50.001 to 55.000...................... 32 1,918,697.91 2.85
55.001 to 60.000...................... 51 3,321,058.21 4.93
60.001 to 65.000...................... 76 5,221,942.22 7.75
65.001 to 70.000...................... 120 9,519,449.68 14.13
70.001 to 75.000...................... 146 11,282,822.29 16.75
75.001 to 80.000...................... 208 18,921,687.68 28.09
80.001 to 85.000...................... 78 7,135,128.81 10.59
85.001 to 90.000...................... 64 6,047,493.28 8.98
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
S-36
<PAGE> 37
GEOGRAPHIC DISTRIBUTION OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
LOCATION OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
-------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Alaska................................ 1 $ 95,900.00 0.14%
Arizona............................... 9 813,325.87 1.21
Arkansas.............................. 8 591,366.45 0.88
California............................ 89 11,518,556.38 17.10
Colorado.............................. 3 224,512.07 0.33
Connecticut........................... 3 241,926.81 0.36
Delaware.............................. 1 63,718.64 0.09
Florida............................... 98 7,587,050.58 11.26
Georgia............................... 47 3,433,551.63 5.10
Hawaii................................ 5 615,455.92 0.91
Idaho................................. 9 581,563.20 0.86
Illinois.............................. 24 2,108,616.70 3.13
Indiana............................... 53 2,719,247.50 4.04
Iowa.................................. 1 67,000.00 0.10
Kansas................................ 1 65,600.00 0.10
Kentucky.............................. 16 795,636.51 1.18
Louisiana............................. 50 2,457,267.43 3.65
Maine................................. 2 84,533.22 0.13
Maryland.............................. 5 392,277.23 0.58
Massachusetts......................... 9 1,072,808.28 1.59
Michigan.............................. 142 10,544,164.26 15.65
Minnesota............................. 3 148,393.59 0.22
Mississippi........................... 5 235,149.20 0.35
Missouri.............................. 12 642,451.21 0.95
Montana............................... 5 477,899.71 0.71
Nebraska.............................. 3 199,664.27 0.30
Nevada................................ 3 329,063.92 0.49
New Hampshire......................... 4 269,070.13 0.40
New Jersey............................ 3 165,014.06 0.24
New Mexico............................ 6 299,263.58 0.34
New York.............................. 5 960,188.92 1.43
North Carolina........................ 8 719,669.73 1.07
North Dakota.......................... 1 47,390.63 0.07
Ohio.................................. 61 4,262,572.93 6.33
Oklahoma.............................. 6 147,966.25 0.22
Oregon................................ 9 874,445.09 1.30
Pennsylvania.......................... 23 1,231,980.31 1.83
Rhode Island.......................... 1 83,610.11 0.12
South Carolina........................ 4 301,914.42 0.45
South Dakota.......................... 3 189,113.72 0.28
Tennessee............................. 70 4,860,833.34 7.22
Texas................................. 6 495,651.27 0.74
Utah.................................. 9 1,447,083.68 2.15
Vermont............................... 1 53,917.97 0.08
Virginia.............................. 12 807,718.68 1.20
Washington............................ 13 1,363,426.30 2.02
West Virginia......................... 1 38,000.00 0.06
Wisconsin............................. 9 487,099.67 0.72
Wyoming............................... 4 213,783.95 0.32
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
S-37
<PAGE> 38
DOCUMENTATION LEVELS OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
DOCUMENTATION LEVEL OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
Full Documentation....................... 695 $54,007,266.06 80.18%
Stated Income or No Documentation........ 150 11,135,257.84 16.53
Limited or Lite Documentation............ 21 2,213,891.42 3.29
--- -------------- ------
Total.......................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
PREPAYMENT CHARGES(1) POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
PERIOD(1)(2) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
------------ -------- ------------------------ ------------------------
<S> <C> <C> <C>
0 to 5................................. 107 $ 8,432,856.51 12.52%
12 to 17............................... 6 470,754.42 0.70
18 to 23............................... 2 78,283.69 0.12
24 to 29............................... 32 3,107,119.13 4.61
36 to 41............................... 301 23,462,947.66 34.83
greater than 47........................ 418 31,804,453.91 47.22
--- -------------- ------
Total........................ 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
- ---------------
(1) Prepayment charges are assessed on any Pool 2 Mortgage Loan prepaid in full
or in part within the specified period.
(2) Periods are in months.
LOAN TYPE OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
LOAN TYPE OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
--------- -------- ------------------------ ------------------------
<S> <C> <C> <C>
15 Year Balloon....................... 34 $ 2,770,069.59 4.11%
Fully Amortizing...................... 832 64,586,345.73 95.89
--- -------------- ------
Total....................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
S-38
<PAGE> 39
CREDIT GRADES OF THE POOL 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF THE OUTSTANDING AS OF THE
CREDIT GRADES(1) OF LOANS STATISTICAL CUT-OFF DATE STATISTICAL CUT-OFF DATE
---------------- -------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
Countrywide A........................ 289 $24,929,883.48 37.01%
A-....................... 244 20,001,970.83 29.70
B........................ 148 10,195,435.40 15.14
C........................ 105 6,206,078.60 9.21
C-....................... 28 1,157,265.51 1.72
D........................ 11 737,653.14 1.10
--- -------------- ------
Total.................... 825 $63,228,286.96 93.87%
=== ============== ======
Option One A........................ 11 $ 1,495,607.56 2.22%
AA....................... 15 1,579,122.64 2.34
B........................ 9 474,999.87 0.71
C........................ 4 506,379.55 0.75
CC....................... 2 72,018.74 0.11
--- -------------- ------
Total.................... 41 $ 4,128,128.36 6.13%
=== ============== ======
TOTAL.................... 866 $67,356,415.32 100.00%
=== ============== ======
</TABLE>
- ---------------
(1) Credit grades are based on the Originator's underwriting guidelines as
described in "-- Servicing of the Mortgage Loans" herein.
PRIMARY MORTGAGE INSURANCE POLICY
Approximately 26.47% of the Pool 1 Mortgage Loans and approximately 19.57%
of the Pool 2 Mortgage Loans have original Loan-to-Value Ratios in excess of
80%. Substantially all such Mortgage Loans are covered by the Mortgage Insurance
Policy issued by Radian Guaranty Inc. (the "MI Insurer"). The remainder of the
Mortgage Loans will not be covered by the Mortgage Insurance Policy. The
Mortgage Insurance Policy insures losses on the Principal Balance of each such
Mortgage Loan in an amount generally equal to, at the option of the MI Insurer,
either (a) the sum of (i) the Principal Balance of the Mortgage Loan, (ii)
unpaid accumulated interest due on the Mortgage Loan at the Mortgage Rate (for a
maximum period of two years) and (iii) the amount of certain advances (such as
hazard insurance, taxes, maintenance expenses and foreclosure costs) made by the
Servicers, reduced by certain mitigating amounts collected with respect thereto
(collectively, the "Loss Amount"), in which case the MI Insurer would take title
to the Mortgaged Property, or (b) an amount equal to the product of (i) the Loss
Amount and (ii) the percentage of coverage (the "Coverage Percentage") specified
in the Mortgage Insurance Policy, in which case the Bond Issuer would retain
title to (and the proceeds obtained in a foreclosure and sale of) the Mortgaged
Property. The Coverage Percentage specified in the Mortgage Insurance Policy
will be different for each Mortgage Loan depending upon the original
Loan-to-Value Ratio of the related Mortgage Loan (Mortgage Loans with higher
Loan-to-Value Ratios will generally have a higher Coverage Percentage and
Mortgage Loans with lower Loan-to-Value Ratios will generally have a lower
Coverage Percentage). The Mortgage Insurance Policy will remain in place for the
life of the related Mortgage Loan (provided that no MI Insurer Insolvency Event
(as defined in the Policy) has occurred and is continuing), even if the related
Loan-to-Value Ratio falls below 80%. If a MI Insurer Insolvency Event has
occurred or is continuing, the Bond Issuer shall, at the discretion of the Bond
Insurer, and may in the case of a Bond Insurer Default, terminate the Mortgage
Insurance Policy on any Mortgage Loan that is not then past due.
S-39
<PAGE> 40
Claim payments, if any, under a Mortgage Insurance Policy will be made to
the applicable Servicer, deposited in the Bond Account and treated in the same
manner as a prepayment of the related Mortgage Loan. Premiums payable on the
Mortgage Insurance Policy (the "MI Premiums") will be paid monthly by the Master
Servicer with funds withdrawn from the custodial account with respect to the
related Mortgage Loans.
The Bond Insurer requires that, in the event of a downgrade in the rating
of the MI Insurer or a cumulative claims denial by the MI Insurer in an amount
greater than a specified amount, the required over-collateralization of the
Bonds step up to an amount specified in the Insurance Agreement.
SERVICING OF THE MORTGAGE LOANS
THE MASTER SERVICER
The information set forth in this section has been provided by Norwest Bank
Minnesota, National Association ("Norwest" or the "Master Servicer"), and none
of the Bond Issuer, the Depositor, the Seller, the Owner Trustee, the Indenture
Trustee, the Bond Insurer, the Servicers nor the Underwriters or any of their
respective affiliates has made or will make any representations or warranties as
to the accuracy or completeness of such information.
Norwest is a national banking association, with executive offices located
at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its
master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044.
The Servicers will directly service the Mortgage Loans under the
supervision of the Master Servicer pursuant to the terms of a Master Servicing
Agreement by and among the Master Servicer, the Bond Issuer and the Indenture
Trustee. The Master Servicer will not be ultimately responsible for the
servicing of the Mortgage Loans except to the extent described under "Advances"
herein. If a Servicer fails to fulfill its obligations under the related
Servicing Agreement, the Master Servicer is obligated to terminate such Servicer
and appoint a successor servicer as provided in the Master Servicing Agreement.
The Master Servicer is engaged in the business of master servicing single
family residential mortgage loans secured by properties located in all 50 states
and the District of Columbia. As of June 30, 1999, the Master Servicer master
serviced more than 639,000 mortgage loans with an aggregate outstanding
principal balance of approximately $73 billion.
THE SERVICERS
The Mortgage Loans will initially be serviced by either Option One Mortgage
Corporation ("Option One") or Countrywide Home Loans, Inc. ("Countrywide")
(each, a "Servicer" and collectively, the "Servicers"). Each Servicer will be
responsible for servicing the Mortgage Loans which they have originated and
which are included in the Trust Estate. The Servicers will be responsible for
all servicing obligations with respect to the Mortgage Loans including, but not
limited to, all collection, advancing and reporting functions, preserving the
priority of the related mortgage and the Mortgaged Property, and maintaining and
managing the liquidation of the Mortgaged Property.
Option One
The information set forth in the following paragraphs has been provided by
Option One. None of the Master Servicer, Countrywide, the Bond Issuer, the
Depositor, the Seller, the Owner Trustee, the Indenture Trustee, the Bond
Insurer nor the Underwriters or any of their respective affiliates has
S-40
<PAGE> 41
made or will make any representations or warranties as to the accuracy or
completeness of such information.
Option One, a California corporation, headquartered in Irvine, California,
was incorporated in 1992. It commenced receiving applications for mortgage loans
under its regular lending program in February 1993 and began funding such
mortgage loans indirectly in the same month. The principal business of Option
One is the origination, sale and servicing of non-conforming mortgage loans.
Option One is a wholly-owned subsidiary of Block Financial, which is in
turn a wholly-owned subsidiary of H&R Block, Inc. As of March 31, 1999, Option
One had four loan origination centers in California, two loan origination
centers in each of Florida, Ohio and Rhode Island and one loan origination
center in each of Georgia, Illinois, Texas, Virginia, Connecticut, Pennsylvania,
Massachusetts and Wisconsin.
Option One operates as a stand-alone mortgage banking company and is a
Fannie Mae and Freddie Mac approved servicer.
The following tables set forth, as of December 31, 1996, 1997, 1998 and
March 31, 1999 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in Option One's entire
servicing portfolio (which portfolio includes mortgage loans originated under
Option One's Guidelines and mortgage loans that are subserviced for others) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis.
S-41
<PAGE> 42
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------------ ---------------------
PERCENT
BY PERCENT BY BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ---------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio..................................... 20,107 $1,856,636 100.00% 100.00% 34,707 $3,407,167
Period of Delinquency
31-59 days......................................... 329 $ 29,980 1.64% 1.61% 457 $ 42,556
60-89 days......................................... 161 $ 14,972 0.80% 0.80% 222 $ 20,364
90 days or more.................................... 773 $ 70,607 3.84% 3.78% 1,099 $ 100,238
------ ---------- ------ ------ ------ ----------
Total Delinquent Loans........................... 1,263 $ 115,559 6.28% 6.19% 1,778 $ 163,158
====== ========== ====== ====== ====== ==========
Loans in Foreclosure(1)............................. 677 $ 61,555 3.37% 3.30% 923 $ 83,726
<CAPTION>
AT AT
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ ------------------------------------------
PERCENT PERCENT
PERCENT BY BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio..................................... 100.00% 100.00% 55,708 $5,601,703 100.00% 100.00%
Period of Delinquency
31-59 days......................................... 1.32% 1.25% 514 $ 47,806 0.92% 0.85%
60-89 days......................................... 0.64% 0.60% 276 $ 25,731 0.50% 0.46%
90 days or more.................................... 3.17% 2.94% 1,161 $ 101,984 2.08% 1.82%
------ ------ ------ ---------- ------ ------
Total Delinquent Loans........................... 5.12% 4.79% 1,951 $ 175,521 3.50% 3.13%
====== ====== ====== ========== ====== ======
Loans in Foreclosure(1)............................. 2.66% 2.46% 939 $ 83,757 1.69% 1.50%
<CAPTION>
AT
MARCH 31, 1999
------------------------------------------
PERCENT
BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ---------- -------- -------
<S> <C> <C> <C> <C>
Total Portfolio..................................... 61,341 $6,149,475 100.00% 100.00%
Period of Delinquency
31-59 days......................................... 437 $ 42,081 0.71% 0.68%
60-89 days......................................... 287 $ 27,262 0.47% 0.44%
90 days or more.................................... 1,376 $ 123,783 2.24% 2.01%
------ ---------- ------ ------
Total Delinquent Loans........................... 2,100 $ 193,126 3.42% 3.14%
====== ========== ====== ======
Loans in Foreclosure(1)............................. 1,172 $ 108,522 1.91% 1.76%
</TABLE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ------------------------ ------------------------
BY BY BY
DOLLAR DOLLAR DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio.................... 20,107 $1,865,636 34,707 $3,407,167 55,708 $5,601,703
Foreclosed Loans(2)................ 323 $ 30,677 296 $ 26,313 336 $ 28,344
Foreclosure Ratio(3)............... 1.61% 1.64% 0.85% 0.77% 0.60% 0.51%
<CAPTION>
AT
MARCH 31, 1999
------------------------
BY
DOLLAR
BY NO. AMOUNT
OF LOANS OF LOANS
-------- ----------
<S> <C> <C>
Total Portfolio.................... 61,341 $6,149,475
Foreclosed Loans(2)................ 363 $ 30,831
Foreclosure Ratio(3)............... 0.59% 0.50%
</TABLE>
- ---------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans".
(2) For the purpose of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by Option One, by investors or by an insurer following
foreclosure or delivery of a deed in lieu of foreclosure.
(3) The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of "Foreclosed Loans" divided by the aggregate principal balance or
number, as applicable, of mortgage loans in the "Total Portfolio" at the end
of the indicated period.
S-42
<PAGE> 43
LOAN LOSS EXPERIENCE ON OPTION ONE'S SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE AT OR FOR THE AT OR FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED QUARTER ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Total Portfolio(1)............. $1,865,636 $3,407,167 $5,601,703 $6,149,475
Net Losses(2)(3)............... $ 8,451 $ 24,663 $ 22,168 $ 5,105
Net Losses as a Percentage of
Total Portfolio(4)........... 0.45% 0.72% 0.40% 0.33%
</TABLE>
- ---------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses" are
actual losses incurred on liquidated properties for each respective period.
Losses are calculated after repayment of all principal, foreclosure costs
and accrued interest to the date of liquidation. "Recoveries" are recoveries
from liquidation proceeds and deficiency judgments.
(3) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may change
in future periods. The information in this table reflects costs and
recoveries through May 31, 1999.
(4) For March 31, 1999, "Net Losses as a Percentage of Total Portfolio" was
annualized by multiplying "Net Losses" by 4.0 before calculating the
percentage of "Net Losses as a Percentage of Total Portfolio."
It is unlikely that the delinquency experience of the Mortgage Loans
included in the Mortgage Pools will correspond to the delinquency experience of
Option One's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for Option One's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans included in the Mortgage
Pools will depend on the results obtained over the life of the Mortgage Pools.
There can be no assurance that such Mortgage Loans will perform consistent with
the delinquency or foreclosure experience described herein. In particular, if
the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by Option One. In addition, adverse
economic conditions may affect the timely payment by Mortgagors of scheduled
payments of principal and interest on such Mortgage Loans and, accordingly, the
actual rates of delinquencies and foreclosures with respect to the Mortgage
Pool.
Option One Underwriting Standards
The Mortgage Loans included in the Trust which were originated by Option
One will have been originated generally in accordance with Option One's
Guidelines (the "Option One Guidelines"). On a case-by-case basis, exceptions to
the Option One Guidelines are made where compensating factors exist.
The Option One Guidelines are primarily intended to assess the value of the
mortgaged property and to evaluate the adequacy of such property as collateral
for the mortgage loan. The Mortgage Loans were also generally underwritten with
a view toward the resale thereof in the secondary market. All the Mortgage Loans
generally bear higher rates of interest than mortgage loans that are originated
in accordance with Fannie Mae and Freddie Mac standards.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Option One Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. Mortgaged properties that
are to secure mortgage loans generally are appraised by qualified independent
appraisers. Such appraisers inspect and appraise the subject
S-43
<PAGE> 44
property and verify that such property is in acceptable condition. Following
each appraisal, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when deemed
appropriate, replacement cost analysis based the current cost of constructing a
similar home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and are generally on forms acceptable to Fannie Mae and
Freddie Mac. The Option One Guidelines require a review of the appraisal by a
loan underwriter, who may request a written review by an independent appraiser
retained by Option One.
The Mortgage Loans were originated consistent with and generally conform to
the Option One Guidelines "Full Documentation", "Lite Documentation" and "Stated
Income Documentation" residential loan programs. Under each of the programs,
Option One reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar documentation,
reviews the credit history of the applicant, calculates the debt
service-to-income ratio to determine the applicant's ability to repay the loan,
reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, a rate
(the "Qualifying Rate") has been created under the Option One Guidelines that
generally is equal to the initial interest rate on the loan being applied for or
one percent above the initial interest rate on such loan. The Option One
Guidelines require that mortgage loans be underwritten in a standardized
procedure which complies with applicable federal and state laws and regulations
and requires Option One's underwriters to be satisfied that the value of the
property being financed, as indicated by an appraisal and a review of the
appraisal, currently supports the outstanding loan balance. In general, the
maximum loan amount for mortgage loans originated under the programs is
$350,000. Mortgage loans may, however, be originated generally up to $950,000.
The Option One Guidelines permit one-to-four-family loans to have Loan-to-Value
Ratios ("LTV's") at origination of generally up to 80%, depending on, among
other things, the purpose of the mortgage loan, the mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the property. With respect to mortgage loans where the review of the
appraisal results in a valuation of the mortgaged property that is more than (i)
10% less in the case of mortgage loans with LTV's less than or equal to 80% or
(ii) 5% less in the case of mortgage loans with LTV's in excess of 80%, the LTV
of the related mortgage loan is based on the valuation obtained in the review of
the original appraisal. With respect to mortgage loans secured by mortgaged
properties acquired by a mortgagor under a "lease option purchase," the LTV of
the related mortgage loan is based on the lower of the appraised value at the
time of origination of such mortgage loan or the sale price of the related
mortgaged property if the "lease option purchase price" was set less than 12
months prior to origination and is based on the appraised value at the time of
origination if the "lease option purchase price" was set 12 months or more prior
to origination.
The Option One Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs be as follows: Under the Full
Documentation program, applicants generally are required to submit verification
of stable income for 24 months (or, if the LTV is less than or equal to 80%, for
12 months). Under the Lite Documentation and Stated Income Documentation
programs, an applicant may be qualified based upon monthly income as stated on
the mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that with respect to salaried employees there be a
telephone verification of the applicant's employment. Verification of the source
of funds (if any) required to be deposited by the applicant into escrow in the
case of a purchase money loan is generally required under the Full Documentation
program guidelines. No such verification is required under the other programs.
S-44
<PAGE> 45
The Option One Guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
"AA+" Risk. Under the "AA+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms. A maximum
of one 30-day late payment, and no 60-day late payments, within the last 12
months is acceptable on an existing mortgage loan. An existing mortgage loan is
not required to be current at the time the application is submitted.* No open
charge-offs may remain open after funding of the loan. No bankruptcy or notice
of default may have occurred during the preceding five years and the borrower
must have re-established a minimum of four trade lines, not including mortgages,
all repaid according to its terms. A maximum LTV of 95% is permitted for a
mortgage loan on a single-family owner-occupied property. A maximum LTV of 90%
is permitted on a mortgage loan on an owner-occupied condominium or manufactured
home. The debt service-to-income ratio generally ranges from 45% or less
depending on the Qualifying Rate.
"AA" Risk. Under the "AA" risk category, the applicant must have generally
repaid installment or revolving debt according to its terms. A maximum of one
30-day late payment, and no 60-day late payments, within the last 12 months is
acceptable on an existing mortgage loan. An existing mortgage loan is not
required to be current at the time the application is submitted.* No open
collection accounts or open charge-offs may remain open after the funding of the
loan. No bankruptcy or notice of default filings may have occurred during the
preceding three years; provided, however, that if the borrower's chapter 13
bankruptcy has been discharged during the past three years and the borrower has
re-established a credit history otherwise complying with the credit parameters
set forth in this paragraph, then the borrower may qualify for a mortgage loan
on LTVs less than or equal to 80%.
The mortgaged property must be in at least average condition. A maximum LTV
of 95% is permitted for a mortgage loan on a single family owner-occupied
property. A maximum LTV of 90% is permitted for a mortgage loan on an
owner-occupied condominium or a maximum LTV of 80% is permitted on a two- to
four-family residential property. The debt service-to-income ratio generally
ranges from 45% or less to 55% or less depending on the Qualifying Rate and the
LTV.
"A" Risk. Under the "A" risk category, an applicant must have generally
repaid installment or revolving debt according to its terms. A maximum of two
30-day late payments, and no 60-day late payments, within the last 12 months is
acceptable on an existing mortgage loan. An existing mortgage loan is not
required to be current at the time the application is submitted.* Minor
derogatory items are allowed as to non-mortgage credit, and a letter of
explanation may be required under the Full Documentation program. No open
collection accounts or open charge-offs may remain open after funding of the
loan if the LTV is greater than 80%; if the LTV is less than or equal to 80%,
then up to $500 may remain open after funding of the loan. No bankruptcy or
notice of default filings may have occurred during the preceding two years;
provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past two years and the borrower has re-established a
credit history otherwise complying with the credit parameters set forth in this
paragraph, then the borrower may qualify for a mortgage loan, if the LTV is less
than or equal to 80%. No notice of default filings may have occurred during the
preceding three years if the LTV is greater than 80% or two years if the LTV is
less than or equal to 80%. The mortgaged property must be in at least average
condition. A maximum LTV of 90% (or 80% for mortgage loans originated under the
Stated Income Documentation program) is permitted for a mortgage loan on a
single family or condo owner-occupied property. A maximum LTV of 75% (or 70% for
mortgage loans originated under the Stated Income Documentation program) is
permitted for a mortgage loan on a non-owner-occupied property. However, for
most refinance mortgage loans under the Full Documentation program, a
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* Only open charge-offs and open collection accounts less than 2 years are
considered.
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<PAGE> 46
maximum LTV of 80% is permitted for a mortgage loan on an owner-occupied
property, and a maximum LTV of 75% is permitted only for a mortgage loan on a
non-owner-occupied property. The debt service-to-income ratio generally ranges
from 45% or less to 55% or less depending on the Qualifying Rate and the LTV.
"B" Risk. Under the "B" risk category, an applicant must have generally
repaid installment or revolving debt according to its terms. A maximum of four
30-day late payments, or two 30-day and one 60-day late payment, within the last
12 months, or, if the LTV is less than or equal to 80%, two 30-day late
payments, and one 60-day late payment in the last 12 months, is acceptable on an
existing mortgage loan. An existing mortgage loan is not required to be current
at the time the application is submitted, unless there has been a 60-day late
payment in the last 12 months. As to non-mortgage credit, some prior defaults
may have occurred, and a letter of explanation may be required under the Full
Documentation program.* Generally, no more than $500 if the LTV is greater than
80% or $1,500 if the LTV is less than or equal to 80% in open charge-offs or
collection accounts may remain open after the funding of the loan. No bankruptcy
or notice of default filings by the applicant may have occurred during the
preceding 18 months with respect to loans with LTVs that are less than or equal
to 80% or the preceding 24 months with respect to loans with LTVs that are
greater than 80%; provided, however, that if the borrower's chapter 13
bankruptcy has been discharged during the past 18 months and the borrower has
re-established a credit history otherwise complying with the credit parameters
set forth in this paragraph, then the borrower may qualify for a mortgage loan,
if the LTV is less than or equal to 80%. The mortgaged property must be in at
least average condition. A maximum LTV of 85% is permitted for a mortgage loan
on an owner-occupied property for the Full Documentation or 80% for the Stated
Income Documentation programs. A maximum LTV of 75% (or 70% for mortgage loans
originated under the Stated Income Documentation program) is permitted for a
mortgage loan on a non-owner-occupied property. The debt service-to-income ratio
generally ranges from 45% or less to 55% or less depending on the Qualifying
Rate and the LTV.
"C" Risk. Under the "C" risk category, an applicant may have experienced
significant credit problems in the past. A maximum of six 30-day late payments,
including one 60-day late payment and one 90-day late payment, within the last
12 months is acceptable on an existing mortgage loan. However, more than six
30-day late payments within the last 12 months are acceptable if there are no
60-day or 90-day late payments within the last 12 months. An existing mortgage
loan is not required to be current at the time the application is submitted. As
to non-mortgage credit, significant prior defaults may have occurred.* No more
than $3,000 in open charge-offs or bond accounts may remain open after the
funding of the loan. No bankruptcy or notice of default filings by the applicant
may have occurred during the preceding 12 months; provided, however, that if the
borrower's chapter 13 bankruptcy has been discharged during the past 12 months
and the borrower has re-established a credit history otherwise complying with
the credit parameters set forth in this paragraph, then the borrower may qualify
for a mortgage loan. The mortgaged property must be in adequate condition.
Generally, a maximum LTV of 75% for a mortgage loan on an owner-occupied
property for the Full Documentation or 70% for the Stated Income Documentation
programs is permitted. A maximum LTV of 70% is permitted for a mortgage loan on
a single family, detached non-owner-occupied property. A maximum LTV of 65% is
permitted under the Full Documentation or Stated Income Documentation programs
for all other acceptable types of properties. The debt service-to-income ratio
generally ranges from 55% or less to 60% or less depending on the Qualifying
Rate and the LTV.
"CC" Risk. Under the "CC" risk category, an applicant may have experienced
significant credit problems in the past. As to mortgage credit, mortgage
delinquency, including foreclosure proceedings, will be considered on a
case-by-case basis. As to non-mortgage credit, significant prior defaults may
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* Only open charge-offs and open collection accounts less than 2 years are
considered.
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<PAGE> 47
have occurred. Open charge-offs or collection accounts may remain open after the
funding of the loan. The mortgaged property may exhibit some deferred
maintenance. A maximum LTV of 65% (or 60% non-owner-occupied for mortgage loans
originated under the Stated Income Documentation program) is permitted for a
mortgage loan on either an owner-occupied property or a non-owner-occupied
property. The debt service-to-income ratio generally is 60% or less depending on
the Qualifying Rate and the LTV.
Exceptions. As described above, the foregoing categories and criteria are
guidelines only. On a case-by-case basis, it may be determined that an applicant
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category (collectively called an "upgrade" or
an "exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, among others: low LTV; pride
of ownership; a maximum of one 30-day late payment on all mortgage loans during
the last 12 months; stable employment or ownership of current residence of five
or more years. An upgrade or exception may also be allowed if the applicant
places a down payment through escrow of at least 20% of the purchase price of
the mortgaged property, or if the new loan reduces the applicant's monthly
aggregate mortgage payment by 25% or more. Accordingly, certain mortgagors may
qualify in a more favorable risk category that, in the absence of such
compensating factors, would satisfy only the criteria of a less favorable risk
category.
COUNTRYWIDE
The information set forth in the following paragraphs have been provided by
Countrywide. None of the Master Servicer, Option One, the Bond Issuer, the
Depositor, the Seller, the Owner Trustee, the Indenture Trustee, the Bond
Insurer nor the Underwriters or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of such
information.
Countrywide, a New York corporation and a subsidiary of Countrywide Credit
Industries, Inc., is engaged primarily in the mortgage banking business, and as
such, originates, purchases, sells and services mortgage loans. Countrywide
originates mortgage loans through a retail branch system and through mortgage
loan brokers and correspondents nationwide. Countrywide's mortgage loans are
principally first-lien, fixed or adjustable rate mortgage loans secured by
single-family residences.
As of March 31, 1999, Countrywide provided servicing for mortgage loans
with an aggregate principal balance of approximately $218.7 billion,
substantially all of which are being serviced for unaffiliated persons. As of
March 31, 1999, Countrywide provided servicing for approximately $2.6 billion in
B&C quality mortgage loans.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302. Its telephone number is (818) 225-3000.
Countrywide conducts operations from its headquarters in Calabasas and from
offices throughout the nation.
Loan Servicing
Countrywide services substantially all of the mortgage loans it originates
or acquires. Countrywide has established standard policies for the servicing and
collection of mortgage loans. Servicing includes, but is not limited to,
collecting, aggregating and remitting mortgage loan payments, accounting for
principal and interest, holding escrow (impound) funds for payment of taxes and
insurance, making inspections as required of the mortgaged properties,
preparation of tax related information in connection with the mortgage loans,
supervision of delinquent mortgage loans, loss mitigation efforts, foreclosure
proceedings and, if applicable, the disposition of mortgaged properties, and
generally administering the mortgage loans, for which it receives servicing
fees.
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Billing statements with respect to mortgage loans are mailed monthly by
Countrywide. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by
Countrywide to the mortgagor with such statements. All payments are due by the
first day of the month.
Countrywide Collection Procedures
B&C Quality Mortgage Loans. When a mortgagor fails to make a payment on a
B&C quality mortgage loan, Countrywide attempts to cause the deficiency to be
cured by corresponding with the mortgagor. In most cases, deficiencies are cured
promptly. Pursuant to Countrywide's B&C servicing procedures, Countrywide
generally mails to the mortgagor a notice of intent to foreclose after the loan
becomes 31 days past due (two payments due but not received) and, within 30 days
thereafter, if the loan remains delinquent, institutes appropriate legal action
to foreclose on the mortgaged property. Foreclosure proceedings may be
terminated if the delinquency is cured. Mortgage loans to borrowers in
bankruptcy proceedings may be restructured in accordance with law and with a
view to maximizing recovery of such loans, including any deficiencies.
Once foreclosure is initiated by Countrywide, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
If foreclosed, the mortgaged property is sold at a public or private sale
and may be purchased by Countrywide. After foreclosure, Countrywide may
liquidate the mortgaged property and charge-off the loan balance which was not
recovered through liquidation proceeds.
Servicing and charge-off policies and collection practices with respect to
B&C quality mortgage loans may change over time in accordance with, among other
things, Countrywide's business judgment, changes in the servicing portfolio and
applicable laws and regulations.
Countrywide Foreclosure And Delinquency Experience
B&C Quality Mortgage Loans. The following table summarizes the delinquency
and foreclosure experience, respectively, on the dates indicated, of
Countrywide's B&C quality mortgage loans. A B&C quality mortgage loan is
characterized as delinquent if the borrower has not paid the monthly payment due
within one month of the Due Date (i.e., generally, the first day of each month).
The delinquency and foreclosure percentages may be affected by the size and
relative lack of seasoning of the servicing portfolio because many of such loans
were not outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount, or severity
of delinquency or losses on the Mortgage Loans in either Mortgage Pool, and no
assurances can be given that the delinquency or foreclosure experience presented
in the table below will be indicative of such experience on such Mortgage Loans.
The sum of the columns below may not equal the total indicated due to rounding.
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DELINQUENCY AND FORECLOSURE EXPERIENCE FOR B&C MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1998 AS OF MARCH 31, 1999
------------------------------ ------------------------------ ------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE BALANCE PERCENTAGE
----------------- ---------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio........... $1,370,527,326.89 -- $2,248,667,416.28 -- $2,631,086,009.91 --
Delinquency percentage
30-59 Days............ $ 48,214,087.76 3.52% $ 103,063,606.19 4.58% $ 99,224,973.36 3.77%
60-89 Days............ $ 13,795,882.50 1.01% $ 23,791,570.99 1.06% $ 22,708,127.70 0.86%
90+ Days.............. $ 5,486,263.92 0.40% $ 3,913,233.13 0.17% $ 9,655,425.84 0.37%
----------------- ---- ----------------- ---- ----------------- ----
Total(2)......... $ 67,496,234.18 4.95% $ 130,768,410.31 5.82% $ 131,588,526.90 5.00%
================= ==== ================= ==== ================= ====
Foreclosure Rate(3)....... $ 12,191,591.67 0.89% $ 40,596,309.61 1.81% $ 47,596,141.67 1.81%
Bankruptcy Rate(4)........ $ 12,022,391.48 0.88% $ 20,237,252.48 0.90% $ 27,756,422.76 1.05%
</TABLE>
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(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Certain total percentages and dollar amounts may not equal the sum of the
percentages and dollar amounts indicated in the columns due to differences
in rounding.
(3) "Foreclosure Rate" is the dollar amount of mortgage loans in foreclosure as
a percentage of the total principal balance of mortgage loans outstanding as
of the date indicated.
(4) "Bankruptcy Rate" is the dollar amount of mortgage loans for which the
related borrower has declared bankruptcy as a percentage of the total
principal balance of mortgage loans outstanding as of the date indicated.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on B&C quality
mortgage loans. There can be no assurance that factors beyond Countrywide's
control, such as national or local economic conditions or downturn in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
Countrywide Underwriting Standards
B&C Quality Mortgage Loans. The following is a description of the
underwriting procedures customarily employed by Countrywide with respect to B&C
quality mortgage loans. Countrywide produces its B&C quality mortgage loans
through its Consumer Markets, Full Spectrum Lending, Correspondent Lending and
Wholesale Lending Divisions. Prior to the funding of any B&C quality mortgage
loan, Countrywide underwrites the related mortgage loan in accordance with the
underwriting standards established by Countrywide. In general, the mortgage
loans are underwritten centrally by a specialized group of underwriters who are
familiar with the unique characteristics of B&C quality mortgage loans. In
general, Countrywide does not purchase any B&C quality mortgage loan that it has
not itself underwritten.
Countrywide's underwriting standards are primarily intended to evaluate the
value and adequacy of the mortgaged property as collateral for the proposed
mortgage loan and the borrower's credit standing and repayment ability. On a
case by case basis, Countrywide may determine that, based upon compensating
factors, a prospective borrower not strictly qualifying under the underwriting
risk category guidelines described below warrants an underwriting exception.
Compensating factors may include low loan-to-value ratio, low debt-to-income
ratio, stable employment and time in the same residence. It is expected that a
significant number of the Mortgage Loans underwritten in accordance with
Countrywide's B&C quality mortgage loan underwriting guidelines, will have been
originated based on such underwriting exceptions.
Each prospective borrower completes an application which includes
information with respect to the applicant's assets, liabilities, income, credit
history and employment history, as well as certain other personal information.
If the loan-to-value ratio is greater than 70%, Countrywide generally verifies
the source of funds for the down-payments; Countrywide does not verify the
source of such funds if the loan-to-value ratio is 70% or less. Countrywide
requires an independent credit bureau report on the credit history of each
applicant in order to evaluate the applicant's ability to repay. The
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report typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcy, repossession, suits or judgments.
After obtaining all applicable employment, credit and property information,
Countrywide uses a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the mortgage loan in addition to other
monthly credit obligations. The "debt-to-income ratio" is the ratio of the
borrower's total monthly credit obligations to the borrower's gross monthly
income. The maximum monthly debt-to-income ratio varies depending upon a
borrower's credit grade and documentation level (as described below) but does
not generally exceed 60%. Variations in the monthly debt-to-income ratios limit
are permitted based on compensating factors.
Countrywide's underwriting standards are applied with applicable federal
and state laws and regulations and require an independent appraisal of the
mortgaged property which conforms to Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Corporation ("FNMA") standards. Each
appraisal includes a market data analysis based on recent sales of comparable
homes in the area and, where deemed appropriate, replacement cost analysis based
on the current cost of constructing a similar home and generally is required to
have been made not earlier than 180 days prior to the date of origination of the
mortgage loan. Every independent appraisal is reviewed by a Countrywide
representative before the loan is funded, and an additional field review
appraisal is generally performed in connection with loan amounts over $350,000
with 80% or higher loan-to-value ratios. A field review appraisal is an exterior
examination of the premises by the appraiser to determine that the property is
in acceptable condition and the appraisal value is reasonable. In most cases,
properties that are not at least average condition (including properties
requiring major deferred maintenance) are not acceptable as collateral for a B&C
loan. The maximum loan amount varies depending upon a borrower's credit grade
and documentation level but does not generally exceed $500,000. Variations in
maximum loan amount limits are permitted based on compensating factors.
Countrywide's underwriting standards permit first mortgage loans with
loan-to-value ratios at origination of up to 90% and second mortgage loans with
combined loan-to-value ratios at origination of up to 85% depending on the
program, type and use of the property, documentation level, creditworthiness of
the borrower and debt-to-income ratio.
Countrywide requires title insurance on all B&C quality mortgage loans.
Countrywide also requires that fire and extended coverage casualty insurance be
maintained on the mortgaged property in an amount at least equal to the
principal balance or the replacement cost of the mortgaged property, whichever
is less.
Countrywide's B&C mortgage loan underwriting standards are less stringent
than the standards generally acceptable to FNMA and FHLMC with regard to the
borrower's credit standing and repayment ability because the standards focus
more on the value of the mortgaged property. Borrowers who qualify generally
have payment histories and debt-to-income ratios which would not satisfy FNMA
and FHLMC underwriting guidelines and may have a record of major derogatory
credit items such as outstanding judgments or prior bankruptcies. Countrywide's
B&C mortgage loan underwriting guidelines establish the maximum permitted
loan-to-value ratio for each loan type based upon these and other risk factors
with more risk factors resulting in lower loan-to-value ratios.
Countrywide underwrites or originates B&C quality mortgage loans pursuant
to alternative sets of underwriting criteria under its Full Documentation Loan
Program (the "Full Doc Program"), Simple Documentation Loan Program (the "Simple
Doc Program") and Stated Income Loan Program (the "Stated Income Program").
Under each of the underwriting programs, Countrywide verifies the loan
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applicant's sources of income (except under the Stated Income Program),
calculates the amount of income from all sources indicated on the loan
application, reviews the credit history of the applicant, calculates the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
reviews the appraisal of the mortgaged property for compliance with
Countrywide's underwriting standards.
The Simple Doc Program is an alternative documentation program whereby
income is verified using methods other than those employed by FNMA and FHLMC.
Under the Simple Doc Program, acceptable documentation of income consists of six
months' income verification. In the case of self-employed individuals,
acceptable alternative documentation consists of a profit and loss statement
supported by a record of bank statements. Maximum loan-to-value ratios and
maximum loan amounts are generally lower than those permitted under the Full Doc
Program.
Under the Stated Income Program, the borrower's employment and income
sources must be stated on the borrower's application. The borrower's income as
stated must be reasonable for the related occupation and such determination as
to reasonableness is subject to the loan underwriter's discretion. However, the
borrower's income as stated on the application is not independently verified.
Maximum loan-to-value ratios are generally lower than those permitted under the
Full Doc Program. Except as otherwise stated above, the same mortgage credit,
consumer credit and collateral related underwriting guidelines apply.
Under the Full Doc, Simple Doc and Stated Income Programs, various risk
categories are used to grade the likelihood that the mortgagor will satisfy the
repayment conditions of the mortgage loan. These risk categories establish the
maximum permitted loan-to-value ratio, debt-to-income ratio and loan amount,
given the borrower's credit history, the occupancy status of the mortgaged
property and the type of mortgaged property. In general, higher debt-to-income
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies result in a loan being assigned to a
higher credit risk category.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each Servicer will be paid a monthly fee (a "Servicing Fee") with respect
to each Mortgage Loan serviced by it calculated as 0.50% annually (the
"Servicing Fee Rate") on the outstanding principal balance of each such Mortgage
Loan serviced by it. The Servicers will also be entitled to receive, to the
extent provided in the applicable servicing agreement, additional compensation,
in the form of any interest or other income earned on funds it has deposited in
a custodial account pending remittance to the Master Servicer, as well as
certain customary fees and charges (such as assumption fees, late payment
charges, charges for checks returned for insufficient funds, and extension and
other administrative charges) paid by borrowers (but excluding prepayment
premiums).
As compensation, the Master Servicer will be entitled to receive all
interest or other income earned on funds on deposit in the Bond Account pending
remittance of such collections to the Distribution Account maintained by the
Indenture Trustee. See "Description of the Bonds -- The Bond Account and
Distribution Account."
The Servicing Fee of each Servicer is subject to reduction as described
below under "-- Prepayment Interest Shortfalls." See "Servicing of the Mortgage
Loans -- Servicing and Other Compensation and Payment of Expenses" in the
Prospectus for information regarding expenses payable by the Master Servicer and
the Servicers. The Master Servicer and the Servicer will be entitled to
reimbursement for certain expenses prior to distribution of any amounts to
Bondholders. See "Servicing of Loans -- Servicing and Other Compensation and
Payment of Expenses" in the Prospectus.
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PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
scheduled payment dates, the borrower pays interest on the amount prepaid only
from the last scheduled payment date to the date of prepayment (or to the first
day of the applicable month, in the case of certain prepayments in part), with a
resulting reduction in interest payable for the month during which the
prepayment is made (a "Prepayment Interest Shortfall"). Any Prepayment Interest
Shortfall resulting from a prepayment in full or in part, is generally required
to be paid by the applicable Servicer, but only to the extent that such amount
does not exceed the aggregate of the Servicing Fees on the Mortgage Loans
serviced by it for the applicable Payment Date.
ADVANCES
Each Servicer will generally be obligated to make an advance (a "Monthly
Advance") with respect to delinquent payments of principal and interest on the
Mortgage Loans, adjusted to the related Mortgage Rate less the Servicing Fee
Rate, to the extent that such Monthly Advances, in its judgment, are reasonably
recoverable from future payments and collections, insurance payments or proceeds
of liquidation of a Mortgage Loan (a "Recoverable Advance"). The Master Servicer
will be obligated to make any such Monthly Advances if the Servicer fails in its
obligation to do so and to the extent that such Monthly Advances, in the Master
Servicer's judgment, are Recoverable Advances. The Master Servicer or the
Servicers, as applicable, will be entitled to recover any Monthly Advances made
by them with respect to a Mortgage Loan out of late payments thereon or out of
related liquidation proceeds and insurance proceeds or, if such amounts are
insufficient, from collections on other Mortgage Loans.
The purpose of making such Monthly Advances is to maintain a regular cash
flow to the Bondholders, rather than to guarantee or insure against losses. No
party will be required to make any Monthly Advances with respect to reductions
in the amount of the monthly payments on Mortgage Loans due to reductions made
by a bankruptcy court in the amount of a Scheduled Payment owed by a borrower or
a reduction of the applicable Mortgage Rate by application of the Soldiers' and
Sailors' Relief Act.
The Servicers will also be required to make monthly advances ("Servicing
Advances") in respect of real estate taxes, assessments, insurance premiums and
other reasonable costs and expenses associated with pursuing judicial
proceedings relating to mortgages and managing and liquidating the Mortgaged
Properties, but only if, in its judgment, such Servicing Advances, would be
Recoverable Advances.
The Servicers will be permitted to pay all or a portion of any Monthly
Advance or Servicing Advance out of amounts on deposit in their respective
custodial accounts which are being held for payment on a subsequent Payment Date
relating to such Due Period. Any such amounts so used are required to be
replaced by the Servicers by deposit to their respective custodial accounts on
or before the Remittance Date relating to the next Payment Date.
INSURANCE COVERAGE
The Master Servicer and the Servicers are required to obtain and thereafter
maintain in effect a bond, corporate guaranty or similar form of insurance
coverage (which may provide blanket coverage), or any combination thereof,
insuring against loss occasioned by the errors and omissions of their respective
officers and employees.
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EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement will provide that each year during which the
Servicers directly service any of the Mortgage Loans, a firm of independent
accountants will furnish a statement to the Indenture Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of mortgage loans similar to the Mortgage Loans by such Servicers and that, on
the basis of such examination, such firm is of the opinion that the servicing
has been conducted in accordance with the terms of such Servicing Agreement,
except for (1) such exceptions as the firm believes to be immaterial and (2)
such other exceptions set forth in such statement. In addition, each Servicing
Agreement and the Master Servicing Agreement will provide that each Servicer and
the Master Servicer will be required to deliver, on or before a specified date
in each year, an annual statement signed by an officer of such party to the
effect that such party has fulfilled its material obligations and duties under
the applicable Servicing Agreement or Master Servicing Agreement throughout the
preceding year, as the case may be.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicing Agreements require the Servicers, acting as the agents of the
Indenture Trustee, to foreclose upon or otherwise comparably convert to
ownership in the name of the Indenture Trustee, on behalf of the Bondholders and
the Bond Insurer, Mortgaged Properties securing such of the Mortgage Loans as
come into default, as to which no satisfactory arrangements can be made for the
collection of delinquent payments and which the Bond Issuer has not reacquired
pursuant to the option described below; provided, however, that if the
applicable Servicer has actual knowledge or reasonably believes that any
Mortgaged Property is contaminated by hazardous or toxic wastes or substances,
such Servicer will cause an environmental inspection of the Mortgaged Property
in accordance with accepted servicing practices. If the environmental inspection
reveals any potentially hazardous substances, the applicable Servicer will
notify the Indenture Trustee and the Bond Insurer, and the applicable Servicer
will not foreclose or accept a deed in lieu of foreclosure on the Mortgaged
Property without the consent of the Bond Insurer. In connection with such
foreclosure or other conversion, the applicable Servicer will follow such
practices as it deems necessary or advisable and as are in keeping with accepted
servicing practices; provided, however, that such Servicer will not be required
to expend its own funds in connection with foreclosure or other conversion,
correction of a default on a senior deed of trust or restoration of any
Mortgaged Property unless such Servicer determines that such foreclosure,
correction or restoration will be recoverable from the Mortgaged Property.
In servicing the Mortgage Loans, the Servicers will be required to
determine, with respect to each defaulted Mortgage Loan, when it has recovered,
whether through trustee's sale, foreclosure sale or otherwise, all amounts, if
any, it expects to recover from or on account of such defaulted Mortgage Loan,
whereupon such Mortgage Loan will be charged off and such Mortgage Loan will
become a "Liquidated Mortgage Loan."
Under the Indenture, the Bond Issuer will have the right but not the
obligation, to purchase and thereby remove it from the lien of the Indenture any
Mortgage Loan which becomes delinquent, in whole or in part, as to three
consecutive monthly installments or any Mortgage Loan as to which enforcement
proceedings have been brought by the applicable Servicer; provided, however, the
Bond Issuer's repurchase rights (i) must first be exercised as to those Mortgage
Loans most delinquent in payment at the time of repurchase and (ii) may be
exercised, in aggregate (but excluding those Mortgage Loans being removed to
satisfy the MI Insurer's right to purchase delinquent Mortgage Loans covered by
the Mortgage Insurance Policy), with respect to no more than 3% of the Cut-off
Date Balance of the Mortgage Loans without the Bond Insurer's prior consent in
the order of most delinquent to least delinquent. Any such Mortgage Loan so
reacquired will be withdrawn from the
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related Mortgage Pool on a remittance date at the Purchase Price therefor. See
"Descriptions of the Bonds -- Assignment of the Mortgage Loans".
THE BOND ISSUER
American Residential Eagle Bond Trust 1999-2 is a statutory business trust
created under Delaware law pursuant to the Trust Agreement between the Depositor
and the Owner Trustee for the purpose of executing the transactions described in
this Prospectus Supplement. Upon its formation, the Trust will not engage in any
activity other than (i) acquiring, holding and managing the Mortgage Loans and
the other assets of the Trust and the proceeds therefrom, (ii) issuing the Bonds
and the Investor Certificate and making payments due thereon and (iii) engaging
in other activities that are necessary to accomplish the foregoing.
The assets of the Trust pledged to secure the Bonds will consist of (i) the
Mortgage Pools, (ii) all payments in respect of principal and interest (but
excluding prepayment charges) on the Mortgage Loans due after the Cut-off Date;
(iii) security interests in the Mortgaged Properties; (iv) rights under certain
primary mortgage and hazard insurance policies, if any, covering the Mortgaged
Properties; (v) the Depositor's rights under the Mortgage Loan Purchase
Agreement (which have been fully assigned to the Trust); (vi) the Trust's rights
under the Master Servicing Agreement; (vii) amounts on deposit relating to the
Mortgage Loans in the Bond Account and Distribution Account (as described
herein); (viii) certain other ancillary or incidental funds, rights and
properties related to the foregoing; and (ix) all proceeds of the foregoing. The
Bondholders of each class of Bonds will also have the benefit of the Insurance
Policy issued by the Bond Insurer. See "The Insurance Policies" herein.
As described at "Description of the Bonds", the assets of the Trust will be
pledged under the Indenture to the Indenture Trustee and constitute the "Trust
Estate" to secure the payment of the Bonds.
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Bonds, or of any Mortgage Loans or
related documents, and will not be accountable for the use or application by the
Master Servicer or Indenture Trustee of any funds paid to the Servicers, the
Master Servicer or Indenture Trustee in respect of the Bonds, or the Mortgage
Loans, or the investment of any monies by the Master Servicer of monies
deposited into the Bond Account or by the Indenture Trustee of any monies
deposited in the Distribution Account. The Owner Trustee will be required to
perform only those ministerial duties specifically required of it under the
Trust Agreement. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The duties of the Trust to be performed with respect to
the Mortgage Loans under the Master Servicing Agreement or the Bonds under the
Indenture will be performed for the Trust by AmREIT as manager under the
Management Agreement.
The Owner Trustee may resign at any time, in which event the Indenture
Trustee will be obligated to appoint a successor thereto acceptable to the Bond
Insurer. The Indenture Trustee may also remove the Owner Trustee if it ceases to
be eligible to continue as such under the Trust Agreement or becomes legally
unable to act or becomes insolvent. Any resignation or removal of the Owner
Trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor.
The Bond Issuer's principal offices are located at the Corporate Trust
Office of the Owner Trustee c/o Wilmington Trust Company, Rodney Square North,
1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate
Trust Administration.
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THE DEPOSITOR
American Residential Eagle, Inc. is a limited purpose finance subsidiary of
AmREIT incorporated in Delaware in January 1998. The Depositor is a qualified
real estate investment trust subsidiary. The Depositor's principal executive
offices are located at 445 Marine View Avenue, Suite 100, Del Mar, California
92014.
THE SELLER
American Residential Investment Trust, Inc. was incorporated under Maryland
law in February 1997 and operates as a "real estate investment trust" under the
Internal Revenue Code investing in residential fixed and adjustable rate
mortgage loans and mortgage related securities.
DESCRIPTION OF THE BONDS
INTRODUCTION
The Bond Issuer will issue two classes ("Class A-1" and "Class A-2") of its
Collateralized Home Equity Bonds, Series 1999-2, pursuant to an Indenture, dated
as of July 1, 1999 (the "Indenture"), by and between the Bond Issuer and Norwest
Bank Minnesota, National Association, as indenture trustee (the "Indenture
Trustee"). Pursuant to the Trust Agreement, the Bond Issuer will also issue a
trust certificate (an "Investor Certificate") evidencing the beneficial
ownership in the assets of the Trust, which interest will be fully subordinate
in priority to payment of the Bonds. The Investor Certificate will be retained
by the Depositor.
The following summary describes certain provisions of the Indenture, the
Trust Agreement and the Master Servicing Agreement and certain other Basic
Documents. Such discussion does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of such
Basic Documents. For more details regarding the terms of the Indenture,
prospective investors in the Bonds are advised to review the Indenture. The
Depositor will provide a copy of the Indenture (without exhibits), without
charge, upon written request addressed to: American Residential Eagle, Inc., 445
Marine View Avenue, Suite 100, Del Mar, California 92014, Attention: Portfolio
Manager.
GENERAL
The Bonds will be secured by the Trust Estate created by the Indenture. See
"The Bond Issuer." The Class A-1 Bonds will be primarily secured by principal
and interest collections received from the Pool 1 Mortgage Loans. The Class A-2
Bonds will be primarily secured by principal and interest collections received
from the Pool 2 Mortgage Loans. The Bonds are non-recourse obligations of the
Bond Issuer and the proceeds of the assets of the Trust Estate, including
payments under the Insurance Policy, will be the only sources of payments on the
Bonds. The Bonds will not represent an interest in, or an obligation of, the
Bond Issuer, the Seller, the Depositor, the Owner Trustee, the Master Servicer,
either Servicer, the Indenture Trustee, the Bond Insurer, the Underwriters, any
of their respective affiliates or any other entity.
As of the Closing Date, the aggregate principal amount of the Class A-1
Bonds will equal $332,350,000 (the "Original Class A-1 Balance") and the
aggregate principal amount of the Class A-2 Bonds will equal $61,750,000 (the
"Original Class A-2 Balance"), subject to the variance described on the front
cover page hereof. The principal amount of a class of Bonds (the "Class
Balance") on any Payment Date (as defined below) will equal its respective
Original Class Balance minus the aggregate of amounts actually paid as principal
to the holders of such class as described
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below. As used below, the "Bond Balance" means the aggregate sum of the Class
Balance of both classes of Bonds as of the date of determination.
Payments on the Bonds will be made on the 25th day of each month, or if
such day is not a Business Day, on the following Business Day (each, a "Payment
Date"), commencing September 27, 1999. All payments on the Bonds will be made by
or on behalf of the Indenture Trustee to each registered holder of a Bond (a
"Bondholder") of record on (i) in the case of the Class A-1 Bonds, the Business
Day immediately prior to such Payment Date and (ii) in the case of the Class A-2
Bonds, the last day of the calendar month immediately prior to the related
Payment Date (each, a "Record Date") as indicated in the register ("Bond
Register") maintained by the Indenture Trustee; provided, however, if Bonds are
issued in definitive form in exchange for Book-Entry Bonds, the Record Date will
be in the case of both classes of Bonds the last day of the calendar month
immediately prior to the Payment Date. For purposes of the Basic Documents, a
"Business Day" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the States of New York, Maryland, California or
the state in which the corporate trust office of the Indenture Trustee is
located are required or authorized by law to be closed for business.
The Bonds will initially be issued in book-entry form ("Book-Entry Bonds")
through the facilities of The Depository Trust Company ("DTC"). Accordingly,
payments on the Bonds will be made by or on behalf of the Indenture Trustee to
the DTC or its nominee. Bonds in definitive certificated form ("Definitive
Bonds") will only be issued in exchange for Book-Entry Bonds in very limited
circumstances described under "Book-Entry Registration and Definitive Bonds."
Payments on Definitive Bonds, if issued, generally will be made either (i) by
check mailed to the address of each Bondholder as it appears in the Bonds
Register or (ii) by wire transfer of immediately available funds to the account
of a Bondholder, if such Bondholder (a) is the registered holder of Definitive
Bonds having an initial principal amount of $1,000,000 and (b) has provided the
Indenture Trustee with wiring instructions in writing five days prior to the
related Payment Date or has provided the Indenture Trustee with such
instructions for any previous Payment Date. A fee may be charged by the
Indenture Trustee to a Bondholder of Definitive Bonds for any payment made by
wire transfer. Notwithstanding the above, the first payment in redemption of any
Definitive Bonds will be made only upon presentation and surrender of such
Definitive Bonds at the office or agency designated by the Indenture Trustee for
that purpose.
The Bonds will be issued in denominations of $50,000 and multiples of $1 in
excess thereof, except that one Bond certificate may evidence an additional
amount equal to the remaining applicable Class Balance.
BOOK-ENTRY REGISTRATION AND DEFINITIVE BONDS
The Bonds initially will be book-entry bonds (the "Book-Entry Bonds").
Beneficial Owners (as defined below) will hold the Bonds through DTC, in the
United States, or Cedelbank ("Cedel") or the Euroclear system ("Euroclear") in
Europe, if they are participants of such systems, or indirectly through
organizations that are participants in such systems. The Book-Entry Bonds
initially will be registered in the name of Cede & Co., the nominee of DTC.
Cedel and Euroclear will hold omnibus positions on behalf of Cedel Participants
and Euroclear Participants, respectively, through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. ("Citibank") will act as
depositary for Cedel, and Morgan Guaranty Trust Company of New York ("Morgan")
will act as depositary for Euroclear (Citibank and Morgan, in such capacities,
individually the "Relevant Depositary" and collectively, the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry
Bonds will be entitled to receive a Definitive Bond. Unless and until Definitive
Bonds are issued, it is anticipated
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that the only "Bondholder" will be Cede & Co., as nominee of DTC or Citibank or
Morgan, as nominees of Cedel and Euroclear, respectively. Persons acquiring a
beneficial ownership interest in a Bond (each, a "Beneficial Owner") will not be
Bondholders as that term is used in the Indenture. Beneficial Owners are
permitted to exercise their rights only indirectly through DTC and its
Participants (including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Bond will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and interest
on, the Bonds from the Indenture Trustee through DTC and its Participants
(including Cedel and Euroclear). While the Bonds are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Bonds and is required to receive and transmit payments of
principal of, and interest on, the Bonds. Participants and indirect participants
with whom Beneficial Owners have accounts with respect to Book-Entry Bonds are
similarly required to make book-entry transfers and receive and transmit such
payments on behalf of their respective Beneficial Owners. Accordingly, although
Beneficial Owners will not possess certificates, the Rules provide a mechanism
by which Beneficial Owners will receive payments and will be able to transfer
their interests.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Bonds, except under the limited
circumstances described below. Unless and until Definitive Bonds are issued,
Beneficial Owners who are not Participants may transfer ownership of Bonds only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer Bonds, by book-entry transfer, through DTC
for the account of the purchasers of the Bonds, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Bonds will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participants or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant or Euroclear Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures relating to the Bonds, see "ANNEX
A: Global Clearance, Settlement and Tax Documentation Procedures -- Certain U.S.
Federal Income Tax Documentation Requirements" hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants ("Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each Participant in the Book-Entry
Bonds, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Bonds will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States Dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depositary, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants, through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States Dollars. Euroclear provides various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation that 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
(the "Federal Reserve Board") and the New York State Banking Department, as well
as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Payments on the Book-Entry Bonds will be made on each Payment Date by the
Indenture Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable Participants in accordance with
DTC's normal procedures. Each Participant will be responsible for disbursing
such payments to the Beneficial Owners that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Owners that it represents.
Under a book-entry format, Beneficial Owners may experience some delay in
their receipt of payments because such payments will be forwarded by the
Indenture Trustee to Cede & Co. Payments with respect to Bonds held through
Cedel or Euroclear will be credited to the cash accounts of Cedel Participants
or Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "ANNEX A: Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" hereto. Because DTC has indicated that it will act only on behalf
of Financial Intermediaries, the ability of Beneficial Owners to pledge
Book-Entry Bonds to persons or entities that do not participate in the
depository system or otherwise take actions in respect of such Book-Entry Bonds
may be limited due to the lack of physical certificates representing such
Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry
form may reduce the liquidity of the Bonds in the secondary market because
certain potential investors may be unwilling to purchase Bonds for which they
cannot obtain physical certificates.
The monthly and annual statements with respect to the Mortgage Loans and
the Bonds as described under "-- Reports to Bondholders" herein will be provided
by the Indenture Trustee to Cede & Co., as nominee of DTC and a Bondholder, and
may be made available by such entity to Beneficial Owners upon request, in
accordance with the Rules, and to the Financial Intermediaries to whose DTC
accounts the related Book-Entry Bonds are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Bonds are issued, DTC will take any action permitted to be taken by a Bondholder
under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Bonds are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Bonds. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Bondholder
under the Indenture on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Bonds that conflict with actions taken with respect to other
Bonds.
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Definitive Bonds will be issued in registered form to Beneficial Owners, or
their nominees, rather than to DTC, only if (i) DTC or the Bond Issuer advises
the Indenture Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depositary with respect
to the Bonds and the Bond Issuer or the Indenture Trustee is unable to locate a
qualified successor, (ii) the Bond Issuer, at its option, advises the Indenture
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after a Bond Event of Default under the Indenture, the Beneficial Owners
representing not less than 51% of the aggregate Principal Balance of the Book-
Entry Bonds advise the Indenture Trustee and DTC that the book-entry system is
no longer in the best interests of such Beneficial Owners. Upon issuance of
Definitive Bonds to Beneficial Owners, the Bonds will be transferable directly
(and not exclusively on a book-entry basis) and registered holders will deal
directly with the Indenture Trustee with respect to transfers, notices and
payments.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify DTC, which
in turn will notify all Beneficial Owners of the occurrence of such event and
the availability through DTC of Definitive Bonds. Upon surrender by DTC of the
global certificates representing the Book-Entry Bonds and instructions for re-
registration, the Indenture Trustee will issue Definitive Bonds and thereafter
the Indenture Trustee will recognize the holders of such Definitive Bonds as
Bondholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfer of Bonds among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans were acquired by the Seller from the Originators either
directly or in the secondary market and sold by the Seller to the Depositor
pursuant to the Mortgage Loan Purchase Agreement. See "Overview of the
Transaction" and "Servicing of the Mortgage Loans." On the
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Closing Date, the Depositor in turn will convey each such Mortgage Loan to the
Bond Issuer pursuant to the Mortgage Loan Purchase Agreement.
At the time of issuance of the Bonds, the Bond Issuer will pledge all of
its right, title and interest in and to the Mortgage Loans, including all
principal and interest due on each such Mortgage Loan after the Cut-off Date
(but excluding prepayment charges) and all other Trust assets comprising the
Trust Estate, without recourse, to the Indenture Trustee pursuant to the
Indenture as collateral for the Bonds; provided, however, that the Seller will
reserve and retain all its right, title and interest in and to principal and
interest due on the Mortgage Loans on or prior to the Cut-off Date (whether or
not received on or prior to such Cut-off Date), and to prepayments received on
or prior to the Cut-off Date. The Indenture Trustee, concurrently with such
assignment, will authenticate and deliver the Bonds at the direction of the Bond
Issuer in exchange for the Trust Estate.
The Indenture will require the Bond Issuer to deliver to the Indenture
Trustee or to Bankers Trust Company of California, N.A. as its custodian (the
"Custodian"), the related Mortgage Notes endorsed without recourse to the
Indenture Trustee or in blank, the related mortgages or deeds of trust with
evidence of recording thereon, if applicable, and certain other documents
relating to the Mortgage Loans (collectively, the "Mortgage Files"). The
Depositor will be required to cause to be prepared at the expense of the
Depositor and within the time period specified in the Indenture (or, if original
recording information is unavailable, within such later period as is permitted
by the Indenture), assignments of the mortgages to the Indenture Trustee.
The Indenture Trustee or the Custodian on behalf of the Indenture Trustee
will review the Mortgage Files delivered to it and if any document required to
be included in any Mortgage File is found to be missing or to be defective in
any material respect and such defect is not cured within 90 days following
notification thereof to the Seller, the Bond Issuer, the Depositor and the Bond
Insurer by the Indenture Trustee or the Custodian, the Indenture Trustee will
require either that the related Mortgage Loan be removed from the Trust or that
a Mortgage Loan conforming to the requirements of the Indenture (a "Qualified
Replacement Mortgage") be substituted for the related Mortgage Loan in the
manner described below.
In connection with the transfer of the Mortgage Loans to the Depositor, the
Seller will make certain representations and warranties under the Mortgage Loan
Purchase Agreement as to the accuracy in all material respects of the
information set forth on a schedule identifying and describing each Mortgage
Loan. In addition, the Seller will make certain other representations and
warranties regarding the Mortgage Loans, including, for instance, that each
Mortgage Loan, at its origination, complied in all material respects with
applicable state and federal laws; that each mortgage is a valid first priority
lien; that, as of the Statistical Cut-off Date, no more than approximately 0.16%
of the Pool 1 Mortgage Loans and 0.20% of the Pool 2 Mortgage Loans (by
Principal Balance as of the Statistical Cut-off Date) will be more than two
payments past due; that each Mortgaged Property consists of a one-to four-family
residential property, including, but not limited to, condominiums, planned unit
developments, manufactured housing or mixed use property; that the Seller had
good title to each Mortgage Loan prior to such transfer; and that the
Originators were authorized to originate each Mortgage Loan. The rights of the
Depositor to enforce remedies for breaches of such representations and
warranties in the Mortgage Loan Purchase Agreement against the Seller will be
assigned by the Depositor to the Bond Issuer (and by the Bond Issuer to the
Indenture Trustee pursuant to the Indenture).
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
Indenture Trustee, the Bondholders or the Bond Insurer therein or (2) a breach
of any representation
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or warranty made by the Seller relating to such Mortgage Loan materially and
adversely affects the value of any such Mortgage Loan or materially and
adversely affects the interests of the Indenture Trustee, the Bondholders or the
Bond Insurer therein, the Indenture Trustee will enforce the remedies for such
defects or breaches against the Seller by requiring the Seller to remove the
related Mortgage Loan (any such Mortgage Loan, a "Defective Mortgage Loan") from
the Trust Estate by remitting to the Indenture Trustee an amount equal to the
Principal Balance (as defined herein) of such Defective Mortgage Loan together
with interest accruing at the Mortgage Rate on such Defective Mortgage Loan from
the date interest was last paid by the related mortgagor to the end of the Due
Period immediately preceding the related Remittance Date, plus, the amount of
any unreimbursed Monthly Advances or Servicing Advances made by the applicable
Servicer or the Master Servicer with respect to such Defective Mortgage Loan,
less any payments received during the related Collection Period in respect of
such Defective Mortgage Loan (the "Purchase Price"). The Seller will also have
the option, but not the obligation, to substitute for such Defective Mortgage
Loan a Qualified Replacement Mortgage. Upon delivery of a Qualified Replacement
Mortgage and deposit of certain amounts in the Distribution Account (as
hereinafter defined) as set forth in the Indenture, or deposit of the Purchase
Price in the Distribution Account and receipt by the Indenture Trustee and the
Bond Insurer of written notification of any such substitution or removal, as the
case may be, the Indenture Trustee shall execute and deliver an instrument of
transfer or assignment necessary to vest legal and beneficial ownership of such
Defective Mortgage Loan (including any property acquired in respect thereof or
proceeds of any insurance policy with respect thereto) to the Seller and release
such Defective Mortgage Loan from the Trust Estate.
The "Collection Period" with respect to a Payment Date shall be the period
beginning on the first day of the calendar month immediately preceding the month
in which such Payment Date occurs (or, in the case of the first Payment Date,
the period beginning on the Cut-off Date) and ending on the last day of such
calendar month. The "Remittance Date" shall be the 18th day of the month in
which such Payment Date occurs, or if such day is not a Business Day, the next
succeeding Business Day. The "Due Period" with respect to any Payment Date shall
be the period commencing on the second day of the calendar month immediately
preceding the calendar month in which such Payment Date occurs (or, with respect
to the first Payment Date, commencing on the Cut-off Date for each Mortgage
Loan) and ending on the first day of the calendar month in which such Payment
Date occurs.
The obligation of the Seller to cure, remove or substitute any Mortgage
Loan as described above will constitute the sole remedy available to
Bondholders, the Bond Insurer (with certain exceptions) or the Indenture Trustee
for a Defective Mortgage Loan.
PAYMENT ON THE BONDS
Priority of Payments. Payments on each class of Bonds will be made by the
Indenture Trustee (in such capacity, the "Paying Agent") on each Payment Date,
commencing with the Payment Date in September 1999, to Bondholders as of the
applicable Record Date in an amount equal to the product of such Bondholders'
Percentage Interest and the amount paid in respect of such class of Bonds.
Payments on the Class A-1 Bonds will be made primarily from Available Funds for
Pool 1 and payments on the Class A-2 Bonds will be made primarily from Available
Funds for Pool 2. The "Percentage Interest" represented by any Bond will be
equal to the percentage obtained by dividing the aggregate principal balance of
such Bond by the Class Balance of the related class of Bonds.
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On each Payment Date, the Paying Agent will be required to pay the
following amounts with respect to each class of Bonds, in the following order of
priority, out of Available Funds for the related Mortgage Pool, unless otherwise
specified:
first, to the Bondholders of such class, an amount equal to (a) the
Monthly Interest Amount for such class for such Payment Date and (b) any
unpaid interest due pursuant to this priority first with respect to
previous Payment Dates;
second, to the Bondholders of such class, an amount equal to the
Monthly Principal Amount for such class for such Payment Date in reduction
of the Class Balance until such Class Balance is reduced to zero;
third, pursuant to the cross-collateralization provisions of the
Trust, to the Bondholders of the other class of Bonds, the amount, if any,
necessary to fund any deficiency in priority first with respect to the
other class of Bonds, but solely after taking into account the allocation
of 100% of Available Funds for such class of Bonds as of such Payment Date;
fourth, to the Bond Insurer, any amount due to the Bond Insurer
pursuant to the Insurance Agreement with respect to Bonds of such class
(together with interest thereon at the rate specified in the Insurance
Agreement);
fifth, to the Bondholders of such class, the amount of the
Over-collateralization Deficit, if any, for such class of Bonds with
respect to such Payment Date, in reduction of the related Class Balance;
sixth, pursuant to the cross-collateralization provisions of the
Trust, to the Bondholders of the other class of Bonds, the amount, if any,
necessary to fund any deficiency in priorities fourth and fifth above with
respect to the other class of Bonds, but solely after taking into account
the allocation of 100% of Available Funds for such other Class on such
Payment Date;
seventh, to the Bondholders of such class, the amount, if any,
necessary for the Over-collateralization Amount to equal the Required
Over-collateralization Amount for such class of Bonds on such Payment Date
(after giving effect to the application of the Monthly Principal Amount for
such Payment Date) in an amount necessary to reduce the related Class
Balance until such Class Balance is reduced to zero;
eighth, to a reserve account (the "Reserve Account") for application
in accordance with the Indenture, the amount, if any, equal to the excess
of the Required Over-collateralization Amount with respect to the other
class of Bonds over the Over-collateralization Amount with respect to such
other class of Bonds on such Payment Date (after giving effect to the
application of the Monthly Principal Amount and any payments made pursuant
to priority sixth with respect to such other class of Bonds as of such
Payment Date; and
ninth, to the Bondholders of the Class A-1 Bonds, but solely from
Available Funds related to Pool 1, the amount of any LIBOR Carryover
Amount.
Any Available Funds for the related Class remaining after the application
of priorities first through eighth above will be released by the Indenture
Trustee to the Bond Issuer for distribution to the holder of the Investor
Certificate on such Payment Date free from the lien of the Indenture. Once
distributed, such amounts will not be available to make payments on the Bonds of
either class or payments to the Bond Insurer on any subsequent Payment Date.
In the event that, with respect to a particular Payment Date, Available
Funds for a class (including amounts available from the Reserve Account and
payments pursuant to the cross-collateralization provisions of the Trust) on
such date are not sufficient to pay any portion of the Monthly Interest Amount
for the related class of Bonds, the Indenture Trustee will file a claim on
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the Insurance Policy relating to such class of Bonds in an amount equal to such
deficiency and apply the Insured Payment in respect of such claim to the payment
of the deficiency in the Monthly Interest Amount. In addition, the Indenture
Trustee will file a claim on the Insurance Policy relating to such class in an
amount equal to any Over-collateralization Deficit (as defined at "-- Over-
collateralization" below) for such class on a Payment Date (after taking into
account payments in respect of the Monthly Principal Amount, amounts available
from the Reserve Account and payments pursuant to cross-collateralization
provisions of the Trust on such Payment Date) and, pursuant to priority fifth
above, apply the portion of the Insured Payment related to such Over-
collateralization Deficit to reduce the related Class Balance on such Payment
Date by the amount of such Over-collateralization Deficit. Any Insured Payment
paid in respect of a class of Bonds to make up any Over-collateralization
Deficit shall be paid to the related Bondholders, in reduction of the related
Class Balance, until such Class Balance is reduced to zero. The Indenture
Trustee will also file a claim on the applicable Insurance Policy in an amount
equal to the unpaid principal balance of the related class of Bonds on the
Stated Maturity Date or, if earlier, the date on which the Trust is terminated
pursuant to the Indenture.
In no event will the aggregate payments of principal to the Class A-1
Bondholders exceed the Original Class A-1 Balance or to the Class A-2
Bondholders exceed the Original Class A-2 Balance.
Certain Definitions. For purposes of the priorities discussed above, the
following terms have the meanings set forth below:
"Available Funds" with respect to a Mortgage Pool and the related class of
Bonds on any Payment Date will consist of the sum of the amounts described in
clauses (a) through (g) below to the extent such amounts are related to the
Mortgage Loans of the Mortgage Pool related to such class of Bonds, less, (i)
the Administrative Fee Amount allocable to such class of Bonds in respect of
such Payment Date; (ii) Monthly Advances and Servicing Advances related to the
Mortgage Loans in the related Mortgage Pool, including Nonrecoverable Advances,
previously made that are reimbursable to the Servicers or the Master Servicer
(other than those included in liquidation expenses for any Liquidated Mortgage
Loan and already reimbursed from the related Liquidation Proceeds) in such
Collection Period to the extent permitted by the Master Servicing Agreement;
(iii) any unpaid Servicing Fees and expenses related to the Mortgage Loans in
the related Mortgage Pool attributable to prior periods due to the Servicers;
(iv) any unpaid fees, expenses and other amounts owed to the Indenture Trustee,
the Owner Trustee or the Manager allocable to the related Mortgage Pool or such
class of Bonds attributable to prior periods; and (v) the aggregate amounts (A)
deposited into the Bond Account or Distribution Account that may not be
withdrawn therefrom pursuant to a final and nonappealable order of a United
States bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code and that would otherwise have
been included in Available Funds for such class on such Payment Date and (B)
received by the Master Servicer or the Indenture Trustee that are recoverable
and sought to be recovered from the Bond Issuer as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final nonappealable order of a court of competent
jurisdiction:
(a) all scheduled payments of interest received with respect to the
Mortgage Loans in the related Mortgage Pool due during the related Due
Period and all other interest payments on or in respect of such Mortgage
Loans received by or on behalf of the Servicers or the Master Servicer
during the related Collection Period, net of amounts representing interest
due on such Mortgage Loans in respect of any period prior to the Cut-off
Date, plus any amounts paid by the Servicers or by the Master Servicer in
respect of Prepayment Interest Shortfalls on the Mortgage Loans and any net
income from related REO Properties for such Collection Period;
(b) all scheduled payments of principal received with respect to the
Mortgage Loans in the related Mortgage Pool and due during the related Due
Period and all other principal payments
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(including Principal Prepayments, but excluding amounts described elsewhere
in this definition) received or deemed to be received during the related
Collection Period in respect of such Mortgage Loans;
(c) the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgaged Property in the related Mortgage Pool that
are received during the related Collection Period and applied by the
Servicers to reduce the Principal Balance of the related Mortgage Loan
("Insurance Proceeds") (which proceeds will not include any amounts applied
to the restoration or repair of the related Mortgaged Property or released
to the related mortgagor in accordance with applicable law, the applicable
Servicer's customary servicing procedures or the terms of the related
Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicers
during the related Collection Period in connection with the liquidation of
any Mortgaged Property securing a Mortgage Loan in the related Mortgage
Pool, whether through trustee's sale, foreclosure, condemnation, taking by
eminent domain or otherwise (including any Insurance Proceeds to the extent
not duplicative of amounts in clause (c) above) ("Liquidation Proceeds"),
less expenses incurred by the applicable Servicer in connection with the
liquidation of such Mortgage Loan ("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans in the related Mortgage Pool that are required or permitted to be
repurchased, released, removed or substituted by the Seller during the
related Collection Period as described in "-- Assignment of Mortgage Loans"
and "Servicing of the Mortgage Loans" herein, to the extent such amounts
are received by the Indenture Trustee on or before the related Deposit
Date;
(f) the amount of any Monthly Advances made with respect to the
Mortgage Loans in the related Mortgage Pool made for such Payment Date; and
(g) the aggregate of amounts deposited in the Distribution Account by
the Indenture Trustee, the Bond Issuer or the Bond Insurer, as the case may
be, during such Collection Period in connection with redemption of the
Bonds as described under "-- Redemption of the Bonds" herein;
The "Administrative Fee Amount" for any Payment Date is equal to the sum of
the Management Fee, the Mortgage Insurance Premium, the Bond Insurance Premium
and any fee or expense owing to the Owner Trustee related to such Mortgage Pool
or otherwise allocable to the related class of Bonds and relating to such
Payment Date.
"Bond Insurance Premium" means as to any Payment Date, the monthly premium
as set forth in the Insurance Policy relating to the class of Bonds paid to the
Bond Insurer.
"Class Balance" means as of any Payment Date, the Original Class Balance of
such class of Bonds less all Monthly Principal Amounts and Excess Cash (as
defined at "-- Over-collateralization" below) paid to the Bondholders on
previous Payment Dates in reduction of the Class Balance (exclusive, for the
sole purpose of effecting the Bond Insurer's subrogation rights, of payments
made by the Bond Insurer in respect of any Over-collateralization Deficit under
the Insurance Policy, except to the extent reimbursed to the Bond Insurer
pursuant to the Indenture).
"Determination Date" means, as to any Payment Date, the last day of the Due
Period relating to such Payment Date.
"Insurance Agreement" means the Insurance and Indemnity Agreement, dated as
of July 1, 1999 by and among the Bond Insurer, the Bond Issuer, AmREIT and the
Depositor.
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"Interest Accrual Period" means, with respect to any Payment Date and the
Class A-1 Bonds, the period from the Payment Date in the month preceding the
month of such Payment Date (or, in the case of the first Payment Date, from the
Closing Date) through the day before such Payment Date and, in the case of the
Class A-2 Bonds, the calendar month immediately preceding the month in which the
related Payment Date occurs.
"LIBOR Carryover Amount" means, with respect to the Class A-1 Bonds and as
to any Payment Date, the sum of (i) the excess, if any, of the Monthly Interest
Amount calculated on the basis of Bond Interest Rate (without regard to the
Class A-1 Net Funds Cap) as described at "-- Bond Interest Rate" below over the
related Monthly Interest Amount calculated on the basis of the Class A-1 Net
Funds Cap, (ii) any LIBOR Carryover Amount remaining unpaid from prior Payment
Dates and (iii) interest on the amount in clause (ii) calculated on the basis of
the Class A-1 Bond Interest Rate (without regard to the Class A-1 Net Funds Cap)
for the related Due Period.
"Liquidated Mortgage Loan" means, as to any Payment Date, any Mortgage Loan
as to which the applicable Servicer has determined during the related Collection
Period, in accordance with its customary servicing procedures, that all
Liquidation Proceeds which it expects to recover from or on account of such
Mortgage Loan have been recovered.
"Management Fee" means as to any Payment Date, the monthly fee payable to
AmREIT, as Manager under the Management Agreement.
"Monthly Interest Amount" for any Payment Date will be an amount equal to
interest accrued during the related Interest Accrual Period at the applicable
Bond Interest Rate (see "-- Bond Interest Rate" below) on the Class Balance of
the related class of Bonds as of the preceding Payment Date (after giving effect
to payment, if any, in reduction of principal made on such class on such
preceding Payment Date), minus any Relief Act Shortfalls.
"Monthly Principal Amount" for any Payment Date will be an amount equal to
(A) the aggregate of (i) all scheduled payments of principal received with
respect to the Mortgage Loans in the related Mortgage Pool due during the
related Due Period and all other amounts collected, received or otherwise
recovered in respect of principal on such Mortgage Loans (including Principal
Prepayments) during or in respect of the related Collection Period, and (ii) the
aggregate of all amounts allocable to principal deposited in the Collections
Account on the related Remittance Date by the Seller or the Master Servicer in
connection with a repurchase, release, removal or substitution of any such
Mortgage Loans pursuant to the Master Servicing Agreement, reduced by (B) the
amount of any Over-collateralization Surplus (as defined at
"-- Over-collateralization" below) with respect to such Payment Date and such
class of Bonds.
"Mortgage Insurance Premium" means as to any Payment Date, the aggregate
monthly premiums payable with respect to the Mortgage Loans in the related
Mortgage Pool covered by the Mortgage Insurance Policy.
"Over-collateralization Deficit" means, with respect to any Payment Date,
the amount, if any, by which (x) the aggregate Bond Balance, after taking into
account all payments to be made on such Payment Date on either class of Bonds in
reduction thereof, including any Excess Cash payments, exceeds (y) the sum of
(i) the aggregate Principal Balance of the Mortgage Loans in the Trust Fund as
of the end of the applicable Due Period and (ii) any amounts on deposit in the
Reserve Fund after application of all amounts due on such Payment Date.
"Principal Balance" of a Mortgage Loan with respect to any Determination
Date means the actual outstanding principal balance thereof as of the close of
business on the Determination Date in the preceding month (or, in the case of
the first Payment Date, as of the Cut-off Date), less (i) all
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scheduled payments of principal received with respect to the Mortgage Loans and
due during the related Due Period and all other amounts collected, received or
otherwise recovered in respect of principal on the Mortgage Loans (including
Principal Prepayments) during or in respect of the related Collection Period,
Net Liquidation Proceeds and Insurance Proceeds allocable to principal recovered
or collected in respect of such Mortgage Loan during the related Collection
Period, (ii) the portion of the Purchase Price allocable to principal remitted
by the Seller or the applicable Servicer to the Indenture Trustee on or prior to
the next succeeding Remittance Date in connection with a release and removal of
such Mortgage Loan pursuant to the Indenture, to the extent such amount is
actually remitted on or prior to such Remittance Date, and (iii) the amount to
be remitted by the Seller or the applicable Servicer to the Indenture Trustee on
the next succeeding Remittance Date in connection with a substitution of a
Qualified Replacement Mortgage for such Mortgage Loan pursuant to the Indenture,
to the extent such amount is actually remitted on or prior to such Remittance
Date; provided, however, that Mortgage Loans that have become Liquidated
Mortgage Loans since the preceding Determination Date (or, in the case of the
first Determination Date, since the Cut-off Date) will be deemed to have a
Principal Balance of zero on the current Determination Date.
"Principal Prepayment" means any mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds and
Insurance Proceeds allocable to principal) which, in the case of a mortgagor
payment, is received in advance of its scheduled due date and not accompanied by
an amount as to interest representing scheduled interest for any month
subsequent to the month of such payment or that is accompanied by instructions
from the related mortgagor directing the applicable Servicer to apply such
payment to the Principal Balance of such Mortgage Loan currently.
"Relief Act Shortfalls" means as to any Due Period, the aggregate
reductions in interest collected on the Mortgage Loans as a result of The
Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
THE BOND INTEREST RATE
Class A-1 Bonds
The interest rate applicable to the Class A-1 Bonds (the "Class A-1 Bond
Rate") for any Payment Date will be a per annum rate equal to the least of (i)
the applicable Class A-1 Formula Rate, (ii) the CAP Rate and (iii) the Class A-1
Net Funds Cap. Interest in respect of any Payment Date will accrue during the
related Interest Accrual Period on the basis of a 360-day year and the actual
number of days elapsed. The Interest Accrual Period for the Class A-1 Bonds will
be the period commencing on the prior Payment Date (or in the case of the first
Payment Date, beginning on the Closing Date) and ending on the day immediately
preceding such Payment Date.
The "Class A-1 Formula Rate" will equal One-Month LIBOR as determined by
the Indenture Trustee as set forth under "-- Calculation of One-Month LIBOR"
plus the applicable margin (the "Bond Margin") set forth below:
<TABLE>
<CAPTION>
BOND MARGIN(1) BOND MARGIN(2)
- -------------- --------------
<S> <C>
0.34%.... 0.68%
</TABLE>
- ---------------
(1) Prior to the Initial Redemption Date.
(2) On or after the Initial Redemption Date (see "-- Redemption of the Bonds"
below).
The "Cap Rate" will equal 15.00% per annum both prior to and after the
Initial Redemption Date.
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The "Net Funds Cap" for any Payment Date will equal the "Pool 1 Weighted
Average Net Mortgage Rate" calculated as (i) the average of the Mortgage Rates
of the Pool 1 Mortgage Loans as of the first day of the month preceding the
month of such Payment Date (or in the case of the first Payment Date, the
Closing Date), weighted on the basis of the Principal Balances of the Pool 1
Mortgage Loans as of such date minus (ii) the sum of the (a) Servicing Fee Rate
allocable to Pool 1, (b) the Bond Insurance Premium Rate (i.e., the Bond
Insurance Premium expressed as an annual percentage of the Bonds) allocable to
the Class A-1 Bonds, (c) the Mortgage Insurance Premium Rate (i.e., the Mortgage
Insurance Premium expressed as an annual percentage of the then balance of the
Mortgage Loans covered by such policy) allocable to Pool 1, (d) the Management
Fee Rate (i.e., the Management Fee expressed as an annual percentage of the then
Principal Balance of the Mortgage Loans) allocable to Pool 1, and (e) the
Minimum Spread ((a) through (e) collectively, the "Aggregate Expense Rate"). The
sum of the Servicing Fee Rate, the Bond Insurance Premium Rate, the Mortgage
Insurance Premium Rate and the Management Fee Rate allocable to Pool 1 will be
approximately 1.063% per annum for the initial Due Period and is subject to
change based on (i) the actual rate of prepayments of Pool 1 Mortgage Loans
covered by the Mortgage Insurance Policy and (ii) the change in the Minimum
Spread required by the Bond Insurer. The "Minimum Spread" is equal to 0% for the
first fifteen Payment Dates and 0.50% thereafter.
Calculation of One-Month LIBOR. With respect to each Payment Date, Date,
One-Month LIBOR shall be established by the Indenture Trustee and will equal the
rate for one month United States dollar deposits quoted on Telerate Page 3750 as
of 11:00 A.M., London time, on the second LIBOR Business Day prior to the first
day of the relate Interest Accrual Period (or the second LIBOR Business Day
prior to the Closing Date, in the case of the first Payment Date) (each, a
"LIBOR Determination Date"). "Telerate Page 3750" means the display designated
as page 3750 on the Telerate Service (or such other page as may replace page
3750 on that service for the purpose of displaying London interbank offered
rates of major banks). If such rate does not appear on such page (or other page
as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
reasonably selected by Indenture Trustee), the rate will be the Reference Bank
Rate. The "Reference Bank Rate" will be determined on the basis of the rates at
which deposits in U.S. Dollars are offered by the reference banks (which shall
be three major banks that are engaged in transactions in the London interbank
market, selected by the Manager) as of 11:00 A.M. London time, on the date that
is two LIBOR Business Days prior to the immediately preceding Payment Date to
prime banks in the London interbank market for a period of one month in amounts
approximately equal to the Bond Balance then outstanding. The Indenture Trustee
will request the principal London office of each of the reference banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate will be the arithmetic mean of the quotations. If on such date fewer
than two quotations are provided as requested, the rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the Indenture Trustee as of 11:00 A.M., New York City time, on such date for
loans in U.S. Dollars to leading European banks for a period of one month in
amounts approximately equal to the Class Balance of the Class A-1 Bonds then
outstanding. If no such quotations can be obtained, the rate will be LIBOR for
the prior Payment Date. "LIBOR Business Day" means any day other than (i) a
Saturday or a Sunday or (ii) a day on which banking institutions in the State of
New York or in the city of London, England are required or authorized by law to
be closed.
Class A-2 Bonds
The interest rate applicable to the Class A-2 Bonds (the "Class A-2 Bond
Rate") for any Payment Date will be a per annum rate equal to the lesser of (i)
the Class A-2 Stated Rate and (ii) the Class A-2 Net Funds Cap.
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The "Class A-2 Stated Rate" will be a fixed interest rate of 7.09% per
annum prior to the Initial Redemption Date and (ii) 7.59% per annum on or after
the Initial Redemption Date.
The Class A-2 Net Funds Cap will be calculated using the same methodology
as the Class A-1 Net Funds Cap (as defined above) but excluding any reduction
for Minimum Spread and applying such methodology in relation to the Principal
Balances of the Pool 2 Mortgage Loans and the Class Balance of the Class A-2
Bonds. The sum of the Servicing Fee Rate, Bond Insurance Premium Rate, the
Mortgage Insurance Premium Rate and Management Fee Rate allocable to Pool 2 and
the Class A-2 Bonds will be approximately 0.968% per annum for the initial Due
Period and is subject to change based upon the actual rate of prepayment of Pool
2 Mortgage Loans covered by the Mortgage Insurance Policy. The Interest Accrual
Period for the Class A-2 Bonds will be the calendar month preceding the Payment
Date. Interest on the Class A-2 Bonds will be calculated on the basis of a year
of 360 days and twelve 30 day months.
THE BOND ACCOUNT AND DISTRIBUTION ACCOUNT
Not later than the Remittance Date, the Servicers will be required to wire
transfer to the Master Servicer for deposit into a bond account established with
the Master Servicer (the "Bond Account") all collections received or Monthly
Advances made by them with respect to the Pool 1 and Pool 2 Mortgage Loans.
Pursuant to the Indenture, the Indenture Trustee shall establish and maintain an
account with respect to the Bonds (the "Distribution Account") from which all
payments with respect to the Bonds will be made. On or before 11:00 A.M. on the
Payment Date (the "Deposit Date"), the Master Servicer will be required pursuant
to the Master Servicing Agreement to wire transfer to the Indenture Trustee for
deposit into the Distribution Account the sum (without duplication) of all
amounts on deposit in the Bond Account.
Investment of Bond Account. All or a portion of the Bond Account may be
invested and reinvested by the Master Servicer in one or more Permitted
Investments (as defined in the Indenture) bearing interest or sold at a
discount. The Master Servicer or any affiliate thereof may be the obligor on any
investment in the Bond Account which otherwise qualifies as a Permitted
Investment.
All income or other gain from investments in the Bond Account will not be
available to Bondholders or otherwise subject to any claims or rights of the
Bondholders and will be held in the Bond Account for the benefit of the Master
Servicer, subject to withdrawal from time to time as permitted by the Master
Servicing Agreement. Any loss resulting from such investments will be for the
account of the Master Servicer. The Master Servicer will be required to deposit
the amount of any such loss immediately upon the realization of such loss to the
extent such loss will not be offset by other income or gain from investments in
the Bond Account and then available for such application.
OVER-COLLATERALIZATION
Credit enhancement with respect to each class of Bonds will be provided in
part by over-collateralization resulting from the aggregate Principal Balances
of the Mortgage Loans in the related Mortgage Pool as of the end of each Due
Period exceeding the corresponding Class Balance for the related Payment Date
(after taking into account the Monthly Principal Amount and Excess Cash to be
paid on such Payment Date in reduction of the Class Balance for such class of
Bonds). The Indenture requires that the Over-collateralization Amount (as
defined below) for a class of Bonds be maintained at the related Required
Over-collateralization Amount. This maintenance is intended to be accomplished
by the application of monthly Excess Cash in respect of a Mortgage Pool to
accelerate the pay-down of the Class Balance of the related class of Bonds until
the related Over-collateralization Amount equals the Required
Over-collateralization Amount for such class of Bonds.
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Such applications of Excess Cash, because they consist of interest collections
on the Mortgage Loans, but are distributed as principal on the related class of
Bonds, will increase the Over-collateralization Amount for the related class of
Bonds. Such over-collateralization is intended to result in amounts received on
the Mortgage Loans in the related Mortgage Pool in excess of the amount
necessary to pay the Monthly Interest Amount and Monthly Principal Amount
required to be paid on the related class of Bonds on any Payment Date being
applied to reduce the related Class Balance to zero no later than the Stated
Maturity of such class of Bonds.
The "Excess Cash" with respect to any Mortgage Pool and any Payment Date
will be equal to Available Funds for such Pool for such Payment Date, reduced by
the sum of (i) any amounts payable to the Bond Insurer pursuant to the Insurance
Agreement allocable to such class of Bonds, (ii) the Monthly Interest Amount for
the related class and Payment Date, (iii) the Monthly Principal Amount for the
related class and Payment Date and (iv) any Over-collateralization Deficit (as
defined below) for the related class.
The "Over-collateralization Amount" with respect to any Mortgage Pool and
Payment Date is the amount, if any, by which (x) the aggregate Principal Balance
of the related Mortgage Loans as of the end of the related Due Period exceeds
(y) the Class Balance of the Bonds for the related Mortgage Pool as of such
Payment Date after taking into account payments of the Monthly Principal Amount
to Bondholders (disregarding any permitted reduction in Monthly Principal Amount
due to an Over-collateralization Surplus) made on such Payment Date. The
required level of the Over-collateralization Amount with respect to any Payment
Date and class of Bonds (the "Required Over-collateralization Amount") will be
equal to the amount specified as such in the Indenture. The Indenture generally
provides that the Required Over-collateralization Amount for a class of Bonds
may, over time, decrease or increase, subject to certain floors, caps and
triggers including triggers that allow the Required Over-collateralization
Amount to decrease or "step down" based on the performance of the Mortgage Loans
with respect to certain delinquency rate tests specified in the Indenture. In
addition, Excess Cash for a Mortgage Pool will be applied to the payment in
reduction of principal of the related class of Bonds during the period that the
related Mortgage Loans are unable to meet certain tests specified in the
Insurance Agreement based on delinquency rates. Any increase in the applicable
Required Over-collateralization Amount for a Mortgage Pool may result in an
accelerated amortization of the related class of Bonds until such Required
Over-collateralization Amount is reached. Conversely, any decrease in the
Required Over-collateralization Amount for a Mortgage Pool will result in a
decelerated amortization of the related class of Bonds until such Required
Over-collateralization Amount is reached.
The application of Excess Cash from a Mortgage Pool to reduce the Class
Balance for the related class of Bonds on any Payment Date will have the effect
of accelerating the amortization of such class relative to the amortization of
the Mortgage Loans in the related Mortgage Pool.
In the event that the Required Over-collateralization Amount (calculated
for this purpose on an aggregate rather than a pool basis) is permitted to
decrease or "step down" on any Payment Date in the future, the Indenture will
provide that all or a portion of the Excess Cash for such Pool that would
otherwise be paid to the related class of Bonds on any such Payment Date in
reduction of the Class Balance may be applied to cover any payment shortfalls on
the other class of Bonds pursuant to the cross-collateralization provisions (see
"-- Cross-collateralization" below), with any remaining Excess Cash released to
the holder(s) of the Investor Certificate.
With respect to any class and Payment Date, an "Over-collateralization
Surplus" means, the amount, if any, by which (x) the Over-collateralization
Amount for such Mortgage Pool and for such Payment Date exceeds (y) the then
applicable Required Over-collateralization Amount for such Mortgage Pool and
class of Bonds for such Payment Date. As a technical matter, an Over-
collateralization Surplus for a Mortgage Pool may result even prior to the
occurrence of any decrease
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or "step down" in the Required Over-collateralization Amount because each class
of Bonds will be entitled to receive 100% of collected principal on the Mortgage
Loans, even though the Class Balance of such class will, as a result of the
accelerated amortization caused by the application of the Excess Cash for such
Mortgage Pool, be less than the aggregate Principal Balance of the Mortgage
Loans in such Pool, in the absence of any Realized Losses (as defined below) on
the Mortgage Loans.
The Indenture will provide that on any Payment Date, all amounts collected
on the Mortgage Loans in a Mortgage Pool in respect of principal to be applied
on such Payment Date will be paid to the applicable Bondholders in reduction of
the related Class Balance on such Payment Date, except as provided above with
respect to any Payment Date for which there exists an Over-collateralization
Surplus for such Pool. If any Mortgage Loan became a Liquidated Mortgage Loan
during such prior Collection Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the Principal Balance of the
related Mortgage Loan; the amount of any such deficiency is a "Realized Loss" to
be applied in the related Pool. In addition, the Indenture will provide that the
Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage Loan
shall equal zero. The Indenture will not require that the amount of any Realized
Loss be paid to related class of Bondholders on the Payment Date following the
event of loss. However, the occurrence of a Realized Loss will reduce the
Over-collateralization Amount for the related class of Bonds, and will result in
more Excess Cash, if any, being paid on the Bonds in reduction of the related
Class Balance on subsequent Payment Dates than would be the case in the absence
of such Realized Loss.
CROSS-COLLATERALIZATION
As set forth at "Payment of the Bonds -- Priority of Payments," the
Indenture permits Excess Cash generated by one Mortgage Pool to be applied to
fund certain interest shortfalls or to fund the Over-collateralization Deficit
with respect to the unrelated class of Bonds. Such Excess Cash will be applied
first, to fund any shortfall in the Monthly Interest Amount with respect to the
other class of Bonds; second, to fund any Over-collateralization Deficit or any
reimbursement owed to the Bond Insurer with respect to the other class of Bonds;
and thereafter, to fund the Reserve Account that will be used to build up the
Required Over-collateralization Amount for the other class of Bonds.
REPORTS TO BONDHOLDERS
Concurrently with each payment to Bondholders, the Indenture Trustee will
make available a statement to each Bondholder, the Bond Insurer and the
Underwriters in the form required by the Indenture and setting forth the
following information (to the extent the Servicers and Master Servicer makes
such information (other than the information described in clause (b) below)
available to the Indenture Trustee):
(a) the amount of such payment to the Bondholders of each class and in
the aggregate on the related Payment Date allocable to (i) the Monthly
Principal Amount (separately setting forth Principal Prepayments) and (ii)
any Excess Cash payment;
(b) the amount of such payment to the Bondholders of each class and in
the aggregate on such Payment Date allocable to the Monthly Interest
Amount;
(c) the Class Balance for each class of Bonds and in the aggregate
after giving effect to the payment of the Monthly Principal Amount and any
Excess Cash applied to reduce the Class Balance of each class on such
Payment Date;
(d) the aggregate Principal Balance of the Mortgage Loans in each
Mortgage Pool and in the aggregate as of the end of the related Due Period;
(e) the amount of Monthly Advances made with respect to each class of
Bonds and in the aggregate and with respect to such Payment Date and the
aggregate amount of unreimbursed
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Monthly Advances and protective Servicing Advances with respect to each
class of Bonds and in the aggregate, if any;
(f) the number and the aggregate of the Principal Balances of the
Mortgage Loans in each Mortgage Pool and in the aggregate delinquent (i)
one month (30 to 59 days), (ii) two months (60 to 89 days) and (iii) three
or more months (90 days or more) as of the end of the related Collection
Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans in
each Mortgage Pool and in the aggregate in foreclosure or other similar
proceeding or in which the borrower is in bankruptcy;
(h) the Insured Payment, if any, for each class of Bonds and in the
aggregate such Payment Date;
(i) the amount of the Servicing Fees paid to or retained by each
Servicer with respect to such Payment Date;
(j) the Over-collateralization Amount, the then applicable Required
Over-collateralization Amount, the Over-collateralization Surplus, if any,
and the Over-collateralization Deficit, if any, with respect to each class
of Bonds and in the aggregate for such Payment Date related to the
Bondholder's class of Bonds;
(k) the Weighted Average Net Mortgage Rate on the Mortgage Loans in
each Mortgage Pool as of the first day of the month prior to the Payment
Date;
(l) the Aggregate Expense Rate with respect to each Mortgage Pool with
respect to such Payment Date;
(m) the Bond Interest Rate for each class of Bonds for such Payment
Date; and
(n) the LIBOR Carryover Amount with respect to the Class A-1 Bonds.
In the case of information furnished pursuant to clauses (a) and (b) above,
the amounts shall be expressed as a dollar amount per Bond with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture Trustee
will make available to each person who at any time during such calendar year was
a Bondholder and to the Underwriters, if requested in writing by any such
person, a statement containing the information set forth in clauses (a) and (b)
above, aggregated for such calendar year or, in the case of each person who was
a Bondholder for a portion of such calendar year, setting forth such information
for each month thereof. Such obligation of the Indenture Trustee shall be deemed
to have been satisfied to the extent that substantially comparable information
shall be prepared and furnished by the Indenture Trustee to Bondholders pursuant
to any requirements of the Code as are in force from time to time.
The Indenture Trustee will make the Report to Bondholders (and, at its
option, any additional files containing the same information in an alternative
format) available each month to Bondholders and other parties to the agreement
via the Indenture Trustee's internet website and its fax-on-demand service. The
Indenture Trustee's fax-on-demand service may be accessed by calling (301)
815-6610. The Indenture Trustee's internet website shall initially be located at
"www.ctslink.com." Assistance in using the website or the fax-on-demand service
can be obtained by calling the Indenture Trustee's customer service desk at
(301) 815-6600. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The Indenture Trustee shall have
the right to change the way the Report to Bondholders is distributed in order to
make such distribution more convenient and/or more accessible to the above
parties and the Indenture Trustee shall provide timely and adequate notification
to all above parties regarding any such changes.
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REDEMPTION OF THE BONDS
The Bond Issuer has the option to redeem the Bonds, in whole but not in
part, on any Payment Date after which the then aggregate outstanding Principal
Balance of the Mortgage Loans (on an aggregate rather than a pool basis) is less
than 20% of their Cut-off Date Principal Balance (such date, the "Initial
Redemption Date"). As discussed at "-- Bond Interest Rate" above, failure of the
Bond Issuer to exercise its optional redemption rights at the Initial Redemption
Date will result in the increase in the Class A-1 Formula Rate and the Class A-2
Stated Rate for such Payment Date and all succeeding Payment Dates.
If the Bond Issuer elects to redeem the Bonds it shall, no later than 30
days prior to the Payment Date selected for redemption, deliver notice of such
election to the Indenture Trustee together with the Redemption Price therefor to
be deposited into the Distribution Account. The Redemption Price must equal 100%
of the then outstanding Class Balance, plus accrued interest thereon through the
end of the Interest Accrual Period immediately preceding the related Payment
Date and any unpaid LIBOR Carryover Amount on the Class A-1 Bonds; provided,
however, that no redemption may take place unless, in connection with such
redemption, (i) any amounts due and owing to the Bond Insurer under the
Insurance Agreement are paid in full to the Bond Insurer, (ii) any unreimbursed
Servicing Fees, Monthly Advances or Servicing Advances, including Non-
Recoverable Advances, are paid in full to the Servicers and (iii) any fees and
expenses of the Owner Trustee and the Indenture Trustee have been paid or
reimbursed. There will be no prepayment premium in connection with such a
redemption. Notice of an optional redemption of the Bonds must be mailed by the
Indenture Trustee to the Bondholders and the Bond Insurer at least ten days
prior to the Payment Date set for such redemption.
The payment on the final Payment Date in connection with the redemption of
the Bonds shall be in lieu of the payment otherwise required to be made on such
Payment Date in respect of the Bonds.
TERMINATION OF THE TRUST
Following the first Payment Date (the "Auction Call Date") on which the
aggregate Principal Balance of the Mortgage Loans (on an aggregate rather than
pool basis) is 10% or less of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date, the Indenture Trustee will be required to solicit
competitive bids for the purchase of the Mortgage Loans for fair market value.
In the event that satisfactory bids are received as described below, the
proceeds of such sale shall be used to redeem the Bonds in full and any excess
shall be paid to the holder of the Investor Certificate on the immediately
succeeding Payment Date. The Indenture Trustee will solicit good-faith bids from
no fewer than three prospective purchasers that are considered at the time to be
competitive participants in the residential mortgage loan market, which
prospective purchasers may include the Depositor (or its affiliates), the Master
Servicer, the Servicers or any affiliate thereof. The Indenture Trustee will
consult with the Underwriters and any securities brokerage house then making a
market in the Bonds to determine if the fair market value of the Mortgage Loans
has been offered.
If the highest bid received by the Indenture Trustee from a qualified
bidder is not less than the fair market value of the Mortgage Loans and would
equal or exceed the amount set forth in the third succeeding sentence, the
Indenture Trustee must notify the Depositor, the Master Servicer and the
Servicers of the bid price. The Depositor (and its affiliates) will have the
right of first refusal to purchase the Mortgage Loans at such bid price (or if
the Depositor (or its affiliates) does not exercise such right, the Servicers
(or if the Servicers waive such right, the Master Servicer) may exercise such
first refusal rights to purchase the Mortgage Loans at said bid price). If each
of the Depositor (or its affiliates), the Servicers or the Master Servicer
affirmatively waive their respective first refusal rights, then the Indenture
Trustee will sell and assign such Mortgage Loans without recourse to the highest
bidder and will redeem the Bonds. For the Indenture Trustee to consummate
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the sale, the bid must be at least equal to an amount, which, when added to
Available Funds for each class of Bonds on the related Payment Date, would equal
the sum, without duplication, of (i) the accrued interest then due on such
Payment Date plus any unpaid LIBOR Carryover Amount on the Class A-1 Bonds, (ii)
the aggregate Class Balance of each class of Bonds as of such Payment Date,
(iii) the aggregate of all Insured Payments made by the Bond Insurer to the
Bondholders of either class of Bonds remaining unreimbursed as of such Payment
Date and any amounts owing to the Bond Insurer under the Insurance Agreement,
plus interest on such amount calculated at the rate as set forth in the
Insurance Agreement, (iv) any accrued and unpaid Servicing Fees, Servicing
Advances and Monthly Advances (including Non-Recoverable Advances) previously
made by the Master Servicer or the Servicers and remaining unreimbursed as of
such Payment Date and (v) any accrued and unpaid fees and other amounts owing to
the Indenture Trustee, Master Servicer or the Owner Trustee as of such Payment
Date. If such conditions are not met, the Indenture Trustee will not consummate
such sale. In addition, the Indenture Trustee will decline to consummate such
sale unless it receives an opinion of counsel that such sale will not give rise
to any adverse tax consequences to the Bond Issuer, the Bond Insurer or the
Bondholders or adversely affect the opinion that the Bonds will evidence
indebtedness of the Bond Issuer under the Code. In the event such sale is not
consummated in accordance with the foregoing, the Indenture Trustee will
continue to solicit bids on a quarterly basis for the purchase of such assets
upon the terms described above.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will be the Indenture Trustee under the Indenture. The Indenture
will provide that the Indenture Trustee is entitled to any investment earnings
or other income earned on amounts on deposit in the Bond Payment Amount and
reimbursement of certain expenses. Norwest Bank Minnesota, National Association,
will also perform the functions of calculation agent and paying agent and will,
in addition, provide Bondholders with a monthly payment report based upon
information provided by the Servicers and the necessary information to prepare
federal and state tax returns with respect to the Bonds.
The Indenture also will provide that the Indenture Trustee may resign at
any time, upon notice to the Bond Issuer, the Bond Insurer and any Rating
Agency, in which event the Bond Insurer may (and if the Bond Insurer fails to do
so within 60 days, the Bond Issuer will be obligated) to appoint a successor
Indenture Trustee acceptable to the Bond Insurer. The Bond Issuer, with the
prior consent of the Bond Insurer, may, and if so directed by the Bond Insurer,
shall remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. Any resignation or removal of the Indenture Trustee and
appointment of a successor Indenture Trustee will not become effective until
acceptance of the appointment by the successor Indenture Trustee. The Indenture
will provide that the Indenture Trustee is under no obligation to exercise any
of the rights or powers vested in it by the Indenture at the request or
direction of any of the Bondholders, unless such Bondholders shall have offered
to the Indenture Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. The Indenture Trustee may execute any of the rights or
powers granted by the Indenture or perform any duties thereunder either directly
or by or through its agents or attorneys; provided, however, the Indenture
Trustee shall remain liable for the performance of all of its duties. Pursuant
to the Indenture, the Indenture Trustee is not liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized by an
authorized officer of any person or within its rights or powers under the
Indenture. The Indenture Trustee and any director, officer, employee or agent of
the Indenture Trustee may rely and will be protected in acting or refraining
from acting in good faith in reliance on any certificate, notice or other
document of any kind prima facie properly executed and submitted by
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the authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Trust for certain
losses and other events to the extent described in the Indenture.
The corporate trust office of the Indenture Trustee is located at Sixth
Avenue and Marquette, Minneapolis, Minnesota 55479, Attention: Corporate Trust
Services: American Residential Eagle Bond Trust 1999-2.
VOTING
Unless otherwise specified in the Indenture, with respect to any provisions
of the Indenture providing for the action, consent or approval of the
Bondholders evidencing specified "Voting Interests," each Bondholder will have a
Voting Interest equal to the percentage obtained by dividing the aggregate
principal balance of such Bond by the combined Class Balance of the Class A-1
and Class A-2 Bonds. Unless a Bond Insurer Default (as defined in the Insurance
Agreement) has occurred and is continuing, the Voting Interests of the
Bondholders will be exercised solely by the Bond Insurer and may be exercised by
Bondholders only with the consent of the Bond Insurer.
BOND EVENTS OF DEFAULTS
An "Event of Default" with respect to the Bonds shall occur if, on any
Payment Date, after taking into account all payments made in respect of each
class of Bonds on such Payment Date, the Monthly Interest Amount for such
Payment Date remains unpaid or an Over-collateralization Deficit still exists
with respect to the Bonds. In addition, a Default under the Insurance Agreement
will trigger an Event of Default under the Indenture. See "The
Agreements -- Events of Default; Rights upon Events of Default" in the
Prospectus for a description of the circumstances under which a default on the
Bonds, other than a payment default, may occur. For a description of the rights
of Bondholders in connection with any Event of Default with respect to the
Bonds, see "The Agreements -- Events of Default; Rights upon Event of Default"
in the Prospectus. In the absence of a failure by the Bond Insurer to pay
Insured Payments, no acceleration of the maturity of the Bonds shall be
permitted without the consent of the Bond Insurer.
AMENDMENT
The Indenture provides that, without the consent of the Holders of any
class of Bonds, but with the consent of the Bond Insurer, the Bond Issuer and
the Indenture Trustee, at any time and from time to time, may enter into one or
more supplemental indentures (which will conform to the provisions of the Trust
Indenture Act of 1939, as amended (the "TIA"), as in force at the date of the
execution thereof), in form satisfactory to the Indenture Trustee, for any of
the following purposes: (a) to correct or amplify the description of any
property at any time subject to the lien of the Indenture, or better to assure,
convey and confirm unto the Indenture Trustee any property subject or required
to be subjected to the lien of the Indenture, or to subject to the lien of the
Indenture additional property; (b) to evidence the succession, in compliance
with the applicable provisions of the Indenture, of another entity to the Bond
Issuer, and the assumption by any such successor of the covenants of the Bond
Issuer contained in the Bonds or the Indenture; (c) to add to the covenants of
the Bond Issuer for the benefit of the Holders of the Bonds, or to surrender any
right or power conferred upon the Bond Issuer in the Indenture; (d) to convey,
transfer, assign, mortgage or pledge any property to or with the Indenture
Trustee; (e) to cure any ambiguity, to correct or supplement any provision in
the Indenture or in any supplemental indenture that may be inconsistent with any
other provision in the Indenture or in any supplemental indenture; (f) to make
any other provisions with respect to matters or questions arising under the
Indenture or in any supplemental indenture; provided, that such action will not
materially and adversely affect the interests of the Bondholders or the Bond
Insurer; (g) to evidence and provide for the acceptance of
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the appointment under the Indenture by a successor trustee with respect to the
Bonds and to add to or change any of the provisions of the Indenture as will be
necessary to facilitate the administration of the trusts thereunder by more than
one trustee, pursuant to the requirements of the Indenture; or (h) to modify,
eliminate or add to the provisions of the Indenture to such extent as will be
necessary to effect the qualification of the Indenture under the TIA or under
any similar federal statute enacted after the date of the Indenture and to add
to the Indenture such other provisions as may be expressly required by the TIA;
provided, however, that no such supplemental indentures will be entered into
unless the Indenture Trustee shall have received an Opinion of Counsel (which
shall not be an expense of the Indenture Trustee) to the effect that entering
into such supplemental indenture will not have any material adverse tax
consequences to the Bondholders. Any such amendment or supplement to the
Indenture shall be deemed not to adversely affect in any material respects the
interests of the Bondholders if the Indenture Trustee receives written
confirmation from each Rating Agency that such amendment will not cause such
Rating Agency to reduce the then current rating of the Bonds.
The Indenture also provides that the Bond Issuer and the Indenture Trustee,
when authorized by a written request of the Bond Issuer, also may, with prior
notice to the Bond Insurer and each Rating Agency and with the consent of the
Bond Insurer and the Holders of the class of Bonds affected thereby representing
not less than 66 2/3% of the aggregate Voting Interest thereof, enter into a
supplemental indenture 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 Bondholders thereunder; provided, that
no such supplemental indenture may, without the consent of the Holder of each
class of Bond affected thereby: (a) change the date of payment of any
installment of principal of or interest on any Bond, or reduce the principal
amount thereof or the interest rate thereon, change the provisions of the
Indenture relating to the application of collections on, or the proceeds of the
sale of, the corpus of the Trust Estate to payment of principal of or interest
on the Bonds, or change any place of payment where, or the coin or currency in
which, any Bond or the interest thereon is payable, or impair the right to
institute suit for the enforcement of the provisions of the Indenture requiring
the application of funds available therefor to the payment of any such amount
due on such class on or after the respective dates such amounts become due; (b)
reduce the percentage of the Voting Interest of the Bonds, the consent of the
Holders of which is required for any such supplemental indenture, or the consent
of the Holders of which is required for any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder and their
consequences provided for in the Indenture; (c) modify or alter the provisions
of the proviso to the definition of the term "Outstanding" in the Indenture or
modify or alter the exception in the definition of the term "Holder" therein;
(d) reduce the percentage of the Voting Interest of the Bonds required to direct
the Indenture Trustee to direct the Bond Issuer to sell or liquidate the corpus
of the Trust Estate pursuant to the Indenture; (e) modify any provision of the
amendment provisions of the Indenture except to increase any percentage
specified in the Indenture or to provide that certain additional provisions of
the Indenture or the other agreements cannot be modified or waived without the
consent of the Holder of each Bond affected thereby; (f) modify any of the
provisions of the Indenture in such manner as to affect the calculation of the
amount of any payment of interest or principal due on any Bond on any Payment
Date (including the calculation of any of the individual components of such
calculation); or (g) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any part of the Trust
Estate or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any property at any time subject thereto
or deprive the Holder of any class of Bond of the security provided by the lien
of the Indenture; and provided, further, that such action will not, as evidenced
by an Opinion of Counsel (which shall not be an expense of the Indenture
Trustee), cause the Trust to be subject to an entity level tax.
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THE INSURANCE POLICY
The following summary of the terms of the Insurance Policy do not purport
to be complete and is qualified in its entirety by reference to such Policy. A
form of the Insurance Policy (without exhibits) relating to each class of Bonds
may be obtained, upon written request, without charge, from the Depositor at
American Residential Eagle, Inc., 445 Marine View Avenue, Suite 100, Del Mar,
California 92014, Attention: Portfolio Manager.
Simultaneously with the issuance of the Bonds, the Bond Insurer will
deliver the Insurance Policy to the Indenture Trustee for the benefit of the
Bondholders. Under the Insurance Policy, the Bond Insurer will irrevocably and
unconditionally guarantee payment on each Payment Date to the Indenture Trustee
for the benefit of the holders of the Bonds the full and complete payment of
Insured Payments with respect to the Bonds, calculated in accordance with the
original terms of the Bonds when issued and without regard to any amendment or
modification of the Bonds or the Agreement except amendments or modifications to
which the Bond Insurer has given its prior written consent. "Insured Payments"
shall mean with respect to the Bonds as of any Payment Date (i) the Monthly
Interest Amount for the related Interest Accrual Period net of Relief Act
Shortfalls and Prepayment Interest Shortfalls, (ii) the Over-collateralization
Deficit on such Payment Date, and (iii) the Class Balance of the Bonds to the
extent unpaid on the final Payment Date.
Payment of claims under the Insurance Policy in respect of Insured Payments
will be made by the Bond Insurer following Receipt by the Bond Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Payment Date.
The Bond Insurer shall be entitled to pay any amount under the Insurance
Policy in respect of Insured Payments, including any acceleration payment,
whether or not any notice and certificate shall have been received by the Bond
Insurer as provided above, provided, however, that by acceptance of the
Insurance Policy the Indenture Trustee agrees to provide upon request to the
Bond Insurer a notice and certificate in respect of any such payments made by
the Bond Insurer. The Bond Insurer shall be entitled to pay principal under the
Insurance Policy on an accelerated basis if the Bond Insurer shall so select in
its sole discretion, at any time or from time to time, in whole or in part, at
an earlier Payment Date than provided in the definition of "Insured Payments,"
if such principal would have been payable under the Agreement were funds
sufficient to make such payment available to the Indenture Trustee for such
purpose. Insured Payments insured by the Insurance Policy shall not include
interest, in respect of principal paid under the Insurance Policy on an
accelerated basis, accruing from after the date of such payment of principal.
If any Insured Payment is voided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Bond Insurer will pay
such amount out of funds of the Bond Insurer on the later of (a) the date when
due to be paid pursuant to the Order referred to below or (b) the first to occur
of (i) the fourth Business Day following Receipt by the Bond Insurer from the
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 of
Bonds is required to return principal or interest distributed with respect to a
Bond during the Term of the Insurance Policy because such distributions were
avoidable preferences under applicable bankruptcy law (the "Order"), (B) a
certificate of such holder of Bonds that the Order has been entered and is not
subject to any stay, and (C) an assignment duly executed and delivered by such
holder of Bonds, in such form as is reasonably required by the Bond Insurer and
provided to such holder of Bonds by the Bond Insurer, irrevocably assigning to
the Bond Insurer all rights and claims of such holder of Bonds against the
debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Bond Insurer from the
Indenture Trustee of the items referred to in clauses (A), (B) and (C) above if,
at least four Business Days prior to such date of Receipt, the
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Bond Insurer shall have Received written notice from the Indenture Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Indenture Trustee or holder of Bonds directly (unless a holder of Bonds has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order, in which case such payment shall be
disbursed to the Indenture Trustee for distribution to such Bondholder upon
proof of such payment reasonably satisfactory to the Bond Insurer). In
connection with the foregoing, the Bond Insurer shall have the rights provided
pursuant to the Agreement.
The terms "Receipt" and "Received," with respect to the Insurance Policy,
mean actual delivery to the Bond Insurer and to its fiscal agent appointed by
the Bond Insurer at its option, if any, prior to 12:00 P.M., New York City time,
on a Business Day; delivery either on a day that is not a Business Day or after
12:00 P.M., New York City time, shall be deemed to be Receipt on the next
succeeding Business Day. If any notice or certificate given under the 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 Bond Insurer or the fiscal agent shall promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended notice.
Under the Insurance Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York, the State of New York or in the city in which the corporate
trust office of the Indenture Trustee is located, are authorized or obligated by
law or executive order to be closed. The Bond Insurer's obligations under the
Insurance Policy to make Insured Payments shall be discharged to the extent
funds are transferred to the Indenture Trustee as provided in the Insurance
Policy, whether or not such funds are properly applied by the Indenture Trustee.
"Term of the Insurance Policy" means the period from and including the date
of issuance of the Insurance Policy to and including the date on which the Class
Balance of the Bonds is zero, plus such additional period, to the extent
specified in the Insurance Policy, during which any payment on the Bonds could
be avoided in whole or in part as a preference payment.
The Bond Insurer shall be subrogated to the rights of the holders of the
Bonds to receive payments of principal and interest, as applicable, with respect
to distributions on the Bonds to the extent of any payment by the Bond Insurer
under the Insurance Policy. To the extent the Bond Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Indenture
Trustee), to the holders of the Bonds, the Bond Insurer will be subrogated to
the rights of the holders of the Bonds, as applicable, with respect to such
Insured Payment and shall be deemed to the extent of the payments so made to be
a registered holder of Bonds for purposes of payment.
The Insurance Policy is governed by the laws of the State of New York. The
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 Bond Insurer agrees
under the Insurance Policy not to assert, and waives, for the benefit of each
holder of Bonds, 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 such rights
and defenses may be available to the Bond Insurer to avoid payment of its
obligations under the Insurance Policy in accordance with the express provisions
of the Insurance Policy.
Claims under the Insurance Policy constitute direct, unsecured and
unsubordinated obligations of the Bond Insurer ranking not less than pari passu
with other unsecured and unsubordinated indebtedness of the Bond Insurer for
borrowed money. Claims against the Bond Insurer under the
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Insurance Policy and claims against the Bond Insurer under each other financial
guaranty insurance policy issued thereby constitute pari passu claims against
the general assets of the Bond Insurer. The terms of the Insurance Policy cannot
be modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Depositor. The Insurance Policy may not be
cancelled or revoked prior to payment in full of the Bonds.
Pursuant to the terms of the Master Servicing Agreement and the Indenture,
unless a Bond Insurer Default exists, the Bond Insurer will be entitled to
exercise certain rights of the holders of the Bonds, without the consent of such
Bondholders, and the holders of the Bonds may exercise such rights only with the
prior written consent of the Bond Insurer.
The Bond Issuer, the Depositor, AmREIT, the Seller and the Bond Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Depositor, AmREIT and the Seller will agree to reimburse,
with interest, the Bond Insurer for amounts paid pursuant to claims under the
Insurance Policy. AmREIT, the Depositor, and the Seller will further agree to
pay the Bond Insurer all reasonable charges and expenses which the Bond Insurer
may pay or incur relative to any amounts paid under the Insurance Policy or
otherwise in connection with the transaction and to indemnify the Bond Insurer
against certain liabilities. Except to the extent provided therein, amounts
owing under the Insurance Agreement will be payable solely from the Trust. An
"event of default" by AmREIT or the Seller under the Insurance Agreement
includes (i) a failure by AmREIT, the Seller or the Depositor to pay when due
any amount owed under the Insurance Agreement or certain other Basic Documents,
(ii) the untruth or incorrectness in any material respect of any representation
or warranty of AmREIT, the Seller or the Depositor in the Insurance Agreement or
certain other Basic Documents, (iii) a failure by AmREIT, the Seller or the
Depositor to perform or to observe any covenant or agreement in the Insurance
Agreement, the Master Servicing Agreement or certain other Basic Documents, (iv)
a failure by either AmREIT, the Seller or the Depositor to pay its debts in
general or the occurrence of certain events of insolvency or bankruptcy with
respect to AmREIT, the Seller or the Depositor, (v) the occurrence of Servicer
Event of Default or Master Servicer Event of Default (as defined under the
Master Servicing Agreement), (vi) the failure of the Mortgage Loans to meet
certain loss and delinquency tests set forth in the Insurance Agreement and
(vii) a claim is made under the Insurance Policy which is not timely reimbursed
by the Trust under the terms of the Insurance Policy.
THE BOND INSURER
The following information has been provided by Financial Security Assurance
Inc. (the "Bond Insurer") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor or the Underwriters as to the accuracy
and completeness of such information.
GENERAL
The Bond Insurer is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. The Bond Insurer is licensed to engage in the
financial guaranty insurance business in all 50 states, the District of Columbia
and Puerto Rico.
The Bond Insurer 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. The
Bond 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
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Mortgage Notes 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. The Bond Insurer insures both newly
issued securities sold in the primary market and outstanding securities sold in
the secondary market that satisfy the Bond Insurer's underwriting criteria.
The Bond Insurer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include White Mountains Insurance Group, Inc.,
MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co., Ltd., and
XL Capital Ltd. No shareholder of Holdings is obligated to pay any debt of the
Bond Insurer or any claim under any insurance policy issued by the Bond Insurer
or to make any additional contribution to the capital of the Bond Insurer.
The principal executive offices of the Bond Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Bond Insurer or its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Bond Insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Bond
Insurer as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit the Bond Insurer's
obligations under any financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
The Bond Insurer's insurance financial strength is rated "Aaa" by Moody's.
The Bond Insurer's insurer financial strength is rated "AAA" by each of Standard
& Poor's, a division of The McGraw-Hill Companies, Inc. and Standard & Poor's
(Australia) Pty. Ltd. The Bond Insurer's claims-paying ability is rated "AAA" by
Fitch IBCA, Inc. and Japan Rating and Investment Information, Inc. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "Risk Factors" and "Ratings"
herein.
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CAPITALIZATION
The following table sets forth the capitalization of the Bond Insurer and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums)................................................. $ 512,383
Surplus Bonds............................................... 120,000
Minority Interest........................................... 20,973
Shareholder's Equity
Common Stock.............................................. 15,000
Additional Paid-In Capital................................ 706,117
Accumulated other comprehensive income (net of deferred
income taxes).......................................... 25,879
Accumulated Earnings...................................... 391,745
Total Shareholder's Equity.................................. $1,138,741
----------
Total Deferred Premium Revenue, Surplus Bonds, Minority
Interest and Shareholder's Equity......................... $1,792,097
==========
</TABLE>
For further information concerning the Bond Insurer, see the Consolidated
Financial Statements of the Bond Insurer and Subsidiaries, and the Bonds
thereto, incorporated by reference herein. The Bond Insurer's financial
statements are included as exhibits to the Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q that are filed with the Securities and Exchange
Commission by Holdings and may be reviewed at the EDGAR website maintained by
the Securities and Exchange Commission and at Holdings' web site,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by the Bond Insurer are
available upon request to the State of New York Insurance Department.
INSURANCE REGULATION
The Bond Insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the Bond Insurer and its insurance subsidiaries
are subject to regulation by insurance laws of the various other jurisdictions
in which they are licensed to do business. As a financial guaranty insurance
corporation licensed to do business in the State of New York, the Bond Insurer
is subject to Article 69 of the New York Insurance Law which, among other
things, limits the business of each such insurer to financial guaranty insurance
and related lines, requires that each such insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each such insurer, and limits the size of individual
transactions ("single risks") and the volume of transactions ("aggregate risks")
that may be underwritten by each such insurer. Other provisions of the New York
Insurance Law, applicable to non-life insurance companies such as the Bond
Insurer, regulate, among other things, permitted investments, payment of
dividends, transactions with affiliates, mergers, consolidations, acquisitions
or sales of assets and incurrence of liabilities for borrowings.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Where You Can Find More
Information" in the Prospectus, the financial statements of the Bond Insurer
included in or as exhibits to the following documents which have been filed with
the Securities and Exchange Commission by Holdings, are hereby incorporated by
reference in this Prospectus Supplement: the Annual Report on Form 10-K for the
year ended December 31, 1998 and Quarterly Reports on Form 10-Q for the quarter
ended March 31, 1999.
All financial statements of the Bond Insurer included in documents filed by
Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Bonds shall be
deemed to be incorporated by reference into this Prospectus Supplement and to be
a part hereof from the respective dates of filing such documents.
The Seller will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the foregoing financial statements incorporated
herein by reference. Requests for such copies should be directed to American
Residential Eagle, Inc., 445 Marine View Avenue, Suite 100, Del Mar, California
92014, Attention: Portfolio Manager.
The Depositor on behalf of the Bond Issuer hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the Trust's annual report pursuant to section 13(a) or section 15(d)
of the Exchange Act and each filing of the financial statements of the Bond
Insurer included in or as an exhibit to the annual report of Holdings filed
pursuant to section 13(a) or section 15(d) of the Exchange Act that is
incorporated by reference in the Registration Statement (as defined in the
accompanying Prospectus) shall be deemed to be a new registration statement
relating to the Bonds offered hereby, and the offering of such Bonds at that
time shall be deemed to be the initial bona fide offering thereof.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on each class of Bonds, the aggregate amount
of payment on each class of Bonds and the yield to maturity of each class will
be related to the rate and timing of payments of principal on the Mortgage Loans
in the related Mortgage Pool, the amount and timing of mortgagor delinquencies
and defaults resulting in realized losses, and the application of Excess Cash
from the related Mortgage Pool. Such yield may be adversely affected by a higher
or lower anticipated rate of principal payments (including principal
prepayments) on the related Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases by the Seller).
THE EFFECT OF THE BOND INTEREST RATE ON YIELD
The Bond Interest Rate of each class of Bonds is subject to the applicable
Net Funds Cap. See "Description of the Bonds -- Bond Interest Rate." The Net
Funds Cap on any Payment Date is determined, in part, by reference to the
weighted average Mortgage Rate of the Mortgage Loans in the related Mortgage
Pool minus the Aggregate Expense Rate (the "Weighted Average Net Mortgage
Rate"). All of the Mortgage Rates on the Fixed Rate Mortgage Loans in Pool 2 are
fixed for the lives of such Mortgage Loans. If Mortgage Loans bearing higher
Mortgage Rates were to
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prepay at faster rates than Mortgage Loans with lower Mortgage Rates, the
applicable Net Funds Cap would be lower than otherwise would be the case, thus
have an adverse effect on yield of that class of Bonds.
The yield to investors in the Bonds also will be sensitive to, among other
things, the level of One-Month LIBOR (as defined herein) and the levels of the
Index. All of the Adjustable Rate Mortgage Loans in Pool 1 are Delayed
Adjustment Mortgage Loans which will bear interest at fixed Mortgage Rates for
24 or 36 months, after origination of such Mortgage Loans. Although each of the
Adjustable Rate Mortgage Loans in Pool 1 bears interest at an adjustable rate,
such rate is subject to a Periodic Rate Cap, a Minimum Mortgage Rate and a
Maximum Mortgage Rate. If the Index increases substantially between Adjustment
Dates, the adjusted Mortgage Rate on the related Mortgage Loan may not equal the
Index plus the related Gross Margin due to the constraint of such caps and
floors. In such event, the related Mortgage Rate will be less than would have
been the case in the absence of such caps. In addition, the Mortgage Rate
applicable to any Adjustment Date will be based on the Index related to the
Adjustment Date. Thus, if the value of the Index with respect to a Pool 1
Mortgage Loan rises, the lag in time before the corresponding Mortgage Rate
increases will, all other things being equal, slow the upward adjustment of the
Class A-1 Net Funds Cap. Furthermore, Pool 1 Mortgage Loans that have not
reached their first Adjustment Date are more likely to be subject to the
applicable Periodic Rate Cap on their first Adjustment Date. See "The Mortgage
Pools" herein. Although the Holders of the Class A-1 Bonds will be entitled to
receive the related LIBOR Carryover Amount (as defined herein) to the extent
funds are available as described herein, and in the priority set forth herein,
there is no assurance that sufficient funds will be available therefor.
Although the Mortgage Rates on the Adjustable Rate Mortgage Loans in Pool 1
are subject to adjustment, the Mortgage Rates adjust less frequently than the
Class A-1 Bond Interest Rate and adjust by reference to the Index. In addition a
Delayed Adjustment Mortgage Loan may not have a first adjustment date for a
period of up to three years following origination. Changes in One-Month LIBOR
may not correlate with changes in the Index and may not correlate with
prevailing interest rates. It is possible that an increased level of One-Month
LIBOR could occur simultaneously, thereby reducing the weighted average lives of
the Class A-1 Bonds.
PREPAYMENTS
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Seller of a delinquent Mortgage Loan and any
optional purchase of the remaining Mortgage Loans in connection with the
termination of the Trust) will result in payments on the Bonds of principal
amounts which would otherwise be paid over the remaining terms of such Mortgage
Loans. Since the rate of payment of principal of the Mortgage Loans will depend
on future events and a variety of factors, no assurance can be given as to such
rate or the rate of principal prepayments. The extent to which the yield to
maturity of a Bond may vary from the anticipated yield will depend upon the
degree to which a Bond is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations
and purchases of such Mortgage Loans.
The rate of prepayment on the Mortgage Loans in either Mortgage Pool cannot
be predicted. All of the Mortgage Loans may be prepaid in whole or in part at
any time. Approximately 85.36% of the Pool 1 Mortgage Loans and approximately
87.48% of the Pool 2 Mortgage Loans are subject to prepayment charges under
certain circumstances if prepaid in full or in part during a period ranging from
one to five years after origination. Each Mortgage Pool's prepayment experience
may be affected by a wide variety of factors, including general economic
conditions, interest rates, the availability of alternative financing and
homeowner mobility. In addition, all of the Mortgage Loans contain due-on-
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sale provisions and the Servicers will be required by the Agreement to enforce
such provisions unless (i) such enforcement is not permitted by applicable law
or (ii) the Servicers, in a manner consistent with accepted servicing practices,
permits the purchaser of the related Mortgaged Property to assume the Mortgage
Loan. The enforcement of a "due-on-sale" provision will have the same effect as
a prepayment of the related Mortgage Loan. To the extent permitted by applicable
law, such assumption will not release the original borrower from its obligation
under any such Mortgage Loan. See "Certain Legal Aspects of Mortgage
Loans -- Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the Pool 2 Mortgage Loans is affected
by prevailing market rates for mortgage loans of a comparable term and risk
level. When the market interest rate is below the interest rate on a mortgage
loan, mortgagors may have an increased incentive to refinance their mortgage
loans. Depending on prevailing market rates, the future outlook for market rates
and economic conditions generally, some mortgagors may sell or refinance
mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
As is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. The existence of the applicable Periodic Rate
Cap, Maximum Mortgage Rate and Minimum Mortgage Rate features also may affect
the likelihood of prepayments. In addition, the delinquency and loss experience
of adjustable rate mortgage loans may differ from that of fixed rate mortgage
loans because the amount of the monthly payments on the adjustable rate mortgage
loans are subject to adjustment on each Adjustment Date. However, no assurance
can be given as to the level of prepayments that the Mortgage Loans in either
Mortgage Pool will experience.
The rate of prepayments on the Mortgage Loans in either Mortgage Pool is
sensitive to the credit standing of the borrower, which may improve and thereby
allow the borrower to refinance on more favorable terms, or may decline and
thereby limit the borrower's ability to refinance. The rate of prepayments on
the Delayed Adjustment Mortgage Loans in Pool 1 which are in the initial fixed
rate period, are sensitive to prevailing interest rates. The prepayment behavior
of such Mortgage Loans may differ from that of the other Mortgage Loans. As a
Delayed Adjustment Mortgage Loan approaches its initial Adjustment Date, the
borrower may become more likely to refinance such loan to avoid an increase in
the Mortgage Rate, even if fixed rate mortgage loans are only available at rates
that are slightly lower or higher than the Mortgage Rate before adjustment.
The rate of defaults on the Mortgage Loans in either Mortgage Pool will
also affect the rate and timing of principal payments on such Mortgage Loans. As
a result of the underwriting guidelines applicable to the Mortgage Loans, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in accordance with the
standards applied by FNMA and FHLMC mortgage loan purchase programs. See "The
Mortgage Pools -- General." In addition, because of such underwriting criteria
and their likely effect on the delinquency, foreclosure, bankruptcy and loss
experience of the Mortgage Loans, the Mortgage Loans will generally be serviced
in a manner intended to result in a faster exercise of remedies, which may
include foreclosure, in the event Mortgage Loan delinquencies and defaults
occur, than would be the case of the Mortgage Loans were serviced in accordance
with such other programs. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
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economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. To the extent that the locations of the Mortgaged
Properties are concentrated in a given region, the risk of delinquencies, loss
and involuntary prepayments resulting from adverse economic conditions in such
region or from other factors, such as fires, storms, landslides and mudflows and
earthquakes, is increased. Certain information regarding the geographic
concentration of the Mortgaged Properties is set forth under "The Mortgaged
Pool -- Characteristics of the Pool 1 Mortgage Loans" and "-- Characteristics of
the Pool 2 Mortgage Loans."
Certain of the Fixed Rate Mortgage Loans in Pool 2 are Balloon Loans.
Balloon Loans involve a greater degree of risk than fully amortizing loans
because the ability of the borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property. The ability of a borrower to accomplish either of these
goals will be affected by a number of factors, including the level of available
mortgage rates at the time of the attempted sale or refinancing, the borrower's
equity in the related Mortgaged Property, the financial condition of the
borrower and operating history of the related Mortgaged Property, tax laws,
prevailing economic conditions and the availability of credit for home equity
borrowers in general.
To the extent that principal prepayments with respect to the Mortgage Loans
result in prepayments on the Bonds during periods of generally lower interest
rates, Bondholders may be unable to reinvest such principal prepayments in
securities having a yield and rating comparable to the Bonds.
The average life of the Bonds and, if purchased at other than par, the
yield realized by holders of the Bonds will be sensitive to levels of payment
(including prepayments) on the Mortgage Loans. In general, the yield on a Bond
that is purchased at a premium from the outstanding principal amount thereof,
may be adversely affected by a higher than anticipated level of prepayments of
the Mortgage Loans. Conversely, the yield on a Bond that is purchased at a
discount from the outstanding principal amount thereof may be adversely affected
by a lower than anticipated level of prepayments.
Because all amounts available for payment on the Bonds after payments in
respect of interest on the Bonds (except as set forth herein), including all or
a portion of the Excess Cash, are applied as reductions of the related Class
Balance, the weighted average life of each Class of Bonds will also be
influenced by the amount of Excess Cash so applied. Because Excess Cash
attributable to the over-collateralization feature is derived from interest
collections on the Mortgage Loans of a class of Bonds in the related Mortgage
Pool and will be applied to reduce the related Class Balance, the aggregate
payments in reduction of the Class Balance on a Payment Date will usually be
greater than the aggregate amount of principal payments (including Principal
Prepayments) on the Mortgage Loans payable on such Payment Date in order to
maintain Required Over-collateralization Amount. As a consequence, Excess Cash
available for payment in reduction of the related Class Balance for a class of
Bonds will increase in proportion to the outstanding Class Balance over time in
the absence of offsetting Realized Losses for the Mortgage Loans.
Excess Cash will be paid in reduction of the related Class Balance on each
Payment Date to the extent the then applicable Required Over-collateralization
Amount exceeds the related Over-collateralization Amount on such Payment Date.
Any remaining Excess Cash to the extent not applied to payment of the other
class of Bonds pursuant to the cross-collateralization provision of the
Indenture (see "Description of the Bonds -- Cross-collateralization") will be
released to the holder of the Investor Certificate. If a Bond is purchased at
other than par, its yield to maturity will be affected by the rate at which the
Excess Cash is paid to the Bondholders. If the actual rate of Excess Cash
payments on the class of Bonds applied in reduction of the related Class Balance
is slower than the
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rate anticipated by an investor who purchases a Bond at a discount, the actual
yield to such investor will be lower than such investor's anticipated yield. If
the actual rate of Excess Cash payments applied in reduction of the related
Class Balance is faster than the rate anticipated by an investor who purchases a
Bond at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield. The amount of Excess Cash on any Payment Date will
be affected by, among other things, the actual amount of interest received,
collected or recovered in respect of the Mortgage Loans during the related
Collection Period and such amount will be influenced by changes in Six-Month
LIBOR, the weighted average of the Mortgage Rates resulting from prepayment and
liquidations of the Mortgage Loans. The amount of Excess Cash paid to the
Bondholders applied to the Class Balance on each Payment Date will be based on
the Required Over-collateralization Amount. The Indenture generally provides
that the Required Over-collateralization Amount may, over time, decrease, or
increase, subject to certain floors, caps and triggers, including triggers that
allow the Required Over-collateralization Amount to decrease or "step down"
based on the performance on the Mortgage Loans with respect to certain tests
specified in the Indenture based on delinquency rates. Any increase in the
Required Over-collateralization Amount may result in an accelerated amortization
until such Required Over-collateralization Amount is reached. Conversely, any
decrease in the Required Over-collateralization Amount will result in a
decelerated amortization of such class of Bonds until such Required
Over-collateralization Amount is reached.
STATED MATURITY DATE
The "Stated Maturity Date" for each class of Bonds is the Payment Date in
July 2029 which is the Payment Date coinciding with the last scheduled due date
for the Mortgage Loan in the Trust Fund having the latest stated maturity date.
For the reasons discussed above at "-- Prepayments" it is expected that the
actual last Payment Date for the Bonds will occur significantly earlier than the
Stated Maturity Date for the Bonds specified above.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on the Bonds purchased at a price less than par and will decrease the
yield on the Bonds purchased at a price greater than par. The effect on an
investor's yield due to principal prepayments on the Mortgage Loans occurring at
a rate that is faster (or slower) than the rate anticipated by the investor in
the period immediately following the issuance of the Bonds will not be entirely
offset by a subsequent like reduction (or increase) in the rate of principal
payments. The weighted average life of the Bonds will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties.
The "weighted average life" of a Bond refers to the average amount of time
that will elapse from the date of issuance to the date each dollar in respect of
principal of such Bond is repaid. The weighted average life of the Bonds will be
influenced by, among other factors, the rate at which principal payments are
made on the Mortgage Loans, including final payments made upon the maturity of
Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment model or standard. The models used in this Prospectus Supplement
("Prepayment Models") are based on an assumed rate of prepayment each month of
the then unpaid principal balance of a pool of mortgage loans similar to the
Mortgage Loans. The Prepayment Model used for Pool 1 in this Prospectus
Supplement ("Constant Prepayment Rate" or "CPR") is a prepayment assumption
which represents a constant assumed rate or prepayment each month relative to
the then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. 28% CPR assumes a constant prepayment rate of 28%. The
Prepayment Model used for Pool 2 assumes a constant CPR of 4.00%
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per annum of the then unpaid principal balance of the mortgage loans in the
first month of the life of such mortgage loans and an additional approximately
1.909% (precisely 21/11 per annum) in each month thereafter until the 12th
month. Beginning in the 12th month and each month thereafter for the life of
such Mortgage Loans, such Prepayment Model assumes a CPR of 25%.
There is no assurance, however, that prepayments on the Mortgage Loans in
either Mortgage Pool will conform to any level of the Prepayment Model, and no
representation is made that such Mortgage Loans will prepay at the prepayment
rates shown or any other prepayment rate. The rate of principal payments on
pools of mortgage loans is influenced by a variety of economic, geographic,
social and other factors, including the level of interest rates. Other factors
affecting prepayment of mortgage loans include changes in obligors' housing
needs, job transfers and unemployment. In the case of mortgage loans in general,
if prevailing interest rates fall significantly below the interest rates on such
mortgage loans, the mortgage loans are likely to be subject to higher prepayment
rates than if prevailing interest rates remain at or above the rates borne by
such mortgage loans. Conversely, if prevailing interest rates rise above the
interest on such mortgage loans, the rate of prepayment would be expected to
decrease.
STRUCTURING ASSUMPTIONS
The following table relating to the Bonds is based on the following
assumptions for the Class A-1 Bonds (the "Class A-1 Structuring Assumptions")
and the Class A-2 Bonds (the "Class A-2 Structuring Assumptions"):
Class A-1 Structuring Assumptions
(i) each Mortgage Pool consists of Mortgage Loans with the
characteristics set forth in the applicable table below;
(ii) the Closing Date for the Class A-1 Bonds is August 5, 1999;
(iii) payments on each class of Bonds are made on the 25th day of each
month regardless of the day on which the Payment Date actually occurs,
commencing in September 1999 and are made in accordance with the priorities
described herein;
(iv) the scheduled monthly payments of principal and interest on the
Mortgage Loans will be timely delivered on the first day of each month
commencing in September 1999 (with no defaults);
(v) with respect to the first Collection Period, assumed to be from
July 15, 1999 to August 31, 1999, an additional 15 days interest is
received on the Pool 1 Mortgage Loans in an amount equal to $1,231,125.20;
(vi) the Mortgage Loans prepay at the indicated percentage of CPR;
(vii) all prepayments are prepayments in full received on the last day
of each month commencing in August 1999 and include 30 days' interest
thereon;
(viii) no optional termination is exercised (other than with respect
to the information shown opposite Weighted Average Life to Optional
Termination);
(ix) each Bond has the respective Bond Interest Rate and Original
Class Balance set forth herein;
(x) the over-collateralization levels are set initially as specified
in the Indenture, and thereafter decrease in accordance with the provisions
of the Indenture; and
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<PAGE> 88
(xi) the Class A-1 Bond Interest Rate is as discussed herein and
One-Month LIBOR is 5.16750% for the first month and remains constant
thereafter at 5.16750% and six-month LIBOR remains constant at 5.58000%.
Class A-2 Structuring Assumptions
(i) each Mortgage Pool consists of Mortgage Loans with the
characteristics set forth in the applicable table below;
(ii) the Closing Date for the Class A-2 Bonds is August 5, 1999;
(iii) payments on each class of Bonds are made on the 25th day of each
month regardless of the day on which the Payment Date actually occurs,
commencing in September 1999 and are made in accordance with the priorities
described herein;
(iv) the scheduled monthly payments of principal and interest on the
Mortgage Loans will be timely delivered on the first day of each month
commencing in September 1999 (with no defaults);
(v) with respect to the first Collection Period, assumed to be from
July 15, 1999 to August 31, 1999, an additional 15 days interest is
received on the Pool 2 Mortgage Loans in an amount equal to $228,245.59;
(vi) the Mortgage Loans prepay at the indicated percentage of CPR;
(vii) all prepayments are prepayments in full received on the last day
of each month commencing in August 1999 and include 30 days' interest
thereon;
(viii) no optional termination is exercised (other than with respect
to the information shown opposite Weighted Average Life to Optional
Termination);
(ix) each Bond has the respective Bond Interest Rate and Original
Class Balance set forth herein;
(x) the over-collateralization levels are set initially as specified
in the Indenture, and thereafter decrease in accordance with the provisions
of the Indenture; and
(xi) the Class A-2 Bond Interest Rate is as discussed herein.
S-88
<PAGE> 89
ASSUMED CHARACTERISTICS OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
TOTAL ORIGINAL REMAINING MONTH
CURRENT GROSS COLLATERAL AMORTIZATION AMORTIZATION TO MONTHS
GROUP AMOUNT($) COUPON(%) FEES(%) TERM (MOS.) TERM (MOS.) BALLOON AGE INDEX MARGIN(%) TO ROLL
----- --------------- --------- ---------- ------------ ------------ ------- --- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed..... $ 258,363.33 8.948% 0.792% 120 116 4
Fixed..... $ 19,495,512.47 9.814% 0.792% 180 178 2
Fixed..... $ 333,452.36 10.535% 0.792% 240 237 3
Fixed..... $ 40,358,473.69 9.645% 0.792% 360 358 2
Fixed..... $ 2,592,484.15 10.377% 0.792% 360 356 176 4
2/28
Arm...... $ 44,065.20 10.990% 0.858% 360 349 11 6M LIB 6.490% 12
2/28
Arm...... $ 430,849.38 9.120% 0.858% 360 350 10 6M LIB 6.115% 13
2/28
Arm...... $ 829,042.97 9.553% 0.858% 360 351 9 6M LIB 6.316% 14
2/28
Arm...... $ 535,667.64 9.956% 0.858% 360 354 6 6M LIB 6.352% 15
2/28
Arm...... $ 1,557,536.41 9.685% 0.858% 360 353 7 6M LIB 6.230% 16
2/28
Arm...... $ 2,181,862.34 9.668% 0.858% 360 354 6 6M LIB 6.261% 17
2/28
Arm...... $ 617,894.51 9.278% 0.858% 360 355 5 6M LIB 6.672% 18
2/28
Arm...... $ 858,277.40 9.128% 0.858% 360 356 4 6M LIB 6.943% 19
2/28
Arm...... $ 21,906,303.82 9.120% 0.858% 360 357 3 6M LIB 6.250% 20
2/28
Arm...... $ 36,637,852.17 9.430% 0.858% 360 358 2 6M LIB 6.020% 21
2/28
Arm...... $159,076,199.30 9.701% 0.858% 359 358 1 6M LIB 5.625% 22
2/28
Arm...... $ 36,493,457.69 9.461% 0.858% 360 359 1 6M LIB 5.808% 23
2/28
Arm...... $ 1,523,280.57 8.678% 0.858% 360 359 1 6M LIB 6.305% 24
2/28
Arm...... $ 68,445.94 8.700% 0.858% 360 354 6 6M LIB 6.500% 29
3/27
Arm...... $ 361,166.39 10.075% 0.858% 360 353 7 6M LIB 6.307% 28
3/27
Arm...... $ 992,930.31 8.993% 0.858% 360 354 6 6M LIB 5.647% 29
3/27
Arm...... $ 583,666.49 10.006% 0.858% 360 355 5 6M LIB 6.080% 30
3/27
Arm...... $ 1,116,955.70 9.731% 0.858% 360 356 4 6M LIB 6.309% 31
3/27
Arm...... $ 28,132,975.50 9.189% 0.858% 360 357 3 6M LIB 5.960% 32
3/27
Arm...... $ 24,287,259.40 9.180% 0.858% 360 358 2 6M LIB 5.910% 33
3/27
Arm...... $ 10,259,471.47 9.559% 0.858% 359 358 1 6M LIB 5.995% 34
3/27
Arm...... $ 10,336,425.63 9.307% 0.858% 360 359 1 6M LIB 5.855% 35
3/27
Arm...... $ 1,173,875.97 9.232% 0.858% 360 359 1 6M LIB 5.614% 36
<CAPTION>
FIRST RATE PERIODIC FLOOR LIFE
GROUP PERIODICITY ADJUSTMENT(%) CAP(%) (%) CAP(%)
----- ----------- ------------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Fixed.....
Fixed.....
Fixed.....
Fixed.....
Fixed.....
2/28
Arm...... 6 3.000% 1.000% 10.990% 17.990%
2/28
Arm...... 6 1.874% 1.500% 9.120% 15.874%
2/28
Arm...... 6 1.877% 1.454% 9.553% 16.303%
2/28
Arm...... 6 1.500% 1.500% 9.956% 16.958%
2/28
Arm...... 6 2.123% 1.374% 9.685% 16.272%
2/28
Arm...... 6 1.912% 1.417% 9.668% 16.394%
2/28
Arm...... 6 2.569% 1.204% 9.278% 15.565%
2/28
Arm...... 6 2.082% 1.458% 9.128% 16.108%
2/28
Arm...... 6 1.636% 1.482% 9.120% 16.013%
2/28
Arm...... 6 2.112% 1.303% 9.430% 16.020%
2/28
Arm...... 6 2.936% 1.022% 9.701% 15.739%
2/28
Arm...... 6 2.547% 1.151% 9.461% 15.742%
2/28
Arm...... 6 1.500% 1.500% 8.678% 15.678%
2/28
Arm...... 6 3.000% 1.500% 8.700% 14.700%
3/27
Arm...... 6 1.218% 1.218% 10.075% 17.077%
3/27
Arm...... 6 1.500% 1.500% 8.993% 15.996%
3/27
Arm...... 6 2.501% 1.473% 10.006% 16.603%
3/27
Arm...... 6 2.803% 1.485% 9.731% 15.801%
3/27
Arm...... 6 1.539% 1.497% 9.189% 16.158%
3/27
Arm...... 6 1.535% 1.451% 9.180% 16.133%
3/27
Arm...... 6 2.348% 1.218% 9.559% 15.995%
3/27
Arm...... 6 1.746% 1.147% 9.307% 16.123%
3/27
Arm...... 6 1.500% 1.009% 9.232% 16.232%
</TABLE>
S-89
<PAGE> 90
DECREMENT TABLES
Subject to the foregoing discussion and assumptions, the following tables
set forth the percentages of the Original Class Balance of each class of Bonds
that would be outstanding after each of the dates shown at various percentages
of the CPR and the weighted average life.
Since the tables were prepared on the basis of the Structuring Assumptions,
there are discrepancies between characteristics of the actual Mortgage Loans and
the characteristics of the Mortgaged Loans assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the Class Balance
outstanding and weighted average life of the Bonds set forth in the table. In
addition, since the actual Mortgage Loans in the related Mortgage Pool have
characteristics which differ from those assumed in preparing the tables set
forth below, the payments of principal on the related class of Bonds may be made
earlier or later than as indicated in the table.
PERCENT OF CLASS BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT MODEL-CLASS A-1
<TABLE>
<CAPTION>
PREPAYMENT MODEL POOL 1 0% 13% 18% 23% 28% 33% 38% 43%
PREPAYMENT MODEL POOL 2 0% 25% 50% 75% 100% 125% 150% 175%
----------------------- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.................................... 100 100 100 100 100 100 100 100
August 25, 2000....................................... 99 86 81 76 71 66 61 56
August 25, 2001....................................... 99 74 66 58 50 43 37 31
August 25, 2002....................................... 98 64 53 44 36 29 23 18
August 25, 2003....................................... 97 55 43 33 26 19 14 10
August 25, 2004....................................... 97 47 35 26 18 13 9 5
August 25, 2005....................................... 96 41 29 20 13 8 5 3
August 25, 2006....................................... 95 35 23 15 9 5 3 1
August 25, 2007....................................... 94 30 19 11 6 3 2 1
August 25, 2008....................................... 93 26 15 9 4 2 1 *
August 25, 2009....................................... 92 22 12 6 3 1 * 0
August 25, 2010....................................... 91 19 10 5 2 1 0 0
August 25, 2011....................................... 89 16 8 3 1 * 0 0
August 25, 2012....................................... 87 14 6 2 1 0 0 0
August 25, 2013....................................... 86 12 5 2 * 0 0 0
August 25, 2014....................................... 83 10 4 1 * 0 0 0
August 25, 2015....................................... 81 8 3 1 0 0 0 0
August 25, 2016....................................... 78 7 2 * 0 0 0 0
August 25, 2017....................................... 76 6 2 * 0 0 0 0
August 25, 2018....................................... 72 5 1 * 0 0 0 0
August 25, 2019....................................... 69 4 1 0 0 0 0 0
August 25, 2020....................................... 64 3 1 0 0 0 0 0
August 25, 2021....................................... 60 2 * 0 0 0 0 0
August 25, 2022....................................... 54 2 * 0 0 0 0 0
August 25, 2023....................................... 49 1 0 0 0 0 0 0
August 25, 2024....................................... 42 1 0 0 0 0 0 0
August 25, 2025....................................... 35 * 0 0 0 0 0 0
August 25, 2026....................................... 28 * 0 0 0 0 0 0
August 25, 2027....................................... 19 0 0 0 0 0 0 0
August 25, 2028....................................... 9 0 0 0 0 0 0 0
August 25, 2029....................................... 0 0 0 0 0 0 0 0
Weighted Average Life to Maturity (in years) (1)...... 21.93 6.51 4.77 3.70 2.98 2.47 2.09 1.79
Weighted Average Life to Optional Redemption (in
Years)(1)........................................... 21.72 5.63 4.01 3.08 2.48 2.05 1.73 1.48
</TABLE>
- -------------------------
* indicates greater than zero but less than 0.5%.
(1) The weighted average life of the Class A-1 Bonds is determined by (i)
multiplying the amount of each payment in reduction of the related Class
Balance by the number of years from the date of issuance of such Bond to the
related Payment Date, (ii) adding the results, and (iii) dividing the sum by
the Original Class Balance.
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<PAGE> 91
PERCENT OF CLASS BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT MODEL-CLASS A-2
<TABLE>
<CAPTION>
PREPAYMENT MODEL POOL 1 0% 13% 18% 23% 28% 33% 38% 43%
PREPAYMENT MODEL POOL 2 0% 25% 50% 75% 100% 125% 150% 175%
----------------------- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.................................... 100 100 100 100 100 100 100 100
August 25, 2000....................................... 99 94 90 85 80 76 71 66
August 25, 2001....................................... 97 87 77 67 59 51 43 36
August 25, 2002....................................... 95 80 66 53 43 34 26 20
August 25, 2003....................................... 93 73 56 42 32 23 16 11
August 25, 2004....................................... 91 67 48 34 23 15 10 6
August 25, 2005....................................... 89 61 41 27 17 10 6 3
August 25, 2006....................................... 86 55 35 21 12 7 3 1
August 25, 2007....................................... 83 50 29 17 9 4 2 1
August 25, 2008....................................... 80 45 25 13 6 3 1 *
August 25, 2009....................................... 77 40 21 10 4 2 * 0
August 25, 2010....................................... 73 36 17 8 3 1 0 0
August 25, 2011....................................... 69 32 14 6 2 * 0 0
August 25, 2012....................................... 64 28 12 4 1 * 0 0
August 25, 2013....................................... 59 24 9 3 1 0 0 0
August 25, 2014....................................... 51 20 7 2 * 0 0 0
August 25, 2015....................................... 49 18 6 1 * 0 0 0
August 25, 2016....................................... 47 16 5 1 0 0 0 0
August 25, 2017....................................... 45 14 4 1 0 0 0 0
August 25, 2018....................................... 43 13 3 * 0 0 0 0
August 25, 2019....................................... 41 11 3 * 0 0 0 0
August 25, 2020....................................... 38 10 2 * 0 0 0 0
August 25, 2021....................................... 35 9 2 0 0 0 0 0
August 25, 2022....................................... 32 7 1 0 0 0 0 0
August 25, 2023....................................... 29 6 1 0 0 0 0 0
August 25, 2024....................................... 25 5 * 0 0 0 0 0
August 25, 2025....................................... 20 4 * 0 0 0 0 0
August 25, 2026....................................... 16 2 0 0 0 0 0 0
August 25, 2027....................................... 11 1 0 0 0 0 0 0
August 25, 2028....................................... 5 * 0 0 0 0 0 0
August 25, 2029....................................... 0 0 0 0 0 0 0 0
Weighted Average Life to Maturity (in years) (1)...... 17.02 9.67 6.31 4.55 3.52 2.84 2.37 2.02
Weighted Average Life to Optional Redemption (in
Years)(1)........................................... 16.90 7.56 4.91 3.61 2.84 2.32 1.96 1.69
</TABLE>
- -------------------------
* indicates greater than zero but less than 0.5%.
(1) The weighted average life of the Class A-2 Bond is determined by (i)
multiplying the amount of each payment in reduction of the related Class
Balance by the number of years from the date of issuance of such Bond to the
related Payment Date, (ii) adding the results, and (iii) dividing the sum by
the Original Class Balance.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Bonds will be applied
by the Depositor towards the purchase of the Mortgage Loans from the Seller.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion, which summarizes certain material U.S. federal
income tax aspects of the purchase, ownership and disposition of the Bonds, is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations thereunder, and published rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to beneficial owners of the
Bonds ("Bondowners") in light of their personal investment circumstances or to
certain types of Bondowners subject to special treatment under the U.S. federal
income tax laws (for example, banks and life insurance companies).
S-91
<PAGE> 92
Accordingly, investors should consult their tax advisors regarding U.S. federal,
state, local, foreign and any other tax consequences to them of investing in the
Bonds.
CHARACTERIZATION OF THE BONDS AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Basic Documents and other relevant documents and assuming compliance with the
terms of the Basic Documents as in effect on the date of issuance of the Bonds,
Jeffers, Wilson, Shaff & Falk, LLP, special tax counsel to the Depositor and the
Seller ("Tax Counsel"), is of the opinion that (i) the Bonds will be treated as
debt instruments for federal income tax purposes as of such date and (ii) the
Trust will not be characterized as an association (or publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool within the
meaning of Section 7701(i) of the Code. Accordingly, upon issuance, the Bonds
will be treated as indebtedness as described in the Prospectus. See "Federal
Income Tax Consequences -- Classification of the Issuer and the Bonds" in the
Prospectus.
The Depositor and the Bondowners express in the Mortgage Loan Purchase
Agreement their intent that, for applicable tax purposes, the Bonds will be
indebtedness secured by the Mortgage Loans. The Depositor and the Bondowners, by
accepting the Bonds, and each Bondowner by its acquisition of a beneficial
interest in a Bond, have agreed to treat the Bonds as indebtedness for U.S.
federal income tax purposes.
TAXATION OF INTEREST INCOME OF BONDOWNERS
Assuming that the Bondowners are holders of debt obligations for U.S.
federal income tax purposes, the Bonds generally will be taxable as
indebtedness. See "Federal Income Tax Consequences -- Classification of the
Issuer and the Bonds" in the Prospectus.
While it is not anticipated that the Bonds will be issued at a greater than
de minimis discount, under Treasury regulations (the "OID Regulations") it is
possible that the Bonds could nevertheless be deemed to have been issued with
original issue discount ("OID") if, for example, the interest were not treated
as unconditionally payable under the OID Regulations. If such regulations were
to apply, all of the taxable income to be recognized with respect to the Bonds
would be includible in income of Bondowners as OID, but would not be includible
again when the interest is actually received. See "Federal Income Tax
Consequences -- Interest and Original Issue Discount" in the Prospectus for a
discussion of the application of the OID rules if the Bonds are in fact issued
at a greater than de minimis discount or are treated as having been issued with
OID under the OID Regulations. For purposes of calculating OID, it is likely
that scheduled interest payments due on the Bonds will be treated as "Qualified
Stated Interest" as defined in Section 1.1273-1(c) of the OID Regulations.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Bond to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Bondowner provides the required foreign
person information certification. See "Federal Income Tax
Consequences -- Withholding with Respect to Certain Foreign Investors" in the
Prospectus.
BACKUP WITHHOLDING
Certain Bondowners may be subject to backup withholding at the rate of 31%
with respect to interest paid on the Bonds if such a Bondowner, upon the Bonds'
issuance, fails to supply the Indenture Trustee or his broker with his taxpayer
identification number, furnish an incorrect taxpayer
S-92
<PAGE> 93
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) property, or, under certain circumstances,
fail to provide the Indenture Trustee or his broker with a certified statement,
under penalty of perjury, that he is not subject to backup withholding.
The Indenture Trustee will be required to report annually to the IRS, and
to each Bondowner of record, the amount of interest paid (and OID accrued, if
any), on the Bonds (and the amount of interest withheld for U.S. federal income
taxes, if any) for each calendar year, except as to exempt holders (generally,
holders that are corporations, certain tax-exempt organizations or nonresident
aliens who provide certification as to their status as nonresidents). As long as
the only "Bondholder" of record is Cede, as nominee for DTC, Bondowners and the
IRS will receive tax and other information including the amount of interest paid
on the Bonds from Participants and Indirect Participants rather than from the
Indenture Trustee. (The Indenture Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and certain
other persons to complete their reports.) Each non-exempt Bondowner will be
required to provide, under penalty of perjury, a certificate on IRS Form W-9
containing his or her name, address, correct federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a non-exempt Bondowner fail to provide the required certification, the
Participants or Indirect Participants (or the Paying Agent) will be required to
withhold 31% of the interest (and principal) otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
Federal income tax liability.
Final regulations dealing with backup withholding and information reporting
on income paid to a foreign person and related matters (the "Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the Withholding Regulations do not significantly alter the substantive
withholding and information reporting requirements, but do unify current
certification procedures and forms and clarify reliance standards. The
Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take the Withholding Regulations into account. Prospective
Bondowners are strongly urged to consult their own tax advisor with respect to
the Withholding Regulations.
STATE TAX CONSIDERATIONS
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Bonds under the tax laws of any state.
Investors considering an investment in the Bonds should consult their own tax
advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local, foreign or any other income tax consequences of the purchase,
ownership and disposition of the Bonds.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Bonds without regard
to the ERISA considerations described below, subject
S-93
<PAGE> 94
to other applicable Federal and state law. However, any such governmental or
church plan which is qualified under section 401(a) of the Code and exempt from
taxation under section 501(a) of the Code is subject to the prohibited
transaction rules set forth in section 503 of the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Bonds should consult with its
counsel with respect to the potential consequences under ERISA, and the Code, of
the Plan's acquisition and ownership of the Bonds. See "ERISA Matters" in the
Prospectus. Investments by Plans are also 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.
PROHIBITED TRANSACTIONS AND PLAN ASSETS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" such that any person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the Bonds were deemed to be equity interests and no
statutory, regulatory or administrative exemption applies, the Trust could be
considered to hold plan assets by reason of a Plan's investment in the Bonds.
Such plan assets would include an undivided interest in any assets held by the
Trust. In such an event, the Indenture Trustee, the Master Servicer, the
Servicer or the Depositor and other persons that perform services for, or in
connection with, the Trust, in providing services with respect to the Trust's
assets (the "Transaction Parties"), may be parties in interest with respect to
such Plans, subject to the fiduciary responsibility provisions of Title I of
ERISA, including the prohibited transaction provisions of Section 406 of ERISA,
and Section 4975 of the Code with respect to transactions involving the Trust's
assets. Under the Plan Asset Regulation, the term "equity interest" is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Asset Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, Labor
has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Asset Regulation, Labor declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment in the instrument would be
a practical vehicle for the indirect provision
S-94
<PAGE> 95
of investment management services. Jeffers, Wilson, Shaff & Falk, LLP has
rendered its opinion that the Bonds will be classified as indebtedness for tax
purposes and the Depositor believes that the Bonds will be classified as
indebtedness without substantial equity features for ERISA purposes. However, if
the Bonds are deemed to be equity interests in the Trust and no statutory,
regulatory or administrative exemption applies, the Trust could be considered to
hold plan assets by reason of a Plan's investment in the Bonds. Furthermore,
regardless of whether the Bonds are treated as equity for purposes of ERISA, the
acquisition or holding of Bonds by or on behalf of a Plan still could be
considered to give rise to a prohibited transaction if a Transaction Party, or
an affiliate thereof, is or becomes a party in interest or a disqualified person
with respect to such Plan.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Bonds on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Bonds, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Bonds, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the Bonds.
LEGAL INVESTMENT CONSIDERATIONS
The Bonds will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA") for so
long as they are rated in one or more of the two highest rating categories by
one or more nationally recognized statistical rating agencies, and, as such, are
legal investments for certain entities to the extent provided in SMMEA. Such
investments, however, will be subject to general regulatory considerations
governing investment practices under state and federal laws.
Moreover, institutions whose investment activities are subject to review by
certain regulatory authorizes may be or may become subject to restrictions,
which may be retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain mortgage related securities. In
addition, several states have adopted or may adopt regulations that prohibit
certain state-chartered institutions from purchasing or holding similar types of
securities.
Accordingly, investors should consult their own legal advisors to determine
whether and to what extent the Bonds may be purchased by such investors.
See "Legal Investment" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated July 21, 1999 (the "Underwriting Agreement"), among the
Depositor, AmREIT, Bear, Stearns & Co. Inc. ("Bear, Stearns"), Morgan Stanley &
Co. Incorporated ("Morgan Stanley") and First Union Capital Markets Corp.
("First Union", and together with Bear Stearns and Morgan Stanley, the
"Underwriters"), the Depositor has agreed to cause the Bond Issuer to sell and
the Underwriters have agreed, subject to the terms and conditions set forth in
the Underwriting Agreement, to
S-95
<PAGE> 96
purchase, severally and not jointly, the entire principal amount of each class
of Bonds in accordance with the following allotments:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OF THE
CLASS A-1 BONDS
---------------
<S> <C>
Bear, Stearns............................................... $110,783,334
First Union................................................. 110,783,333
Morgan Stanley.............................................. 110,783,333
------------
$332,350,000
============
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OF THE
CLASS A-2 BONDS
---------------
<S> <C>
Bear, Stearns............................................... $20,583,334
First Union................................................. 20,583,333
Morgan Stanley.............................................. 20,583,333
-----------
$61,750,000
===========
</TABLE>
The Bonds will be offered by the Underwriters from time to time in
negotiated transaction or otherwise, at varying prices to be determined at the
time of sale. Proceeds to the Depositor, excluding accrued interest, are
expected to be approximately 99.74% of the aggregate principal balance of the
Bonds before deducting issuance expenses payable by the Depositor in connection
with the Bonds. In connection with the purchase of the Bonds, the Underwriter
may be deemed to have received compensation in the form of underwriting
discounts.
The Depositor has been advised by the Underwriters that they presently
intend to make a market in the Bonds offered hereby. However, the Underwriters
are not obligated to do so and any market-making may be discontinued at any
time, and there can be no assurance that an active public market for the Bonds
will develop.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters with respect to the Bonds will be passed upon for the
Bond Issuer and the Depositor by Tobin & Tobin, a professional corporation, San
Francisco, California and for the Underwriter by Brown & Wood LLP, Washington,
D.C. Certain federal income tax consequences with respect to the Bonds will be
passed upon by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California.
S-96
<PAGE> 97
RATINGS
It is a condition to issuance that the Bonds be rated "AAA" by S&P and
"Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Bondholders
of payments on the related Pool of Mortgage Loans. The rating takes into
consideration the characteristics of such Mortgage Loans and the structural,
legal and tax aspects associated with the Bonds. The ratings on the Bonds do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the Mortgage Loans or the possibility that Bondholders might
realize a lower than anticipated yield.
The ratings assigned to the Bonds will depend primarily upon the
creditworthiness of the Bond Insurer. Any reduction in a rating assigned to the
financial strength of the Bond Insurer below the ratings initially assigned to
the Bonds may result in a reduction of one or more of the ratings assigned to
the Bonds.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities. The ratings do not address the
likelihood of the payment of any LIBOR Carryover Amount with respect to the
Class A-1 Bonds.
There can be no assurance as to whether any other rating agency will rate
the Bonds or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Bonds could be
lower than the respective ratings assigned by the applicable Rating Agency.
S-97
<PAGE> 98
INDEX OF CERTAIN DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1933 Act....................... S-22
2/28 Loans..................... S-24
3/27 loans..................... S-24
Adjustable Rate Mortgage
Loans........................ S-20
Adjustment Date................ S-24
Administrative Fee Amount...... S-65
Aggregate Expense Rate......... S-68
AmREIT......................... S-5
Auction Call Date.............. S-73
Available Funds................ S-64
Balloon Loans.................. S-33
Balloon Payment................ S-33
Basic Documents................ S-22
Bear Stearns................... S-95
Beneficial Owner............... S-57
Bond Account................... S-69
Bond Balance................... S-56
Bond Insurance Premium......... S-65
Bond Insurer................... S-22
Bond Issuer.................... S-20
Bond Margin.................... S-67
Bond Register.................. S-56
Bondholders.................... S-21
Bondowners..................... S-91
Bonds.......................... S-21
Book-Entry Bonds............... S-56
Business Day................... S-78
Cap Rate....................... S-67
Cedel.......................... S-56
Cedel Participants............. S-58
Citibank....................... S-56
Class A-1...................... S-55
Class A-1 Bond Rate............ S-67
Class A-1 Formula Rate......... S-67
Class A-1 Net Funds Cap........ S-67
Class A-1 Structuring
Assumptions.................. S-87
Class A-2...................... S-55
Class A-2 Bond Rate............ S-68
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Class A-2 Stated Rate.......... S-69
Class A-2 Net Funds Cap........ S-69
Class A-2 Structuring
Assumptions.................. S-87
Class Balance.................. S-55
Closing Date................... S-21
Code........................... S-91
Collection Period.............. S-62
Constant Prepayment Rate....... S-86
Cooperative.................... S-58
Countrywide.................... S-40
Coverage Percentage............ S-39
CPR............................ S-86
Custodian...................... S-61
Cut-off Date................... S-21
Defective Mortgage Loan........ S-62
Definitive Bonds............... S-56
Delayed Adjustment Mortgage
Loans........................ S-24
Deposit Date................... S-69
Depositor...................... S-20
Determination Date............. S-65
Distribution Account........... S-69
DTC............................ S-56
DTC Services................... S-60
Due Date....................... S-48
Due Period..................... S-62
ERISA.......................... S-93
Euroclear...................... S-56
Euroclear Operator............. S-58
Euroclear Participants......... S-58
European Depositaries.......... S-56
Event of Default............... S-75
Excess Cash.................... S-70
Federal Reserve Board.......... S-59
Financial Intermediary......... S-57
First Union.................... S-95
Fixed Rate Mortgage Loans...... S-20
Full Documentation............. S-44
</TABLE>
S-98
<PAGE> 99
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Global Securities.............. A-1
Gross Margin................... S-24
Holdings....................... S-80
Indenture...................... S-21
Indenture Trustee.............. S-21
Index.......................... S-24
Industry....................... S-60
Initial Cap.................... S-24
Initial Redemption Date........ S-73
Insurance Agreement............ S-22
Insurance Policy............... S-22
Insurance Proceeds............. S-65
Insured Payments............... S-77
Interest Accrual Period........ S-66
Investor Certificate........... S-21
Labor.......................... S-94
LIBOR Business Day............. S-69
LIBOR Carryover Amount......... S-66
LIBOR Determination Date....... S-68
Liquidated Mortgage Loan....... S-53
Liquidation Proceeds........... S-65
Lite Documentation............. S-44
Loan-to-Value Ratio............ S-23
Loss Amount.................... S-39
LTV............................ S-44
Management Agreement........... S-21
Management Fee................. S-66
Management Fee Rate............ S-68
Master Servicer................ S-21
Master Servicing Agreement..... S-21
Maximum Rate................... S-24
MI Insurer..................... S-39
Minimum Rate................... S-24
Minimum Spread................. S-68
MI Premiums.................... S-40
Monthly Advance................ S-52
Monthly Interest Amount........ S-66
Monthly Principal Amount....... S-66
Moody's........................ S-22
Morgan......................... S-56
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Morgan Stanley................. S-95
Mortgage Files................. S-61
Mortgage Insurance Policy...... S-23
Mortgage Insurance Premium..... S-66
Mortgage Loan Purchase
Agreement.................... S-21
Mortgage Loans................. S-20
Mortgage Pool.................. S-20
Mortgaged Properties........... S-20
Mortgage Rate....................Prospectus
Net Funds Cap.................. S-68
Net Liquidation Proceeds....... S-65
Non-U.S. Person................ A-4
Norwest........................ S-40
OID............................ S-92
OID Regulations................ S-92
Option One..................... S-40
Option One Guidelines.......... S-43
Order.......................... S-77
Originators.................... S-20
Over-collateralization
Amount....................... S-70
Over-collateralization
Deficit...................... S-66
Over-collateralization
Surplus...................... S-70
Owner Trustee.................. S-20
Participants................... S-58
Paying Agent................... S-62
Payment Date................... S-56
Percentage Interest............ S-62
Periodic Cap................... S-24
Plan Asset Regulation.......... S-94
Plans.......................... S-93
Pool 1......................... S-20
Pool 1 Mortgage Loans.......... S-20
Pool 1 Weighted Average Net
Mortgage Rate................ S-68
Pool 2......................... S-20
Pool 2 Mortgage Loans.......... S-20
Prepayment Interest
Shortfalls................... S-52
Prepayment Models.............. S-86
Principal Balance.............. S-66
</TABLE>
S-99
<PAGE> 100
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Prepayment........... S-67
Purchase Price................. S-62
Qualifying Rate................ S-44
Qualified Replacement
Mortgage..................... S-61
Rating Agencies................ S-22
Realized Loss.................. S-71
Receipt........................ S-78
Received....................... S-78
Record Date.................... S-56
Recoverable Advance............ S-52
Reference Bank Rate............ S-68
Relevant Depositary............ S-56
Relief Act Shortfalls.......... S-67
Remittance Date................ S-62
Required Over-collateralization
Amount....................... S-70
Reserve Account................ S-63
Rules.......................... S-57
S&P............................ S-22
Seller......................... S-20
Servicer....................... S-21
Servicers...................... S-21
Servicing Advances............. S-52
Servicing Fee.................. S-51
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Servicing Fee Rate............. S-51
SMMEA.......................... S-95
Stated Income Documentation.... S-44
Stated Maturity Date........... S-86
Statistical Cut-Off Date....... S-15
Statistical Cut-Off Date
Principal Balance............ S-22
Systems........................ S-60
Tax Counsel.................... S-92
Telerate Page 3750............. S-68
Term of the Insurance Policy... S-78
Terms and Conditions........... S-59
TIA............................ S-75
Transaction Parties............ S-94
Trust.......................... S-20
Trust Agreement................ S-20
Trust Estate................... S-21
U.S. Person.................... A-4
Underwriters................... S-22
Underwriting Agreement......... S-22
Voting Interests............... S-75
Weighted Average Net Mortgage
Rate......................... S-82
Year 2000 problems............. S-60
</TABLE>
S-100
<PAGE> 101
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Collateralized Home Equity Bonds, Series 1999-2 (the "Global Securities"), will
be available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through DTC, Cedel or Euroclear. The Global
Securities will be traceable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or Euroclear
and Participants holding Bonds will be effected on a delivery-against-payment
basis through the Relevant Depositaries of Cedel and Euroclear (in such
capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as Participants.
Investors selecting to hold their Global Securities through DTC will follow
DTC settlement practice. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN PARTICIPANTS. Secondary market trading between
Participants will be settled using the procedures applicable to prior
asset-backed Bond issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE> 102
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one Business Day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they clear the
overdraft when the Global Securities are credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the Participants a cross-market transaction will
settle no differently than a trade between two Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a Participant. The seller will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one Business Day prior to settlement. In these cases, Cedel or Euroclear will
instruct the Relevant Depositary, as appropriate, to deliver the Global
Securities to the Participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will
A-2
<PAGE> 103
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from Participants for delivery to Cedel Participants or Euroclear
Participants should Bond that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the Participant is at least one day
prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade of Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
A-3
<PAGE> 104
tax will be imposed at that rate unless the filer alternatively files Form W-8.
Form 1001 may be filed by the beneficial owners or their agents.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years, and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate that is
subject to United States federal income tax, regardless of the source of its
income or (iv) a trust if (a) a court in the United States is able to exercise
primary supervision over the administration of the trust, and (b) one or more
United States persons have the authority to control all substantial decisions of
the trust. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of Global Securities or with
the application of recently issued Treasury Regulations relating to tax
documentation requirements that are generally effective with respect to payments
made after December 31, 1999. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of
Global Securities.
A-4
<PAGE> 105
PROSPECTUS
[AMERICAN RESIDENTIAL LOGO]
$900,000,000
(AGGREGATE AMOUNT)
AMERICAN RESIDENTIAL EAGLE
DEPOSITOR
ASSET-BACKED SECURITIES
THIS PROSPECTUS COVERS SECURITIES CONSISTING
OF:
- One or more Series of Collateralized
Mortgage Bonds; and/or
- One or more Series of Mortgage-Backed
Certificates.
EACH SERIES OF COLLATERALIZED MORTGAGE
BONDS:
- Will be secured by the assets of the
trust; and
- Will have trust fund assets consisting
primarily of mortgage collateral comprised
of one or more of the following types: (i)
fixed-rate or floating-rate, first or
junior lien mortgage loans secured by one-
to four-family residential properties or
other types of residential or mixed use
properties; (ii) mortgage pass-through
securities issued or guaranteed by one of
the national government sponsored housing
agencies; or (iii) a combination of
mortgage loans and agency securities.
EACH SERIES OF MORTGAGE-BACKED CERTIFICATES:
- Will evidence beneficial ownership of the
trust fund assets in the related trust;
and
- Will have trust fund assets consisting
primarily of one or more collateralized
mortgage bonds representing the right to
receive all or substantially all of the
payments on the mortgage collateral and
other items securing such collateralized
mortgage bonds.
EACH SERIES OF SECURITIES:
- Will be issued by a separate trust;
- Will consist of one or more classes;
- May also have trust fund assets consisting
of certain cash accounts, insurance
policies, surety bonds, guaranteed
investment contracts,
cross-collateralization rights,
reinvestment income, guaranties, letters
of credit or derivative arrangements to
the extent described in this prospectus
and in the related prospectus supplement;
and
- Will have interest that accrues at a fixed
rate, a variable rate or a combination
thereof as determined in the manner
specified in the related prospectus
supplement.
Consider carefully the risk
factors beginning on page 20
of this prospectus which
include:
- - Risks associated with
Single-Family Mortgage
Loans;
- - Risks Associated with
Multifamily and Mixed use
Mortgage Loans;
- - Risks Associated with Non-
Conforming Loans; and
- - Limited Liquidity of
Investment.
The Securities represent
obligations of or interests
in the Issuer only and do not
represent an interest in or
obligation of AmREIT,
American Residential Eagle,
Inc. or any of their
affiliates.
Bonds of each Series will be characterized for federal income tax purposes
as debt instruments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MARCH 18, 1999
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TABLE OF CONTENTS
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SUMMARY..................................................... 8
RISK FACTORS................................................ 20
Risks Associated with Single-Family Mortgage Loans........ 20
Risks Associated with Investing in Multifamily and Mixed
Use Mortgage Loans..................................... 21
Risks Associated with Non-Conforming Mortgage Loans....... 22
Prepayment and Yield Considerations; Reinvestment Risk.... 23
Risks Associated with Payment Characteristics of Classes
of Securities.......................................... 23
Environmental Risks....................................... 24
Limited Liquidity of Investment........................... 24
Bankruptcy and Insolvency Risks........................... 24
Effects of Book-Entry Registration........................ 25
Ratings of the Securities................................. 26
Credit Considerations and Risks........................... 27
Pre-Funding Accounts May Result in Reinvestment Risk...... 29
Pre-Funding Accounts May Adversely Affect Investment...... 30
Consequences of Owning Original Issue Discount
Securities............................................. 30
INTRODUCTION................................................ 31
The Issuers............................................... 31
The Company............................................... 32
USE OF PROCEEDS............................................. 33
TRUST FUND ASSETS........................................... 33
General................................................... 33
The Mortgage Loans........................................ 34
Agency Securities......................................... 40
Substitution of Mortgage Collateral....................... 46
Optional Purchase of Defaulted Mortgage Loans............. 47
Bond and Distribution Accounts............................ 47
Pre-Funding Account....................................... 48
DESCRIPTION OF THE SECURITIES............................... 49
General................................................... 50
Distributions on Securities............................... 52
Redemption of Bonds....................................... 53
Early Termination......................................... 54
Call Protection and Guarantees............................ 55
Weighted Average Life of the Securities................... 55
Categories of Classes of Securities....................... 57
Reports to Securityholders................................ 60
Book-Entry Securities..................................... 62
CREDIT ENHANCEMENT.......................................... 65
General................................................... 65
Subordination............................................. 66
Reserve Funds............................................. 67
Mortgage Pool Insurance Policies.......................... 67
Special Hazard Insurance Policies......................... 69
Bankruptcy Bonds.......................................... 70
Security Insurance Policies, Surety Bonds and
Guaranties............................................. 70
Letter of Credit.......................................... 71
</TABLE>
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Over-Collateralization.................................... 71
Cross-Collateralization................................... 72
Excess Spread............................................. 72
Minimum Principal Payment Agreement....................... 72
Derivative Arrangements................................... 72
MORTGAGE LOAN PROGRAM....................................... 73
Underwriting Standards.................................... 73
Quality Control........................................... 76
Representations by Sellers; Repurchases................... 76
SERVICING OF THE MORTGAGE LOANS............................. 77
General................................................... 77
Payments on Mortgage Loans................................ 78
Collection Procedures..................................... 79
Junior Mortgages.......................................... 81
Servicing and other Compensation and Payment of
Expenses............................................... 81
Prepayments............................................... 82
Evidence as to Compliance................................. 82
Advances and Other Amounts Payable by Master Servicer..... 82
Resignation of Master Servicer............................ 83
Stand-By Master Servicer.................................. 84
Special Servicing Agreement............................... 84
Certain Matters Regarding the Master Servicer and the
Company................................................ 84
Servicing Defaults........................................ 85
Rights Upon Servicing Default............................. 85
Amendment of Master Servicing Agreement................... 85
THE AGREEMENTS.............................................. 86
Modification of Agreements................................ 86
Events of Default......................................... 87
Rights Upon Events of Default............................. 87
Certain Indenture Covenants of the Issuer................. 88
Issuer's Annual Compliance Statements..................... 89
Bond Trustee's Annual Report.............................. 89
Satisfaction and Discharge of Indenture................... 89
Termination of Trust Agreement............................ 89
The Trustees.............................................. 90
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..................... 91
General................................................... 91
Junior Mortgages.......................................... 92
Foreclosure/Repossession.................................. 93
Rights of Redemption...................................... 95
Anti-Deficiency Legislation and Other Limitations on
Lenders................................................ 96
Federal Bankruptcy and Other Laws Affecting Creditors'
Rights................................................. 97
Environmental Risks....................................... 99
Due-on-Sale Clauses....................................... 101
Enforceability of Prepayment Charges and Late Payment
Fees................................................... 101
Application of Usury Laws................................. 102
Soldiers' and Sailors' Civil Relief Act................... 102
Subordinate Financing..................................... 102
FEDERAL INCOME TAX CONSEQUENCES............................. 103
</TABLE>
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Classification of the Issuer and the Bonds................ 103
Taxation of the FASIT and its Holders..................... 104
Treatment of FASIT Regular Securities..................... 106
Taxation of High-Yield Interests.......................... 106
Taxation of FASIT Ownership Securities.................... 107
Interest and Original Issue Discount...................... 107
Premium................................................... 110
Election to Treat All Interest as Original Issue
Discount............................................... 111
Realized Losses........................................... 111
Sale or Redemption........................................ 111
Market Discount........................................... 111
Withholding with Respect to Certain Foreign Investors..... 113
Backup Withholding........................................ 113
STATE TAX CONSIDERATIONS.................................... 114
LEGAL INVESTMENT............................................ 114
ERISA MATTERS............................................... 116
General................................................... 116
Prohibited Transactions................................... 116
RATINGS..................................................... 118
PLAN OF DISTRIBUTION........................................ 119
LEGAL MATTERS............................................... 119
INDEX OF CERTAIN DEFINITIONS................................ 120
</TABLE>
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IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the securities in two separate documents that
progressively provide more detail: (1) this prospectus, which provides general
information, some of which may not apply to your series of securities, and (2)
the accompanying prospectus supplement which describes the specific terms of
your series of securities and which may contain information that varies from the
information in this prospectus.
PROSPECTUS SUPPLEMENTS
The prospectus relating to a Series of Securities to be offered hereunder
will, among other things, set forth with respect to such Series of Securities,
which Classes of such Series are being offered by the prospectus supplement (the
"Offered Securities") and, to the extent applicable:
The prospectus supplement, set forth to the extent applicable:
- information concerning the Issuer of the series of securities;
- the principal amount and the interest rate, or the method to be used to
determine the interest rate, of each class of the series of securities;
- certain characteristics of the mortgage collateral included in the trust
fund assets for such series of securities and, if applicable, information
as to any insurance policies, surety bonds, guaranties, derivative
arrangements, cross-collateralization, reinvestment income, guaranteed
investment contracts or letters of credit, and the amount and source of
any reserve fund or other cash account for the securities;
- the circumstances, if any, under which the securities of such series are
subject to special redemption or optional redemption or early
termination;
- the stated maturity of each class of securities;
- the method used to calculate the aggregate amount of principal required
to be applied to the securities on each distribution date and the
priority in which such payments will be applied among the classes of
securities;
- the principal amount of each class of securities that would be
outstanding on specified distribution dates if the mortgage collateral
relating to the class prepaid at various assumed rates;
- the distribution dates for the series of securities;
- information as to the nature and extent of subordination with respect to
any class of securities that is subordinate in right of payment to any
other class;
- any minimum principal payment requirements and the terms of any related
minimum principal payment agreement with respect to the series of
securities;
- additional information with respect to the plan of distribution of the
securities; and information as to the Master Servicer and the Bond
Trustee and the Certificate Trustee for the series.
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<PAGE> 110
IF THE TERMS OF YOUR SERIES OF SECURITIES AND ANY OTHER INFORMATION
CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under "Index of Certain Definitions" beginning on page
120 in this prospectus and under the caption "Index of Terms" in the
accompanying prospectus supplement.
Some persons participating in this offering may engage in transactions that
stabilize, maintain, or in some way affect the price of the securities. These
types of transactions may include stabilizing, purchasing securities to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, please read the section entitled "Underwriting" in this
prospectus.
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WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
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Northeast Regional Office Midwest Regional Office
500 West Madison Street, Suite
Seven World Trade Center 1400
New York, New York 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov/ .
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus, and later information
that we file with the SEC will automatically update and supersede this
information. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
This prospectus incorporates by reference the documents filed with the SEC
on behalf of the Bond Issuer named in the accompanying prospectus supplement
during the offering of the Bonds being issued by the Bond Issuer.
Neither we, the Master Servicer, the Bond Trustee nor the Certificate
Trustee for any series of securities intend to file with the SEC periodic
reports with respect to the related Issuer following completion of the reporting
period required by Rule 15d-1 or Regulation 15D under the Securities Exchange
Act of 1934. However, the related Issuer may elect to continue reporting in its
sole discretion.
This prospectus and the accompanying prospectus supplements are part of a
registration statement filed with the SEC (Registration No. 333-70189). You may
request a free copy of any of the above filings by writing or calling:
American Residential Eagle, Inc.
445 Marine View Avenue, Suite 100
Del Mar, California 92014
(619) 259-6082
You should rely on the information incorporated by reference or provided in
this prospectus or the accompanying prospectus supplements. We have not
authorized anyone else to provide you with different information. You should not
assume that the information in this prospectus or in the accompanying prospectus
supplements is accurate as of any date other than the date on the cover page of
this prospectus or the accompanying prospectus supplements.
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<PAGE> 112
SUMMARY
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 the terms of the offering of the
securities, you should read this prospectus and the accompanying prospectus
supplement. Certain capitalized terms used and not otherwise defined herein
shall have the meanings ascribed thereto elsewhere in this prospectus. We refer
you to "INDEX OF CERTAIN DEFINITIONS" in this prospectus for the location of the
definitions of certain terms.
SECURITIES OFFERED
The Asset-Backed Securities being offered are either Collateralized
Mortgage Bonds or Mortgage-Backed Certificates.
The trust fund assets for each series of Bonds will consist primarily of
mortgage collateral comprised of one or more of the following:
- fixed-rate, first or junior lien mortgage loans;
- floating-rate, first or junior lien mortgage loans;
- mortgage pass-through securities issued or guaranteed by Ginnie Mae (or
GNMA), Fannie Mae (or FNMA) or Freddie Mac (or FHLMC); or
- a combination of agency securities and mortgage loans.
- The mortgage loans will be secured by single-family residential
properties (one-to four- units) or other types of residential or mixed
use properties as described in "TRUST FUND ASSETS -- THE MORTGAGE LOANS"
in this prospectus.
The trust fund assets for each series of Certificates will consist
primarily of one or more Bonds.
The trust fund assets for a series of securities may also include certain
cash accounts, insurance policies, surety bonds, guaranteed investment
contracts, cross-collateralization rights, reinvestment income, guaranties or
letters of credit to the extent described herein and in the related prospectus
supplement.
We refer you to "TRUST FUND ASSETS" in this prospectus for more detail.
The Bonds will be issued from time to time in one or more series pursuant
to Indentures (as defined herein) between each Issuer and a bank or trust
company acting as trustee (the "Bond Trustee") for the holders of the Bonds of
each series (the "Bondholders") under the relevant Indenture.
The Certificates may be issued from time to time in one or more series
pursuant to Trust Agreements between American Residential Eagle, Inc. and a bank
or trust company acting as the Certificate Trustee for the Certificateholders.
Each series of securities will consist of one or more Classes which may
include one or more Classes of deferred interest securities (as defined herein).
A series of securities may include one or more classes of Senior Securities and
one or more classes of Subordinated Securities. Unless otherwise specified in
the related prospectus supplement, the Securities represent obligations of or
interests in the Issuer and are not insured or guaranteed by any other person or
entity. We refer you to "DESCRIPTION OF THE SECURITIES" in this prospectus for
more detail. Securities of a class may differ from securities of other classes
of the same series in the amounts allocated to and the priority of principal
payments and interest rate and in such other manner as specified in the related
prospectus supplement. A series of securities may include one or more Classes
entitled to (i) principal distributions, with disproportionate, nominal or no
interest
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<PAGE> 113
distributions or (ii) interest distributions, with disproportionate, nominal or
no principal distributions. A series of securities may be insured or guaranteed
as to payment of principal and interest by a third-party insurer or guarantor,
or secured by certain cash accounts, insurance policies, surety bonds,
guaranteed investment contracts, cross-collateralization, reinvestment income,
guaranties, letters of credit or derivative arrangements, in each case to the
extent provided in this prospectus and in the related prospectus supplement.
ISSUER
The Issuer of each series of securities will be a trust that we establish
for the sole purpose of issuing that series of securities and engaging in
transactions relating to those securities. We are American Residential Eagle,
Inc., a wholly owned limited purpose finance subsidiary of American Residential
Investment Trust, Inc. or "AmREIT". AmREIT, a Maryland corporation, has elected
to be taxed as a real estate investment trust or "REIT". Each trust that is
formed to act as an Issuer will be a business trust created under Delaware law
pursuant to a trust agreement between us, acting as Depositor and a bank or
trust company acting as trustee. Neither we, AmREIT, nor any of our respective
affiliates will guarantee or otherwise be obligated to make payments on the
Securities. The securities will be obligations solely of or represent interests
solely in their respective Issuers. The assets of each Issuer, other than those
comprising the trust fund Assets for the securities it issues, are not expected
to be significant.
We refer you to "INTRODUCTION -- THE ISSUERS" in this prospectus for more
detail.
MASTER SERVICER
The entity or entities named as Master Servicer in the prospectus
supplement will act as master servicer with respect to all of the mortgage loans
included in the trust fund assets for the applicable series of securities
pursuant to a Master Servicing Agreement among the Master Servicer, the Issuer
and the Bond Trustee. The Master Servicer will directly service the mortgage
loans or will administer and supervise the performance of the entities primarily
responsible for servicing the mortgage loans, who may in turn be administering
and supervising the performance of one or more subservicers of such mortgage
loans, and will be obligated to perform the obligations of a terminated servicer
or appoint a successor servicer.
We refer you to "Servicing of the Mortgage Loans" in this prospectus for
more detail.
SPECIAL SERVICER
If specified in the prospectus supplement, we may appoint a Special
Servicer to service, make certain decisions and take various actions with
respect to delinquent or defaulted mortgage loans included in the trust fund
assets.
We refer you to "Servicing of the Mortgage Loans-Special Service Agreement"
in this prospectus for more detail.
CLASSES OF SECURITIES
One or more classes of securities of each series may be entitled to receive
distributions allocable only to principal, only to interest or to any
combination thereof;
- entitled to receive distributions only of prepayments of principal
throughout the lives of the securities or during specified periods;
- subordinated in the right to receive distributions of scheduled payments
of principal, prepayments of principal, interest or any combination
thereof to one or more other classes of securities of such series
throughout the lives of the securities or during specified periods;
- entitled to receive such distributions only after the occurrence of
events specified in the related prospectus supplement;
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- entitled to receive distributions in accordance with a schedule or
formula or on the basis of collections from designated portions of the
related trust fund assets;
- as to securities entitled to distributions allocable to interest, may be
entitled to receive interest at a fixed rate or a rate that is subject to
change from time to time; and
- as to securities entitled to distributions allocable to interest, may be
entitled to distributions allocable to interest only after the occurrence
of events specified in the related prospectus supplement and may accrue
interest until such events occur, in each case as specified in the
related prospectus supplement. The timing and amounts of such
distributions may vary among classes or over time, as specified in the
related prospectus supplement.
DISTRIBUTIONS ON THE SECURITIES
Distributions on the securities entitled to distributions will be made
monthly, quarterly, semi-annually or at such other intervals and on the
distribution dates specified in the related prospectus supplement. Distributions
will be made out of the payments received in respect of the related trust fund
assets or other assets pledged for the benefit of the securities to the extent
specified in the related prospectus supplement. The amount allocable to payments
of principal and interest on any distribution date will be determined as
specified in the related prospectus supplement. The prospectus supplement for a
series of securities will describe the method for allocating distributions among
securities of different classes as well as the method for allocating
distributions among securities for any particular class.
The aggregate original principal balance of the securities will not exceed
the aggregate distributions allocable to principal that such securities will be
entitled to receive. Unless otherwise provided in the related prospectus
supplement, the securities will have an aggregate original principal balance
equal to the aggregate unpaid principal balance of the trust fund assets as of
the related cut-off date and will bear interest in the aggregate at a rate equal
to the interest rate borne by the underlying loans net of the aggregate
servicing fees and any other amounts specified in the related prospectus
supplement or at such other interest rate as may be specified in such prospectus
supplement.
The rate at which interest will be passed through or paid to holders of
each class of securities entitled thereto may be a fixed rate or a rate that is
subject to change from time to time from the time and for the periods, in each
case, as specified in the related prospectus supplement. Any such rate may be
calculated on a loan-by-loan or weighted average basis or calculated based on a
notional amount, in each case, as described in the related prospectus
supplement.
REDEMPTION OF BONDS; EARLY TERMINATION
The securities of each series will be redeemable and subject to early
termination under the circumstances described below. If the series of securities
is redeemable or subject to early termination when the outstanding principal
amount of the securities is greater than 25% of the cut-off date principal
balance, such series will be titled Mortgage-Backed Callable Securities.
- SPECIAL REDEMPTION: The Bonds of a series or a class may be subject to
special redemption, in whole or in part, as specified in the related prospectus
supplement. Pursuant to a special redemption, the Issuer will be required to
redeem, on the dates specified in such prospectus supplement, at 100% of their
unpaid principal amount, plus accrued interest, outstanding Bonds of a series or
class if, as a result of substantial payments of principal on the mortgage
collateral pledged as security for such series or class of bonds or low
reinvestment yields, or both, the Bond Trustee determines, based on the
assumptions specified
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in the Indenture, that in the absence of such special redemption the amount of
cash expected to be on deposit in the Bond Account on the next distribution date
for such series of Bonds would be insufficient to make required payments on the
Bonds of such series on such distribution date. Any such redemption will not
exceed the principal amount of Bonds that would otherwise be required to be paid
on the next distribution date out of the principal payments and prepayments so
received. We refer you to "DESCRIPTION OF THE SECURITIES -- REDEMPTION OF
BONDS -- SPECIAL REDEMPTION" in this prospectus. Principal payments on a special
redemption will be applied to Bonds of a series in accordance with the
priorities specified in the related prospectus supplement.
- OPTIONAL REDEMPTION: If so provided in the related prospectus supplement,
the Bonds of each series may be subject to redemption at the option of the
Issuer. The prospectus supplement for each Series will specify the
circumstances, if any, under which the Bonds of such series may be so redeemed,
the manner of effecting such redemption, the conditions to which such redemption
are subject and the redemption prices for each class of Bonds to be redeemed
(which will be no lower than 100% of the principal amount of outstanding Bonds,
plus accrued interest).
We refer you to "DESCRIPTION OF THE SECURITIES -- REDEMPTION OF
BONDS -- OPTIONAL REDEMPTION" in this prospectus for more detail.
The Master Servicer or other party specified in the related prospectus
supplement may have the option to purchase the remaining trust fund assets
supporting a series of Bonds, subject to the principal balance of such trust
fund assets being less than the percentage specified in the related prospectus
supplement of the aggregate principal balance of the trust fund assets at the
cut-off date for the series. Any such purchase of trust fund assets and property
acquired other person will be at a price specified in the related prospectus
supplement (which will be no lower than 100% of the principal amount of
outstanding Bonds, plus accrued interest). The exercise of such right may cause
the Issuer to call for redemption of all or a portion of the related series of
Bonds secured by such trust fund assets.
- EARLY TERMINATION: If the series of Bonds included in the trust fund
assets for a series of Certificates are redeemed in full pursuant to a special
redemption or optional redemption, the related series of Certificates will be
retired earlier than would otherwise be the case. In addition, we may have the
option to purchase the remaining trust fund assets supporting a series of
Certificates, subject to the principal balance of such trust fund assets being
less than the percentage specified in the related prospectus supplement of the
trust fund assets at the cut-off date for the series. The purchase price for
such remaining trust fund assets will be at least equal to 100% of the aggregate
principal balance of the outstanding Certificates, together with accrued
interest thereon. In any such event, the related Issuer of such series of
Certificates will be terminated and Certificateholders will receive final
distributions as described in the related prospectus supplement.
TRUST FUND ASSETS
Each series of securities will be separately supported by one or more of
the types of trust fund assets set forth below. Unless otherwise provided in the
related prospectus supplement, the Issuer may substitute other mortgage
collateral for the mortgage collateral originally included in the trust fund
assets for the securities of a series so long as the substitute mortgage
collateral meets certain criteria.
We refer you to "TRUST FUND ASSETS -- SUBSTITUTION OF MORTGAGE COLLATERAL"
in this prospectus for more detail.
- MORTGAGE LOANS: In connection with the issuance of a series of securities
supported in whole or in part by mortgage loans, the Issuer will pledge and
assign to the Bond Trustee a pool of conventional (i.e., not insured
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or guaranteed by any governmental agency) loans secured by first or junior
mortgages or deeds of trust on single-family residential properties or other
types of residential or mixed use loans described under "TRUST FUND ASSETS --
THE MORTGAGE LOANS" in this prospectus. Such additional types of mortgage loans
include loans secured by small multifamily residential properties (5 to 20
units) and small mixed use residential properties (up to 12 dwelling units). If
so specified in the related prospectus supplement, the mortgage loans may
include cooperative apartment loans secured by security interests in shares
issued by private, nonprofit, cooperative housing corporations and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in such cooperatives' buildings.
We expect that all or a substantial portion of the mortgage loans for each
series of securities will have been acquired by us from AmREIT for transfer to
the Issuer of such series and that such mortgage loans will in most cases be
"nonconforming" mortgage loans in that they will fail to satisfy the criteria to
be eligible for purchase by FNMA or FHLMC for one or more reasons. Such mortgage
loans may include sub-prime mortgage loans. AmREIT acquires mortgage loans in
the normal course of its business from entities who have originated or otherwise
acquired such loans. AmREIT works with such originating entities to develop
underwriting guidelines for loan products that will meet AmREIT's investment
criteria; however, neither AmREIT nor any of its affiliates originates or
services mortgage loans.
None of the mortgage loans will represent obligations of AmREIT.
As described above, a series of certificates supported in whole or in part
by mortgage loans will evidence an interest in one or more Bonds secured by such
loans rather than the actual mortgage loans. For a series of Certificates
supported by mortgage loans, following the pledge and assignment of such loans
to the Bond Trustee, the Bonds secured by the mortgage loans will be deposited
into the Issuer of such series of Certificates by the Depositor.
We refer you to "TRUST FUND ASSETS -- THE MORTGAGE LOANS" in this
prospectus for more detail.
The payment terms of the mortgage loans supporting a series of securities,
if any, will be described in the related prospectus supplement and may include
any of the following features or combinations thereof or other features
described in the related prospectus supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index (which will be specified in the related prospectus
supplement), a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is convertible from an adjustable rate
to a fixed rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a loan for such
periods and under such circumstances as may be specified in the related
prospectus supplement. The loan agreement or promissory note in respect of a
mortgage loan may provide for the payment of interest at a rate lower than the
interest rate specified in such mortgage note for a period of time or for the
life of the loan, and the amount of any difference may be contributed from funds
supplied by a third party.
(b) Principal may be payable on a level debt service basis to fully
amortize the 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 interest rate on the
mortgage loan 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 ("balloon payments"). Principal may include interest that has been
deferred and added to the principal balance of the mortgage loan.
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(c) Monthly payments of principal and interest may be fixed for the life of
the loan, may increase over a specified period of time or may change from period
to period. mortgage loans may include limits on periodic increases or decreases
in the amount of monthly payments and may include maximum or minimum amounts of
monthly payments.
(d) The mortgage loans generally may be prepaid at any time without payment
of any prepayment fee, unless otherwise specified in the related prospectus
supplement. If so specified in the related prospectus supplement, prepayments of
principal may be subject to a prepayment fee, which may be fixed for the life of
any such mortgage loan or may decline over time, and may be prohibited for the
life of any such mortgage loan or for certain periods ("lockout periods").
Certain mortgage loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. All or a portion of any prepayment fee may
be payable as additional interest on the securities, if so specified in the
related prospectus supplement. Other mortgage loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified time
periods. The mortgage loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with the
sale or certain transfers of the related mortgaged property (as defined below).
Other mortgage loans may be assumable by persons meeting then applicable
underwriting standards.
We refer you to "MORTGAGE LOAN PROGRAM -- UNDERWRITING STANDARDS" in this
prospectus for more detail.
(e) The real property constituting security for repayment of a mortgage
loan may be located in any one of the fifty states, the District of Columbia,
Guam, Puerto Rico, or any other territory of the United States as specified in
the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, all of the mortgage loans will be covered by standard
hazard insurance policies insuring against losses due to fire and various other
causes. The mortgage loans may be covered by primary mortgage insurance policies
to the extent provided in the related prospectus supplement.
We refer you to "TRUST FUND ASSETS -- THE MORTGAGE LOANS" in this
prospectus for more detail.
- AGENCY SECURITIES: The agency securities supporting a series of
securities will consist of:
- fully modified pass-through mortgage-backed certificates guaranteed as to
timely payment of principal and interest by GNMA;
- certificates issued and guaranteed as to timely payment of principal and
interest by FNMA;
- mortgage participation certificates issued and guaranteed as to timely
payment of interest and, unless otherwise specified in the related
prospectus supplement, ultimate payment of principal by FHLMC
certificates;
- stripped mortgage-backed securities representing an undivided interest in
all or a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain GNMA, FNMA
or FHLMC Certificates and, unless otherwise specified in the related
prospectus supplement, guaranteed to the same extent as the underlying
securities; another type of pass-through certificate issued or guaranteed
by GNMA, FNMA or FHLMC and described in the related prospectus
supplement; or
- a combination of such agency securities.
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All GNMA certificates will be backed by the full faith and credit of the
United States. No FHLMC or FNMA Certificates will be backed, directly or
indirectly, by the full faith and credit of the United States.
We refer you to "TRUST FUND ASSETS -- AGENCY SECURITIES" in this prospectus
for more detail.
- BOND AND DISTRIBUTION ACCOUNTS: All scheduled monthly principal and
interest payments and all prepayments received with respect to the mortgage
collateral for a series of securities, other than amounts not required to be
remitted to the Bond Trustee, such as amounts retained by the Master Servicer,
any servicer or any subservicer of mortgage loans as servicing compensation, to
pay certain insurance premiums or to reimburse the Master Servicer or any
servicer for certain advances it has made, will be remitted the Bond Account to
be established as an eligible account on the closing date for the sale of such
series of securities. All principal and interest distributions received from the
mortgage collateral and remitted to the Bond Account, other than amounts, if
any, subsequently withdrawn to reimburse the Master Servicer or any servicer for
certain non-recoverable advances it has made, together with (i) the amount of
cash, if any, initially deposited in the Bond Account by the Issuer, (ii) if
applicable, all amounts withdrawn from any related reserve funds, (iii) any
Insurance Proceeds and Liquidation Proceeds (as such terms are defined herein)
and (iv) if so specified in the related prospectus supplement, all reinvestment
income earned thereon, will be available for transfer to the Distribution
Account (as defined herein) for application to the payment of the principal of,
and interest on, such series of securities as described in the related
prospectus supplement.
On or prior to the closing date, the Bond Trustee will establish the
Distribution Account which shall be an eligible account maintained with the Bond
Trustee or the Certificate Trustee, as the case may be, for the benefit of the
Securityholders of the related series. On or prior to a date specified in the
related prospectus supplement and preceding each related distribution date, the
Master Servicer shall withdraw from the Bond Account the amount required to be
distributed to Securityholders on such distribution date, to the extent of funds
available for such purpose on deposit therein, and will deposit such amount in
the Distribution Account.
Any funds remaining in the Bond Account on a distribution date, other than
amounts not constituting available funds, if so specified in the related
prospectus supplement, after (i) the reimbursement of the Master Servicer or any
servicer for non-recoverable advances made by it, (ii) each required payment of
interest and principal to Securityholders of the related series has been paid in
full, (iii) if applicable, any reserve fund has been funded in the manner
described in the related prospectus supplement and (iv) the payment of certain
expenses relating to such series of bonds, will be subject to withdrawal upon
the order of the Issuer.
We refer you to "TRUST FUND ASSETS -- BOND AND DISTRIBUTION ACCOUNTS" and
"SERVICING OF THE MORTGAGE LOANS" in this prospectus for more detail.
- PRE-FUNDING ACCOUNTS: If so specified in the related prospectus
supplement, the assets of the Issuer will include the funds on deposit in a
Pre-Funding Account which will be used to purchase additional mortgage
collateral during a funding period specified in such prospectus supplement.
We refer you to "TRUST FUND ASSETS -- PRE-FUNDING ACCOUNTS" in this
prospectus for more detail.
CREDIT ENHANCEMENT
The mortgage collateral supporting a series of securities or the securities
of one or more classes in the related series may have the benefit of one or more
types of credit enhancement as described herein and more fully in the related
prospectus supplement. The protection against losses afforded by any such
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credit enhancement may be limited. The type, characteristics and amount of
credit enhancement will be determined based on the characteristics of the
mortgage loans underlying or comprising the mortgage collateral and will be
established on the basis of requirements of each rating agency. In addition, one
or more classes of securities of a series may be guaranteed as to payment of
principal and interest by a third party insurer or guarantor, to the extent
provided in the related prospectus supplement.
We refer you to "CREDIT ENHANCEMENT" in this prospectus for more detail.
- SUBORDINATION: A series of securities may consist of one or more classes
of Senior Securities and one or more classes of Subordinated Securities. The
rights of the Subordinated Securityholders to receive payments of principal
and/or interest (or any combination thereof) will be subordinated to such rights
of the Senior Security-holders to the extent described in the related prospectus
supplement. This subordination is intended to enhance the likelihood of regular
receipt by the Senior Securityholders of the full amount of their scheduled
payments of principal and/or interest. The protection afforded to the Senior
Securityholders of a series by means of the subordination feature will be
accomplished by (i) the preferential right of such holders to receive, prior to
any payment being made on the related Subordinated Securities, the amounts of
principal and/or interest due them on each distribution date out of the funds
available for payment on such date in the related Distribution Account and, to
the extent described in the related prospectus supplement, by the right of such
holders to receive future payments that would otherwise have been payable to the
Subordinated Security-holders; or (ii) as otherwise described in the related
prospectus supplement. If so specified in the related prospectus supplement,
subordination may apply only in the event of certain types of losses not covered
by other forms of credit support, such as hazard losses not covered by standard
hazard insurance policies or losses due to the bankruptcy or fraud of the
borrower. The related prospectus supplement will set forth information
concerning, among other things, the amount of subordination of a class or
classes of Subordinated Securities in a series, the circumstances in which such
subordination will be applicable and the manner, if any, in which the amount of
subordination will decrease over time.
We refer you to "CREDIT ENHANCEMENT -- SUBORDINATION" in this prospectus
for more detail.
- RESERVE FUNDS: If so specified in the related prospectus supplement, the
Issuer will deposit in one or more reserve funds to be established with the Bond
Trustee or the Certificate Trustee, as the case may be, cash, certificates of
deposit, letters of credit, surety bonds, guaranteed investment contracts, re-
investment income or any combination thereof, which may be used by the Bond
Trustee or the Certificate Trustee to make payments on such series of securities
to the extent funds are not otherwise available. The related prospectus
supplement will specify the manner of funding the related reserve fund and the
conditions under which the amounts in any such reserve fund will be used to make
payments to holders of securities of a particular class or released to the
related Issuer.
We refer you to "CREDIT ENHANCEMENT -- RESERVE FUNDS" in this prospectus
for more detail.
- MORTGAGE POOL INSURANCE POLICY: If so specified in the related prospectus
supplement, a mortgage pool insurance policy or policies may be obtained and
maintained for a series of securities supported by mortgage loans, which shall
be limited in scope, covering defaults on such mortgage loans in an initial
amount equal to a specified percentage of the aggregate principal balance of all
mortgage loans included in the related mortgage pool as of the first day of the
month of issuance of the related series of securities or such other date as is
specified in the related prospectus supplement (the "cut-off date").
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We refer you to "CREDIT ENHANCEMENT -- MORTGAGE POOL INSURANCE POLICIES" in
this prospectus for more detail.
- SPECIAL HAZARD INSURANCE POLICY: If so specified in the related
prospectus supplement, a special hazard insurance policy or policies may be
obtained and maintained for a series of securities supported by mortgage loans,
covering certain physical risks that are not otherwise insured against by
standard hazard insurance policies. Each special hazard insurance policy will be
limited in scope and will cover losses pursuant to the provisions of each such
special hazard insurance policy as described in the related prospectus
supplement.
We refer you to "CREDIT ENHANCEMENT -- SPECIAL HAZARD INSURANCE POLICIES"
in this prospectus for more detail.
- BANKRUPTCY BOND: If so specified in the related prospectus supplement, a
bankruptcy bond or bonds may be obtained for a series of securities supported by
mortgage loans to cover certain losses resulting from action that may be taken
by a bankruptcy court in connection with a mortgage loan. The level of coverage
and the limitations in scope of each bankruptcy bond will be specified in the
related prospectus supplement.
We refer you to "CREDIT ENHANCEMENT -- BANKRUPTCY BONDS" in this prospectus
for more detail.
- BOND INSURANCE POLICIES, SURETY BONDS AND GUARANTEES: If so specified in
the related prospectus supplement, credit enhancement for one or more classes of
securities of a series may be provided by insurance policies or surety bonds
issued by one or more insurance companies or sureties. Such guarantee insurance
or surety bond will guarantee timely payments of interest and/ or full payment
of principal on the basis of a schedule of principal payments set forth in or
determined in the manner specified in the related prospectus supplement. If
specified in the related prospectus supplement, one or more surety bonds,
insurance policies or third-party guarantees may be used to provide coverage for
the risks of default or types of loses set forth in such prospectus supplement.
We refer you to "CREDIT ENHANCEMENT -- SECURITY INSURANCE POLICIES, SURETY
BONDS AND GUARANTEES" in this prospectus for more detail.
- LETTER OF CREDIT: If so specified in the related prospectus supplement,
credit enhancement may be provided for a series of securities supported by
mortgage loans by one or more letters of credit. A letter of credit may provide
limited protection against certain losses in addition to or in lieu of other
credit enhancement, such as losses resulting from delinquent payments on the
mortgage loans supporting the related series of securities, losses from risks
not covered by standard hazard insurance policies, losses due to bankruptcy of a
borrower and application of certain provisions of the federal bankruptcy laws,
and losses due to denial of insurance coverage due to misrepresentations made in
connection with the origination or sale of a mortgage loan. The issuer of the
letter of credit will be obligated to honor demands with respect to such letter
or credit, to the extent of the amount available thereunder to provide funds
under the circumstances and subject to such conditions as are specified in the
related prospectus supplement. The liability of an issuer under its letter of
credit will be reduced by the amount of unreimbursed payments thereunder.
- OVER-COLLATERALIZATION: If so specified in the related prospectus
supplement, credit enhancement may consist of over-collateralization whereby the
aggregate principal balance of the related mortgage collateral exceeds the
aggregate principal balance of the securities of the related series. Such over-
collateralization may exist on the related closing date or develop thereafter as
a result of the application of a portion of the interest payment on each
mortgage loan or agency security, as the case may be, as an additional payment
in respect of principal to reduce the principal
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balance of a certain class or classes of securities of such series and, thus,
accelerate the rate of payment of principal on such class or classes of
securities.
We refer you to "CREDIT ENHANCEMENT -- OVER-COLLATERALIZATION" in this
prospectus for more detail.
- CROSS-COLLATERALIZATION: If so specified in the related prospectus
supplement, separate classes of a series may be supported by separate groups of
mortgage collateral. In such case, credit support may be provided by a cross-
collateralization feature which requires that payments be made with respect to
securities supported by one or more groups of mortgage collateral prior to
payments to Subordinated Securities supported by other groups of mortgage
collateral within the same series.
We refer you to "CREDIT ENHANCEMENT -- CROSS-COLLATERALIZATION" in this
prospectus for more detail.
If so specified in the related prospectus supplement, the coverage provided
by one or more of the forms of credit enhancement described in this prospectus
may apply concurrently to two or more separate series of securities. If
applicable, the related prospectus supplement will identify the series of
securities to which such credit enhancement relates and the manner of
determining the amount of coverage provided to such series of securities thereby
and of the application of such coverage to the identified series of securities.
We refer you to "CREDIT ENHANCEMENT -- CROSS-COLLATERALIZATION" in this
prospectus for more detail.
- MINIMUM PRINCIPAL PAYMENT AGREEMENT: If so specified in the related
prospectus supplement, an Issuer may enter into an agreement with an institution
pursuant to which such institution will provide such funds as may be necessary
to enable such Issuer to make principal payments on the securities of the
related series at a minimum rate set forth in such prospectus supplement.
We refer you to "CREDIT ENHANCEMENT -- MINIMUM PRINCIPAL PAYMENT AGREEMENT"
in this prospectus for more detail.
- DERIVATIVE ARRANGEMENTS: If so specified and to the extent described in
the related prospectus supplement, one or more derivative arrangements may be
used to support payments on the Securities. A derivative arrangement is a
contract or agreement, the price of which is directly dependent upon (i.e.,
"derived from") the value of one or more underlying assets. Derivatives involve
rights or obligations based on the underlying asset, but do not necessarily
result in a transfer of the underlying asset. Derivative arrangements include
swap agreements, interest rate swaps, interest rate caps, interest rate floors,
interest rate collars and currency swap agreements.
We refer you to "CREDIT ENHANCEMENT -- DERIVATIVE ARRANGEMENTS" in this
prospectus for more detail.
ADVANCES
The Master Servicer and each servicer may be obligated to advance amounts
corresponding to delinquent interest and/or principal payments on the mortgage
loans supporting a series of securities (including, in the case of cooperative
loans, unpaid maintenance fees or other charges under the related proprietary
lease) until the date, as specified in the related prospectus supplement,
following the date on which the related mortgaged property is sold at a
foreclosure sale or the related mortgage loans are otherwise liquidated. Any
obligation to make advances may be subject to limitations as specified in the
related prospectus supplement. If so specified in the related prospectus
supplement, advances may be drawn from a cash account available for such purpose
as described in such prospectus supplement. Advances will be reimbursable to the
extent described under "SERVICING OF THE
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MORTGAGE LOANS -- ADVANCES AND
OTHER AMOUNTS PAYABLE BY MASTER SERVICER" in this prospectus and "-- ADVANCES"
in the related prospectus supplement.
In the event the Master Servicer or servicer fails to make a required
advance, the Bond Trustee may be obligated to advance such amounts otherwise
required to be advanced by the Master Servicer or servicer.
We refer you to "SERVICING OF MORTGAGE LOANS -- ADVANCES AND OTHER AMOUNTS
PAYABLE BY MASTER SERVICER" in this prospectus for more detail.
TAX STATUS OF THE SECURITIES
The tax counsel to us and to the Issuer is Jeffers, Wilson, Shaff & Falk,
LLP.
The Bonds, when beneficially owned by someone other than AmREIT or one of
its qualified real estate investment trust ("REIT") subsidiaries (as defined in
section 856(i) of the Code), will constitute indebtedness for federal income tax
purposes and not an ownership interest in the Issuer or the collateral. We refer
you to "FEDERAL INCOME TAX CONSEQUENCES" in this prospectus and in the related
prospectus supplement for information concerning the material federal tax
consequences of an investment in the Bonds.
If a FASIT election is made, Certificates representing regular interests in
a FASIT will generally be taxable to holders in the same manner as evidences of
indebtedness issued by the FASIT Issues. Stated interest on such regular
interests will be taxable as ordinary income and taken into account using the
accrual method of accounting, regardless of the holder's normal accounting
method.
Certain classes of securities may be issued with original issue discount
("OID"). You should be aware that the Code and the Treasury regulations
promulgated thereunder do not adequately address certain issues relevant to
prepayable securities, such as the securities.
If you are required to report income with respect to the related securities
under the accrual method of accounting will do so without giving effect to
delays and reductions in distributions attributable to a default or delinquency
on the mortgage loans, except possibly to the extent that it can be established
that such amounts are uncollectable. As a result, the amount of income
(including OID) you report in any period could significantly exceed the amount
of cash distributed to you in that period.
USE OF PROCEEDS
We will apply net proceeds to be received from the sale of the securities
of each series to the purchase or acquisition of the related mortgage collateral
or we will use the proceeds for general corporate purposes. The mortgage
collateral included in the trust fund assets for a series of securities will be
sold to us by AmREIT (or an affiliate) and deposited by us with the Issuer of
such series.
We refer you to "USE OF PROCEEDS" in this prospectus for more detail.
RATINGS
It is a condition to the issuance of each series of securities that the
securities of such series to be offered hereunder be rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization. A rating is not a recommendation to purchase, hold or sell
securities inasmuch as such rating does not comment as to market price or
suitability for a particular investor. Ratings of securities will address the
likelihood of the payment of principal and interest thereon pursuant to their
terms. There can be no assurance that a rating will remain for a given period of
time or that a rating will not be lowered or withdrawn entirely by a rating
agency if in its judgment circumstances in the future so warrant.
We refer you to "RATINGS" in this prospectus for more detail. For more
detailed
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information regarding the ratings assigned to any Class of a particular series
of securities, we refer you to "SUMMARY -- RATINGS" and "RATINGS" in the related
prospectus supplement.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered thereby will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage-related
securities" will be legal investments for certain types of institutional
investors to the extent provided in SMMEA, subject, in any case, to any other
regulations that may govern investments by such institutional investors.
We refer you to "LEGAL INVESTMENT" in this prospectus for more detail.
ERISA MATTERS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans. The prospectus supplement
for each series of securities will discuss the potential applicability of ERISA
and Section 4975 of the Code, the availability of exemptions therefrom and any
limitations on investment in any class of such securities by Plans. Investments
by Plans are also 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.
ABSENCE OF ACTIVE PUBLIC TRADING MARKET
Unless otherwise specified in the related prospectus supplement, the
securities are not expected to be listed on an exchange or quoted in an
automated quotation system of a registered securities association. As a result,
it is not expected that there will be an active public trading market for the
securities. This may limit the liquidity of an investment in the securities and
result in any sale by a Securityholder to be at a discount from the purchase
price.
RISK FACTORS
For a discussion of all material risks associated with an investment in the
Securities, we refer you to "RISK FACTORS" in this prospectus and in the related
prospectus supplement.
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RISK FACTORS
You should consider, among other things, the following factors in
connection with an investment in the securities.
RISKS ASSOCIATED WITH SINGLE-FAMILY MORTGAGE LOANS
Factors that May Adversely Affect Property Values. There are several
factors that could adversely affect the value of mortgaged properties such that
the outstanding balance of the related mortgage loans would equal or exceed the
value of the mortgaged properties. Among the factors are:
- an overall decline in the residential real estate market in the areas in
which the mortgaged properties are located;
- a decline in the general condition of the mortgaged properties as a
result of failure of borrowers to maintain adequately the mortgaged
properties; and
- natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods.
If such a decline occurs, the actual rate of delinquencies, foreclosures
and losses on the mortgage loans could be higher than those currently
experienced in the mortgage lending industry in general. The holder of one or
more Classes of Securities of the related Series will bear the losses on such
mortgage loans that are not otherwise covered by the credit enhancement
described in the applicable prospectus supplement.
Delays Due to Liquidation. Even assuming that the mortgaged properties
provide adequate security for the mortgage loans, substantial delays could be
encountered in connection with the liquidation of defaulted mortgage loans.
Corresponding delays in the receipt of related proceeds by Securityholders could
occur. An action to foreclose on a mortgaged property securing a mortgage loan
is regulated by state statutes and rules. An action to foreclose is also subject
to the delays, sometimes requiring several years to complete, and expenses of
other lawsuits if defenses or counterclaims are interposed. Furthermore, in some
states an action to obtain a deficiency judgement is not permitted following a
nonjudicial sale of the mortgaged property. If a borrower defaults, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the mortgaged property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related mortgage loan. In addition,
the Master Servicer will be entitled to deduct from related liquidation proceeds
all expenses reasonably incurred in attempting to recover amounts due on
defaulted mortgage loans and not yet repaid, including legal fees and costs of
legal action, real estate taxes and maintenance and preservation expenses.
Disproportionate Effect of Liquidation Expenses. Liquidation expenses with
respect to defaulted loans do not vary directly with the outstanding principal
balance of the loan at the time of default. Therefore, assuming that a servicer
took the same steps in realizing upon a defaulted loan having a small remaining
principal balance as it would in the case of a defaulted loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small loan than would be the case with the defaulted loan having a large
remaining principal balance.
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Nature of Security Provided by Junior Liens. Certain mortgage loans may be
secured by second liens on the related mortgaged properties. As to mortgage
loans secured by second mortgages, the proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the outstanding balance
of such mortgage loans only to the extent that the claims of such senior
mortgages have been satisfied in full, including any related foreclosure costs.
In addition, the holder of a mortgage loan secured by a junior mortgage may not
foreclose on the mortgaged property unless it forecloses subject to the senior
mortgages. In such case the holder must either pay the entire amount due on the
senior mortgages to the senior mortgages at or prior to the foreclosure sale, or
it must undertake the obligation to make payments on the senior mortgages in the
event the mortgagor is in default thereunder. The Issuer will not have any
source of funds to satisfy the senior mortgages or make payments due to the
senior mortgages. However, the Master Servicer or servicer may, at its option,
advance the Issuer such amounts to the extent deemed recoverable or prudent. If
proceeds from a foreclosure or similar sale of the related mortgaged property
are insufficient to satisfy all senior liens and the mortgage loan in the
aggregate, the Issuer, as the holder of the junior lien, and, accordingly,
holders of one or more classes of the securities, to the extent not covered by
credit enhancement, are likely to incur losses in jurisdictions in which a
deficiency judgment against the borrower is not available. The Issuer and,
accordingly, holders of one or more classes of the securities, is also likely to
incur losses if any deficiency judgment obtained is not realized upon. In
addition, the rate of default of second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties.
RISKS ASSOCIATED WITH INVESTING IN MULTIFAMILY AND MIXED USE MORTGAGE LOANS
Investing in multifamily and mixed mortgage loans involves each of the
risks described above for single-family mortgage loans and certain additional
risks unique to multifamily and commercial lending. Owners of multifamily
residential properties rely on monthly lease payments from tenants to pay for
maintenance and other operating costs of such properties, to fund capital
improvements and to service any mortgage loan or other debt that may be secured
by such properties. Various factors, many of which are beyond the control of the
owner or operator of such a property, may affect the economic viability of that
property.
Risk of Defaults by Tenants and Higher Vacancy Rates Under Adverse Economic
Conditions. Changes in payment patterns by tenants may result from a variety of
social, legal and economic factors. Economic factors including the rate of
inflation, unemployment levels and relative rates offered for various types of
housing may create changes in payment patterns that result in the increased
risks of defaults by tenants and higher vacancy rates. Adverse economic
conditions, either local or national, may limit the amount of rent that can be
charged and may result in a reduction in timely lease payments or a reduction in
occupancy levels. Occupancy and rent levels may also be affected by construction
of additional housing units, competition and local politics, including rent
stabilization or rent control laws or policies. In addition, the level of
mortgage interest rates may encourage tenants to purchase single family housing.
We are unable to determine and have no basis to predict whether, or to what
extent, economic, legal or social factors will affect future rental or payment
patterns.
The location and construction quality of a particular building may affect
the occupancy level as well as the rents that may be charged for additional
units. The characteristics of a neighborhood may change over time or in relation
to new
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developments. The effects of poor construction quality will increase over time
in the form of increased maintenance and capital improvements. Even good
construction will deteriorate over time if adequate maintenance is not performed
in a timely fashion.
For mixed use mortgage loans, income from the market value of the portion
of the underlying properties, which are retail or office properties, would be
adversely affected if:
- space in such properties could not be leased;
- tenants are unable to meet their lease obligations;
- a significant tenant were not able to make its lease payments or were to
become a debtor in a bankruptcy case and the lease of the related
property was rejected; or
- for any other reason rental payments could not be collected.
If tenant sales in the properties that contain retail space were to
decline, percentage rents may decline, tenants may be unable to pay their base
rent, or delays in enforcing the lessor's rights could be experienced. Repayment
of the related mixed use mortgage loans will be affected by the expiration of
space leases and the ability of the respective borrowers to renew their leases
or relet space on comparable terms. Even if vacated space is successfully relet,
the costs associated with reletting, including tenant improvements and leasing
commissions (to the extent not reserved), could be substantial and could reduce
cash flow from the properties.
Dependence on the Performance and Viability of the Property Manager of Each
Property. The profitable operation of multifamily properties and multi-tenant
retail and office properties is also dependent on the performance and viability
of the property manager of such property. The property manager is responsible
for responding to changes in the local market, for planning and implementing the
rental structure, including establishing appropriate rental rates, and for
advising the borrower so that maintenance and capital improvements can be
carried out in a timely fashion. Thus, the property manager's performance may
impact the borrower's ability to make payments under the related mortgage loan.
RISKS ASSOCIATED WITH NON-CONFORMING MORTGAGE LOANS
We expect that a substantial portion of the mortgage loans supporting each
series of securities to be comprised of non-conforming mortgage loans in that
they will fail, for one or more reasons, to satisfy the criteria to be eligible
for purchase by Fannie Mae or Freddie Mac. Such non-conforming mortgage loans
may be illiquid and present greater credit and other risks than conforming
mortgage loans. In addition, to the extent mortgage loans are acquired from
AmREIT, and have been purchased under AmREIT's Freedom Program, such mortgage
loans may lack standardized terms and may be secured by properties which are
unique and more difficult to value than typical residential properties. Such
mortgage loans may have been underwritten primarily on the basis of
loan-to-value ratios or favorable credit factors rather than on the borrower's
credit standing or income ratios. Accordingly, the potential loss experience on
the non-conforming mortgage loans supporting a series of securities may be more
difficult to evaluate compared to the experience for conforming or other more
standardized types of residential and mixed-use properties. Actual losses
incurred on such non-conforming mortgage loans may exceed levels of credit
enhancement thought to be sufficient to protect securityholders from risk of
loss.
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PREPAYMENT AND YIELD CONSIDERATIONS; REINVESTMENT RISK
The rate of payments of principal, including prepayments, on the mortgage
collateral supporting a series of securities will directly affect the weighted
average life of such series of securities. The rate of payment of principal
includes prepayments resulting from refinancing or liquidations of the mortgage
loans directly supporting the securities or the mortgage loans underlying the
agency securities, as the case may be, due to defaults, casualties,
condemnations and repurchases by the Issuer, or AmREIT or other seller or
purchases by us or the Master Servicer. The "weighted average life" of a
security refers to the average length of time, weighted by principal that will
elapse from the date of issuance to the date each dollar of principal is repaid
to the investor. The yields to maturity and weighted average lives of the
securities will be affected primarily by the amount and timing of principal
payments received on or in respect of the mortgage collateral supporting the
related series of securities. In addition, the yields to maturity and weighted
average lives of the securities will be affected by the extent to which the
issuer thereof elects to exercise any right to call or redeem such securities.
The "yield to maturity" of a security refers to the investment rate of return on
such security if held to maturity.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. The rate of payment of principal,
including prepayments, on the mortgage loans or the mortgage loans underlying
the agency securities, as the case may be, may be influenced by a variety of
economic, geographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall significantly below the mortgage rates borne by
the mortgage loans underlying the agency securities or the mortgage loans, such
mortgage loans directly supporting the securities are likely to be subject to
higher prepayment rates than if prevailing interest rates remain at or above
such mortgage rates. Conversely, if prevailing interest rates rise appreciably
above the mortgage rates borne by the mortgage loans, such mortgage loans are
likely to experience a lower prepayment rate than if prevailing interest rates
remain at or below such mortgage rates. However, there is no assurance that such
will be the case. In addition, the yields to maturity and weighted average lives
of the securities of a series will be affected by the extent to which the issuer
thereof elects to exercise any option to call or redeem the securities and by
any distribution of amounts remaining in any pre-funding account following the
end of the related funding period. In each case, securityholders may be unable
to reinvest such payments in securities of comparable quality having interest
rates similar to those borne by such securities. It is possible that yields on
any such reinvestments will be lower, and may be significantly lower, than the
yields on such securities.
RISKS ASSOCIATED WITH PAYMENT CHARACTERISTICS OF CLASSES OF SECURITIES
The extent to which yields to maturity of the various classes of securities
of a series may vary from the anticipated yields will depend upon:
- the degree to which such lasses are purchased at a discount or premium;
- the degree to which the timing of payments thereon is sensitive to the
rate of payments of principal, including prepayments;
- the related mortgage collateral; and
- the degree to which the level of payments thereon is sensitive to rapid
shifts in interest rates.
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The timing of changes in the rate of prepayments on such mortgage
collateral may significantly affect an investor's actual yield to maturity. This
is true even if the average rate of principal payments is consistent with an
investor's expectation. In addition, the timing of increases and decreases in
interest rates may significantly affect an investor's actual yield to maturity,
even if the average level of interest rates over the term of the security is as
expected. Categories of classes of securities that are generally more sensitive
to such factors include the Support Classes, the Inverse Floating Rate Classes,
the Interest Only Classes and the Principal Only Classes. The prospectus
supplement relating to a series of securities will discuss in greater detail the
effect that the rate and timing of principal payments (including prepayments),
delinquencies and losses and interest rate changes have on the yield, weighted
average lives and maturities of such classes of securities.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response Compensation and
Liability Act of 1980, or "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. This
is true, regardless of whether the environmental damage or threat was caused by
a prior owner. Such costs could result in a loss to the holder of the related
property. We refer you to "Certain Legal Aspects of Mortgage
Loans -- Environmental Risks" in this prospectus for more detail.
LIMITED LIQUIDITY OF INVESTMENT
Prior to issuance, there has been no market for the securities of any
series. Also, there can be no assurance that a secondary market for any
securities will develop, or if it does develop, that it will provide
securityholders with a sufficient level of liquidity of investment or will
continue while securities of such series remain outstanding. In addition, the
market value of securities of any series may fluctuate with changes in
prevailing rates of interest and prepayments, spreads and other factors.
Consequently, the sale of securities by a securityholder in any secondary market
that may develop may be at a discount from the purchase price. Issuance of the
securities of a series in book-entry form may also reduce the liquidity of such
securities since investors may be unwilling to purchase securities for which
they cannot obtain physical certificates. We refer you to "-- Effects of
Book-Entry Registration" in this prospectus for more detail. No issuer is
expected to apply to have the securities issued by it listed on any exchange or
quoted in an automated quotation system of a registered securities association.
BANKRUPTCY AND INSOLVENCY RISKS
Effects of Bankruptcy of American Residential Investment Trust,
Inc. (AmREIT) or American Residential Eagle, Inc. We and AmREIT will treat
AmREIT's transfer of the trust fund assets to us as a sale for accounting
purposes. We and each Issuer will treat our transfer of the trust fund assets to
such Issuer as a sale for accounting purposes. As a sale of Trust Fund Assets by
AmREIT to us, the trust fund assets would not be part of
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AmREIT's bankruptcy estate and would not be available to AmREIT's creditors.
However, in the event of the insolvency of AmREIT, it is possible that the
bankruptcy trustee or a creditor of AmREIT may attempt to recharacterize the
sale of the trust fund assets as a borrowing by AmREIT, secured by a pledge of
the trust fund assets. Similarly, as a sale of trust fund assets by us to an
Issuer, the trust fund assets would not be part of our bankruptcy estate and
would not be available to our creditors. However, in the event of our
insolvency, it is possible that the bankruptcy trustee or a creditor of ours may
attempt to recharacterize the sale of the trust fund assets as a borrowing by
us, secured by a pledge of the trust fund assets. In either case, in the event
the transfer is recharacterized as a pledge, we or the Issuer, as the case may
be, will have a perfected security interest in the related trust fund assets.
Nonetheless, a court could prevent timely payments of amounts due on the
securities and, thus, cause a reduction of payments due on the securities.
Effects of Bankruptcy on the Master Servicer. In the event of the
bankruptcy of the Master Servicer, the bankruptcy trustee or receiver may have
the power to prevent the Bond Trustee or the Bondholders from appointing a
successor Master Servicer. The time period during which cash collections may be
commingled with the Master Servicer's own funds prior to each distribution date
will be specified in the related prospectus supplement. In the event of the
insolvency of the Master Servicer, and if such cash collections are commingled
with Master Servicer's own funds for at least ten days, the Bond Trustee will
likely not have a perfected interest in such collections. It will likely not be
a perfected interest since such collections would not have been deposited in a
segregated account within ten days after the collection thereof. The inclusion
of the cash collections in the bankruptcy estate of the Master Servicer may
result in delays in payment and failure to pay amounts due on the securities of
the related series.
Effects of Bankruptcy of Obligors on the Mortgage Collateral. In addition,
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 its security. For
example, in a proceeding under the federal bankruptcy laws, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may reduce the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference. The rehabilitation plan proposed by the debtor may
also reduce the monthly payments due under such mortgage loans, change the rate
of interest and alter the mortgage loan repayment schedule. The effect of any
such proceedings under the federal bankruptcy laws, including but not limited to
any automatic stay, could result in delays in receiving payments on the mortgage
collateral supporting a series of securities and possible reductions in the
aggregate amount of such payments.
EFFECTS OF BOOK-ENTRY REGISTRATION
Limited Liquidity. If the securities of a series are issued in book-entry
form, such registration may reduce the liquidity of such securities in the
secondary trading market since investors may be unwilling to purchase securities
for which they cannot obtain physical certificates. Transactions in book-entry
securities can be effected only through the Depository Trust Company, or "DTC",
in the United States, CEDEL or Euroclear in Europe, participating organizations
and financial intermediaries as defined in this prospectus. Thus, your ability
to pledge a book-entry security to persons or entities that do not participate
in the DTC, CEDEL or Euroclear systems may be limited due to lack of a
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physical certificate representing such securities. Security owners will not be
recognized as Securityholders, and Security owners will be permitted to exercise
the rights of Securityholders only indirectly through DTC and its participants.
Potential Delays in Payments. In addition, you may experience some delay in
their receipt of distributions of interest and principal on book-entry
securities since distributions are required to be forwarded by the Bond Trustee
or the Certificate Trustee to DTC. DTC is then required to credit such
distributions to the accounts of depository participants which thereafter will
be required to credit them to your account either directly or indirectly through
financial intermediaries. We refer you to "Description of the
Securities -- Book-Entry Securities" in this prospectus for more detail.
RATINGS OF THE SECURITIES
Ratings Not a Recommendation. It will be a condition to the issuance of a
class of securities we offer hereby that they be rated in one of the four
highest rating categories by each rating agency identified as rating such class
in the related prospectus supplement. Any such rating would be based on, among
other things, the adequacy of the value of the related mortgage collateral and
any credit enhancement with respect to such class. Such rating will represent
such rating agency's assessment solely of the likelihood that holders of such
class of securities will receive payments to which Securityholders are entitled
under the applicable Agreement. Such rating will not constitute an assessment of
the likelihood that principal prepayments on mortgages underlying the related
mortgage collateral will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated nor the likelihood of
early optional termination of the series of securities. Such rating shall not be
deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield. Nor does the rating address the possibility that an
investor purchasing a security at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios.
Ratings May be Lowered or Withdrawn. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the applicable rating agency in the future if
in its judgment circumstances so warrant. Such rating may be lowered or
withdrawn due to any erosion in the adequacy of the value of the assets of the
Issuer or any credit enhancement with respect to a series of securities. Other
reasons why such rating might also be lowered or withdrawn are an adverse change
in the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
Limitations of Analysis Performed by Rating Agencies. The amount, type and
nature of credit enhancement, if any, established with respect to a class of
securities of a series will be determined on the basis of criteria established
by each rating agency. Such criteria are sometimes based upon an actuarial
analysis of the behavior of similar loans in a larger group. Such analysis is
often the basis upon which each rating agency determines the amount of credit
enhancement required with respect to each such class. There is no assurance that
the historical data supporting any such actuarial analysis will accurately
reflect future experience. Nor is there any assurance that the data derived from
a large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of
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any particular pool of mortgages underlying the mortgage collateral. Finally,
there is no assurance that the values of any mortgaged properties have remained
or will remain at their levels on the respective dates of origination of the
related mortgages. If the residential real estate markets should experience an
overall decline in values such that the outstanding principal balances of the
mortgages underlying the mortgage collateral supporting a particular series of
securities and any secondary financing on the related mortgaged properties
become equal to or greater than the value of the mortgaged properties, the rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the mortgage collateral, and accordingly, the rates of
delinquencies, foreclosures and losses with respect to any mortgage collateral
supporting a series of securities. To the extent that such losses are not
covered by credit enhancement, such losses will be borne, at least in part by
the holders of one or more classes of securities of the related series.
CREDIT CONSIDERATIONS AND RISKS
Limited Source of Payments. We do not have, nor expect to have, any
significant assets. Although the securities will be obligations of or interests
in their respective Issuers, no Issuer is expected to have significant assets
other than those included in the trust fund assets for the series of securities
issued by it. Unless otherwise provided in the related prospectus supplement,
the securities of a series will be payable solely from the assets included in
the trust fund assets for such series and will not have any claim against or
security interest in the assets supporting any other series. There will be no
recourse to American Residential Eagle nor AmREIT, nor any other person for any
failure to make payments on the securities. In addition, at the times set forth
in the related prospectus supplement, certain mortgage collateral and/or any
balance remaining in the Bond Account for a series of securities immediately
after making all payments due on such securities, after making any other
payments specified in the related prospectus supplement, may be promptly
released or remitted to American Residential Eagle, AmREIT, any credit
enhancement provider or any other person entitled thereto. Thus, such mortgage
collateral and/or any balance remaining in the Bond Account for a series of
securities will no longer be available for making payments on such securities.
Consequently, for payments on securities of a series, investors in such
securities must rely solely upon payments of principal and interest on the
mortgage collateral and any other assets included in the trust fund assets for
such series, and the sources of credit enhancement identified in the related
prospectus supplement.
No Recourse To American Residential Eagle, Inc. or AmREIT. The securities
will not represent an interest in or obligation of American Residential Eagle or
AmREIT or any affiliate thereof. Our only obligations, if any, with respect to
the mortgage collateral or the securities of any series will be pursuant to
certain representations and warranties. We do not have, and do not expect in the
future to have, any significant assets with which to meet any obligation to
repurchase mortgage collateral with respect to which there has been a breach of
any representation or warranty. If, for example, we were required to repurchase
a mortgage loan, our only sources of funds to make such repurchase would be from
funds obtained (i) from the enforcement of a corresponding obligation, if any,
on the part of AmREIT or other Seller, or (ii) to the extent provided in the
related prospectus supplement, from a reserve fund or similar credit enhancement
established to provide funds for such repurchases.
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The only obligations of AmREIT or other Seller with respect to the mortgage
collateral or the securities of any series will be pursuant to certain
representations and warranties. AmREIT or such other Seller may be required to
repurchase or substitute for any mortgage loan with respect to which such
representations and warranties are breached. There is no assurance, however,
that AmREIT or such other Seller will have the financial ability to effect any
such repurchase or substitution.
Limitations Of Direct or Indirect Backing For Securities. Agency securities
are issued or guaranteed by government-sponsored entities but only the guarantee
by GNMA of Ginnie Mae Certificates is entitled to the full faith and credit of
the United States. The guarantees by FNMA and FHLMC of Fannie Mae Certificates
and Freddie Mac Certificates, respectively, are backed only by the credit of
FNMA, a federally chartered, privately owned corporation or by the credit of
FHLMC, a federally chartered corporation controlled by the Federal Home Loan
Banks. Neither the United States nor any agency thereof will be obligated to
finance the operations of FNMA or FHLMC or to assist either FNMA or FHLMC in any
other way. We refer you to "Trust Fund Assets -- Agency Securities" in this
prospectus for more detail. Although payment of principal of, and interest on,
any agency security securing all or part of a series of securities will be
guaranteed by either GNMA, FNMA or FHLMC, such guarantee will run only to such
agency security and will not guarantee the payment of principal or interest on
the securities of such series.
Deficiency on Sale of Mortgage Collateral. In the event of an acceleration
of the payment of the Bonds of a series, upon an event of default under the
Indenture with respect to such series, there is no assurance that the proceeds
from any sale of the mortgage collateral would be sufficient to pay in full the
outstanding principal amount of such series of Bonds (or related series of
Certificates) together with interest accrued thereon. The market value of such
mortgage collateral generally will fluctuate with changes in prevailing rates of
interest. Consequently, such mortgage collateral may be liquidated at a
discount, in which case the proceeds of liquidation might be less than the
aggregate outstanding principal amount and interest payable on the securities of
such series. Although the securities will be obligations of or represent
interests in their respective Issuers, no Issuer is expected to have significant
assets other than those included in the trust fund assets for the series of
securities issued by it. It is therefore unlikely that the Issuer will have
sufficient other assets available for payment of any such deficiency. If,
following an event of default, a series of Bonds has been declared to be due and
payable, the Bond Trustee may, in its discretion, but subject to the direction
of the securityholders, refrain from selling the collateral for such series of
Bonds and continue to apply amounts received on the collateral to payments due
on the securities of such series in accordance with their terms, notwithstanding
the acceleration of the maturity of such Bonds. We refer you to "The
Agreements -- Rights Upon Events of Default" in this prospectus for more detail.
Effect of Subordination. If so specified in the related prospectus
supplement, the rights of the holders of one or more classes of Subordinated
Securities will be subordinate to the rights of one or more classes of Senior
Securities of such series to payments of principal and/or interest (or any
combination thereof) to the extent specified in the related prospectus
supplement. Although subordination is intended to reduce the risk to holders of
Senior Securities of delinquent payments or ultimate losses, the amount of
subordination will be limited. In addition, if principal payments on one or more
classes of securities of a series are made in a specified order of priority, any
limits with respect to the aggregate
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amount of claims under any related credit enhancement may be exhausted before
the principal of the lower priority classes of securities of such series has
been repaid. As a result, the impact of significant losses on the mortgage
collateral may be borne first by any class of Subordinated Securities of a
series and thereafter by the classes of Senior Securities of such series, in
each case to the extent described in the related prospectus supplement.
Limitations, Reduction and Substitution of Credit Enhancement. The
prospectus supplement for a series of securities will describe any credit
enhancement for such series, which may include cash accounts, insurance
policies, surety bonds, guaranteed investment contracts,
cross-collateralization, reinvestment income, guarantees, letters of credit or
derivative arrangements to the extent described herein and therein. Although
credit enhancement is intended to reduce the risk of delinquent payments or
losses to holders of securities entitled to the benefit thereof, the amount of
such credit enhancement will be limited, as set forth in the related prospectus
supplement. The credit enhancement may be subject to periodic reduction in
accordance with a schedule or formula or otherwise decline, and could be
depleted under certain circumstances prior to the payment in full of the related
series of securities, and as a result securityholders of the related series may
suffer losses. Moreover, such credit enhancement may not cover all potential
losses or risks. For example, credit enhancement may or may not cover fraud or
negligence by a loan originator or other parties. In addition, the Bond Trustee
or the Certificate Trustee will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series of
securities, provided each applicable rating agency indicates that the
then-current rating of the securities of such aeries will not be adversely
affected. We refer you to "Credit Enhancement" in this prospectus for more
detail.
The amount of applicable credit enhancement supporting one or more classes
of securities of a series, including the subordination of one or more classes of
securities, will be determined on the basis of criteria established by each
rating agency. Each rating agency rates such classes of securities based on,
among other things, assumptions regarding levels of defaults, delinquencies and
losses. There can be no assurance that the default, delinquency and loss
experience on the related mortgage collateral will not exceed such assumed
levels. We refer you to "-- Ratings of the Securities" in this prospectus for
more detail.
Delinquent Loans May Adversely Affect Investment. Certain of the mortgage
loans directly supporting the securities or mortgage loans underlying the agency
securities supporting a series of securities may be past due or non-performing
as of the related cut-off date. You should consider the risk that the inclusion
of such loans in the mortgage collateral for a series of securities may affect
the rate of defaults and prepayments on such mortgage collateral and the yield
on the securities of such series.
PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK
If so specified in the related prospectus supplement, on the related
closing date we will deposit cash in an amount specified in such prospectus
supplement into a Pre-Funding Account. The pre-funded amount will be used to
purchase additional mortgage loans and/or agency securities from us during a
period from the related closing date to a date not more than one year after such
closing date. We, in turn, will acquire such subsequent mortgage collateral from
AmREIT. The Pre-Funding Account will be maintained with the Bond Trustee for the
related series of securities and is designed solely to hold funds to be
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applied by such Bond Trustee during the funding period to pay to American
Residential Eagle the purchase price for subsequent mortgage collateral. Monies
on deposit in the pre-funding account will not be available to cover losses on
or in respect of the related mortgage collateral. To the extent that the entire
pre-funded amount has not been applied to the purchase of subsequent mortgage
collateral by the end of the related funding period, any amounts remaining in
the pre-funding account will be distributed as a prepayment of principal to
securityholders on the distribution date immediately following the end of the
funding period in the amounts and pursuant to the priorities set forth in the
related prospectus supplement. Any reinvestment risk resulting from such
prepayment will be borne entirely by the holders of one or more classes of the
related series of securities. We refer you to "Trust Fund Assets -- Pre-Funding
Account" in this prospectus for more detail.
PRE-FUNDING ACCOUNTS MAY ADVERSELY AFFECT INVESTMENT
The ability of the Issuer to acquire subsequent mortgage collateral during
the funding period will be dependent upon our ability to acquire subsequent
mortgage collateral that satisfies the requirements described in the related
prospectus supplement. Although such subsequent mortgage collateral must satisfy
the characteristics described in the related prospectus supplement, such
subsequent mortgage collateral may have certain different characteristics,
including, without limitation, a more recent origination date than the initial
mortgage collateral. As a result, the addition of such subsequent mortgage
collateral pursuant to the pre-funding account may adversely affect the
performance of the related securities. We refer you to "Trust Fund
Assets -- Pre-Funding Account" in this prospectus for more detail.
CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT SECURITIES
All of the "deferred interest securities" will be, and certain of the other
securities may be, issued with original issue discount for federal income tax
purposes. A holder of a security issued with original issue discount will be
required to include original issue discount in ordinary gross income for federal
income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on the deferred
interest securities generally will be treated as original issue discount for
this purpose. We refer you to "Federal Income Tax Consequences -- Interest and
Original Issue Discount" and "-- Market Discount" in this prospectus for more
detail.
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INTRODUCTION
American Residential Eagle, Inc., a Delaware corporation (the "Company"),
proposes to establish one or more trusts to issue and sell Securities from time
to time under this Prospectus and related Prospectus Supplements. The Company is
a limited purpose finance corporation whose capital stock is wholly owned by
American Residential Investment Trust, Inc. ("AmREIT"). AmREIT, a Maryland
corporation, has elected to be treated as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company was
formed for the sole purpose of acting as the depositor of one or more trusts to
be formed for the purpose of issuing the Securities offered hereby and by the
related Prospectus Supplements. Each trust that is formed to act as an Issuer
will be created pursuant to an agreement between the Company acting as depositor
(in such capacity, the "Depositor"), and a bank or trust company, acting as
trustee. Each trust will be established solely for the purpose of issuing one
Series of Securities and engaging in transactions relating thereto. Each Series
of Securities will be separately supported by the Trust Fund Assets described in
the Prospectus Supplement relating to such Series, which assets will constitute
the only significant assets available to make payments on the Securities of such
Series. Accordingly, the investment characteristics of a Series of Securities
will be determined by the Trust Fund Assets for such Series and will not be
affected by the identity of the obligor with respect to such Series of
Securities. The term "Issuer," as used herein, with respect to a Series of
Securities refers to the trust established by the Company for the sole purpose
of issuing such Series of Securities.
Each Series of Bonds will be issued pursuant to a separate Indenture (the
"Indenture") between the Issuer of such Series and a bank or trust company
acting as trustee for the holders of such Bonds (the "Bond Trustee"). Each
Series of Certificates will be issued pursuant to a separate Trust Agreement
(the "Trust Agreement") between the Depositor and a bank or trust company acting
as trustee (the "Certificate Trustee"). The Indentures and Trust Agreements for
Series of Securities offered hereby are referred to herein collectively as
"Agreements" and individually as an "Agreement." A form of the each Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each final Agreement relating to each Series of
Securities will be filed with the Securities and Exchange Commission as soon as
practicable following the issuance of such Series of Securities.
THE ISSUERS
Any trust established to act as Issuer of a Series of Securities will be
created pursuant to a trust agreement between the Company and a bank or trust
company acting as trustee. Under the terms of each trust agreement creating a
trust relating to a Series of Bonds (a "Bond Issuer"), the Company initially
will retain the entire beneficial interest in the trust created thereunder
unless otherwise specified in the related Prospectus Supplement. The Company may
thereafter sell or assign all or a portion of such beneficial ownership to
another entity or entities unless prohibited from doing so by the related trust
agreement. The beneficial owners of each Bond Issuer will have no liability for
the obligations of the Issuer under the Bonds issued by it and holders of Bonds
of each Series will be deemed to have released the holders of beneficial
interest from any claim, liability or obligation on or with respect to the
Bonds. Each Bond Issuer will be managed by AmREIT. Under the terms of each trust
agreement creating a trust relating to a Series of Certificates (a "Certificate
Issuer"), the Company may retain or sell all or a portion of any Class of such
Series of Certificates.
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The Mortgage Collateral for each Series of Securities will have been
deposited with the Issuer of such Series by the Company which, in turn, will
have either (i) received such collateral from AmREIT (or an affiliate) as a
contribution to the Company's capital or (ii) purchased such collateral from
AmREIT (or an affiliate) or another entity or entities (in such capacity, each a
"Seller") as provided in the related Prospectus Supplement. (References herein
to AmREIT in its capacity as Seller shall be deemed to include any affiliate of
AmREIT acting in such capacity.) AmREIT acquires mortgage loans in the normal
course of its business from entities who have originated or otherwise acquired
such loans. AmREIT works with such originating entities to develop underwriting
guidelines for loan products that will meet AmREIT's investment criteria;
however, neither AmREIT nor any of its affiliates originates or services
mortgage loans. None of the Mortgage Loans will represent obligations of AmREIT.
In connection with the issuance of each Series of Bonds, the related
Mortgage Collateral will be deposited by the Company with the Issuer of such
Series and pledged by such Issuer to the Bond Trustee under the related
Indenture to secure such Series of Bonds. The Indenture with respect to each
Series of Bonds will prohibit the incurrence of further indebtedness by the
Issuer of such Series of Bonds. The Bond Trustee will hold the Mortgage
Collateral for a Series of Bonds as security pledged only for that Series, and
holders of the Bonds of that Series will be entitled to the benefits of such
security pursuant to the terms of the Indenture. In connection with the issuance
of each Series of Mortgaged-Backed Certificates (the "Certificates"), the
Company will deposit one or more Series of Bonds created for such purpose into
the Issuer of such Series of Certificates by assigning the Bonds to the
Certificate Trustee under the related Trust Agreement for such Series of
Certificates. The Trust Agreement with respect to such Series will prohibit the
issuance of additional Series of Certificates by that Issuer. The Certificate
Trustee will hold the Bonds so designated as part of the Trust Fund Assets for
such Series of Certificates and the holders of such Series of Certificates will
have beneficial ownership of such Trust Fund Assets pursuant to the terms of the
Trust Agreement.
Each trust agreement will provide that the related trust may not conduct
any activities other than those related to the issuance and sale of the
Securities of the particular Series issued by it and such other limited
activities as may be required in connection with reports and distributions to
holders of beneficial interests in the trust. No trust agreement will be subject
to amendment without the prior written consent of the Bond Trustee or the
Certificate Trustee for the related Series, which consent may not be
unreasonably withheld if such amendment would not adversely affect the interests
of the Securityholders of such Series.
THE COMPANY
The Company was incorporated in the State of Delaware on January 27, 1998
and is a limited purpose finance subsidiary of AmREIT. The Company is a
qualified real estate investment trust subsidiary. AmREIT is a publicly owned
real estate investment trust. The Company's principal executive offices are
located at 445 Marine View Avenue, Suite 100, Del Mar, California 92014. The
Company's telephone number is 619-259-6082.
AmREIT has agreed with the Company that AmREIT will not file or cause to be
filed any voluntary petition in bankruptcy against the Company or any trust
created by it until at least one year after the date on which the related
Securities have been paid in full, if at all.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities of each
Series will be applied by the Company to the purchase or acquisition of the
related Trust Fund Assets or the payment of expenses incurred in connection with
the issuance of Securities and otherwise incurred in connection with the conduct
of the Company's operations.
TRUST FUND ASSETS
GENERAL
The Trust Fund Assets securing each Series of Bonds will consist of
collateral (the "Collateral") comprised of (i) the Mortgage Collateral pledged
as security for such Series of Bonds, (ii) funds on deposit in the Bond Account
and the Distribution Account under the Indenture for such Series of Bonds
representing payments and prepayments on Mortgage Collateral, including, to the
extent applicable, all payments which may become due under any applicable
hazard, mortgage guaranty, mortgagor bankruptcy, title insurance and bond
insurance policies (collectively, the "Insurance Proceeds") and the proceeds
(the "Liquidation Proceeds") of foreclosure or settlement of defaulted Mortgage
Loans each as required to be remitted to the Bond Trustee, (iii) cash,
certificates of deposit, letters of credit, surety bonds, reinvestment income,
guaranteed investment contracts or any combination thereof in the aggregate
amount, if any, specified in the related Prospectus Supplement to be deposited
by the Issuer in a related Reserve Fund, (iv) the amount of cash, if any,
specified in the related Prospectus Supplement, to be initially deposited by the
Issuer in the related Bond Account, (v) certain cash accounts, insurance
policies, surety bonds, reinvestment income, guarantees, letters of credit,
cross-collateralization or derivative arrangements, as specified herein and in
the related Prospectus Supplement, (vi) to the extent applicable, the
reinvestment income on all of the foregoing, (vii) the Issuer's rights under the
Master Servicing Agreement with respect to the Series of Bonds, (viii) the
Issuer's rights under the Mortgage Loan Purchase Agreement with respect to the
Series of Bonds, (ix) amounts (excluding any reinvestment income thereon)
deposited in the related early remittance account, if any, under the Indenture
for such Series of Bonds and (x) the Issuer's rights under certain of the
Mortgage Pool Insurance Policies and/or Bond Insurance Policies obtained for
such Series of Bonds. Scheduled payments on the Mortgage Collateral securing a
Series of Bonds and amounts, if any, initially deposited in the related Bond
Account, together with, to the extent applicable, amounts available to be
withdrawn from any related Reserve Fund, will be sufficient to make timely
payments of interest on the Bonds of such Series and to retire each Class of
Bonds comprising such Series not later than the Stated Maturity of such Class of
Bonds specified in the related Prospectus Supplement.
The Trust Fund Assets for each Series of Certificates will consist
primarily of one or more Bonds representing the right to receive all or
substantially all of the payments on the Collateral securing such Series of
Bonds. Each Series of Certificates will accordingly be supported by the Mortgage
Collateral and other items included in the Trust Fund Assets for the related
Series of Bonds.
Each Prospectus Supplement relating to a Series of Securities will include
information as to (i) the approximate aggregate principal amount of the Mortgage
Collateral supporting such Series and whether the Mortgage Collateral consists
of Mortgage Loans,
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GNMA Certificates, FNMA Certificates, FHLMC Certificates or some combination of
Mortgage Loans and Agency Securities and (ii) the approximate weighted average
terms to maturity of such Mortgage Collateral.
The Collateral supporting each Series of Securities will serve as Trust
Fund Assets only for that Series of Securities, except to the extent that any
Mortgage Pool Insurance Policies, Special Hazard Insurance Policies, Bankruptcy
Bonds or other form of credit enhancement specified herein may, if specified in
the related Prospectus Supplement, be pledged to support more than one Series of
Securities. See "CREDIT ENHANCEMENT" herein.
The following is a brief description of the Mortgage Collateral expected to
be included in the Trust Fund Assets for a Series of Securities. If specific
information respecting the Mortgage Collateral is not known at the time the
related Series of Securities initially is offered, more general information of
the nature described below will be provided in the related Prospectus
Supplement, and specific information will be set forth in a report on Form 8-K
to be filed with the Securities and Exchange Commission within fifteen days
after the initial issuance of such Securities (the "Detailed Description"). A
schedule of the Mortgage Collateral relating to such Series of Securities will
be attached to the applicable Agreement upon issuance of the Securities.
THE MORTGAGE LOANS
GENERAL. All of the Mortgage Loans will be contributed to the Company's
capital by AmREIT (or an affiliate) or purchased by the Company from AmREIT (or
an affiliate) or another Seller and will be master serviced by the Master
Servicer specified in the related Prospectus Supplement. See "SERVICING OF THE
MORTGAGE LOANS" herein. Mortgage Loans contributed to or acquired by the Company
will have been originated in accordance with the underwriting criteria specified
under "MORTGAGE LOAN PROGRAM UNDERWRITING STANDARDS" herein and in the related
Prospectus Supplement. The Mortgage Loans supporting a Series of Securities will
consist solely of Conventional Loans secured by first or junior liens on one-to
four-family residential properties or other types of residential or mixed use
properties described below under "FREEDOM PROGRAM." All Mortgage Loans
supporting a Series of Certificates will be secured by first liens on single
parcels of real estate. See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS -- GENERAL"
herein. The real property constituting security for repayment of a Mortgage Loan
(each, a "Mortgaged Property") may be located in any one of the fifty states,
the District of Columbia, Guam, Puerto Rico, or any other territory of the
United States as specified in the related Prospectus Supplement. Mortgage Loans
with certain Loan-to-Value Ratios and/or certain principal balances may be
covered wholly or partially by primary mortgage insurance policies (each, a
"Primary Mortgage Insurance Policy"). The existence, extent and duration of any
such coverage will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans supporting a Series of Securities will have monthly payments due
on the first day of each month. Such monthly installments on each such Mortgage
Loan, net of (i) applicable servicing compensation or master servicing
compensation, (ii) amounts retained by the Master Servicer or Servicer (as
defined herein) to be applied to the payment of premiums for certain Mortgage
Pool Insurance Policies and, if applicable, bond insurance policies and (iii)
amounts retained to reimburse the Master Servicer or Servicer
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for certain advances it has made, will be payable to the Bond Trustee by the
Master Servicer on or before the monthly remittance date specified in the
Prospectus Supplement relating to the Series of Securities supported by such
Mortgage Loans (each, a "Remittance Date"). See "SERVICING OF THE MORTGAGE LOANS
- --PAYMENTS ON MORTGAGE LOANS" and "-- ADVANCES AND OTHER AMOUNTS PAYABLE BY
MASTER SERVICER" herein. The payment terms of the Mortgage Loans supporting a
Series of Securities will be described in the related Prospectus Supplement and
may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations as set forth in the related loan agreement
or promissory note ("Mortgage Note"). Accrued interest may be deferred and
added to the principal of a loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement. A
Mortgage Note may provide for the payment of interest at a rate lower than
the interest rate ("Mortgage Rate") specified in such Mortgage Note for a
period of time or for the life of the loan and the amount of any difference
may be contributed from funds supplied by the seller of the Mortgaged
Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage 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 ("balloon payments"). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or
may change from period to period. The terms of a Mortgage Loan may include
limits on periodic increases or decreases in the amount of monthly payments
and may include maximum or minimum amounts of monthly payments.
(d) The Mortgage Loans may be prepaid (i) at any time without the
payment of any prepayment fee or (ii) subject to a prepayment fee, which
may be fixed for the life of any such Mortgage Loan or may decline over
time, and may be prohibited for the life of such Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The loans may include "due-on-sale" clauses that permit the
mortgagee to demand payment of the entire Mortgage Loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by
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persons meeting the then applicable underwriting standards. See "MORTGAGE
LOAN PROGRAM -- UNDERWRITING STANDARDS" herein.
The Mortgage Collateral supporting a Series of Securities may include
certain Mortgage Loans ("Buydown Loans") that include provisions whereby a third
party partially subsidizes the monthly payments of the Mortgagors during the
early years of such Mortgage Loans, the difference to be made up from a fund (a
"Buydown Fund") contributed by such third party at the time of origination of
the Mortgage Loan. A Buydown Fund will be in an amount equal either to the
discounted value or full aggregate amount of future payment subsidies. The
underlying assumption of buydown plans is that the income of the Mortgagor will
increase during the buydown period as a result of normal increases in
compensation and inflation, so that the Mortgagor will be able to meet the full
mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the Mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
Mortgage Loans will consist of mortgage loans or deeds of trust secured by
first or junior liens on one-to four-family residential properties or other
types of residential or mixed use properties described below under "FREEDOM
PROGRAM." If provided in the related Prospectus Supplement, certain of the
Mortgage Loans may be secured by junior liens where the related senior liens
("Senior Liens") are not to be included as part of the Mortgage Collateral.
Holders of such Mortgage Loans secured by junior liens are subject to the risk
that adequate funds will not be received in connection with a foreclosure of the
related Senior Liens to satisfy fully both the Senior Liens and the Mortgage
Loans. In the event that a holder of a Senior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgaged Property, if such proceeds are sufficient, before the Issuer as holder
of the junior lien receives any payments in respect of the Mortgage Loan. If the
Master Servicer or a Servicer were to foreclose on any such Mortgage Loan, it
would do so subject to any related Senior Liens. In order for the debt related
to the Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to
pay off all sums due under the Mortgage Loan and the Senior Liens or purchase
the Mortgaged Property subject to the Senior Liens. In the event that such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy all Senior Liens and the Mortgage Loan in the
aggregate, the Issuer, as the holder of the junior liens, and, accordingly,
holders of one or more classes of the Securities of the related Series, bear (i)
the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is not
realized upon. Moreover, deficiency judgments may not be available in certain
jurisdictions or the Mortgage Loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the Company,
with
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respect to the Mortgage Loans supporting the related Series of Securities,
including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the date of issuance
of the related Series of Securities, (ii) the types of property securing the
Mortgage Loans, (iii) the original terms to maturity of the Mortgage Loans, (iv)
the earliest origination date and latest maturity date of any of the Mortgage
Loans, (v) the maximum and minimum per annum Mortgage Rates and (vi) the
geographical distribution of the Mortgage Loans.
If so specified in the related Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings.
The Mortgaged Properties relating to Mortgage Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, small multi-family and mixed use properties
and certain other dwelling units described under "FREEDOM PROGRAM." Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loans by at
least five years.
FREEDOM PROGRAM. Under AmREIT's Freedom Program, it will (i) identify
segments of the residential Mortgage Loan market that meet its general criteria
for potential originations, (ii) develop tailored underwriting guidelines for
Mortgage Loans to be generated in each market segment, (iii) arrange for the
acquisition by it of Mortgage Loans directly from the originators
("Correspondents"), hence avoiding certain loan broker or other intermediary
fees, and (iv) arrange for the servicing of the Mortgage Loans by entities
experienced in servicing the particular types of Mortgage Loans involved.
Although AmREIT works with its Correspondents to develop the desired
underwriting guidelines, neither AmREIT nor any of its affiliates originates or
services mortgage loans.
Under the Freedom Program, AmREIT will identify market segments of the
residential Mortgage Loan market that it believes have the potential for
generating Mortgage Loans with higher yields than other Mortgage Loans with
generally comparable risks. These segments generally are present where there is
less competition among Mortgage Loan originators and, hence, fewer resources
available to borrowers. AmREIT has identified a number of such segments and
expects that new opportunities to other market segments will become available as
the Mortgage Loan market continues to change. These emerging market segments
typically will include Mortgage Loans that are not readily available from large,
nationally-based Mortgage Loan originators due to factors related to the
Mortgage Loan underwriting process itself (such as the need to value a complex,
mixed use property) or a limited secondary market for resale of such types of
Mortgage Loans.
AmREIT has identified the following market segments of the residential
Mortgage Loan market for its initial tailored Mortgage Loan products:
- Small Multifamily Home Mortgage Loans. A small multifamily home
Mortgage Loan will be secured by a first lien on a 5-unit to 20-unit
residential property. The underwriting guidelines for small multifamily
home Mortgage Loans
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will place emphasis on the appraised value, the existence and terms of
underlying leases, a cash flow analysis, the condition of the mortgaged
property and favorable credit reports.
- Manufactured Housing Mortgage Loans. A manufactured housing
Mortgage Loan will be secured by a first lien on an owner occupied
manufactured housing unit (excluding mobile homes) permanently affixed to a
foundation and the underlying lot. The underwriting guidelines for
manufactured housing Mortgage Loans will place emphasis on appraised value
(relying on comparable sales), condition of the property, the quality of
the borrower's income and favorable credit reports.
- Mixed Use Mortgage Loans. A mixed use Mortgage Loan will be secured
by a first lien on a combined commercial and up-to-twelve-unit residential
property. The qualifying commercial uses of the properties will be
generally limited to retail, professional, light industrial or office use.
The underwriting guidelines for mixed use Mortgage Loans will place
emphasis on appraised value (relying on comparable sales), condition of the
property (and environmental compliance),cash flow analysis and credit
reports (including credit reports on commercial tenants).
- Rural Home Mortgage Loans. A rural home Mortgage Loan will be
secured by a first lien on a residential property in a rural area where
agricultural use is present but limited to noncommercial use. The
underwriting guidelines for rural home Mortgage Loans will place emphasis
on appraised value (relying on comparable sales), condition of the
property, quality of the borrower's income and favorable credit reports.
Rural home Mortgage Loan amounts will generally be higher with respect to
the appraised value of the residence, and the first five acres and lower
with respect to any additional acreage.
- Mini-Ranch Home Mortgage Loans. A mini-ranch home Mortgage Loan
will be secured by a first lien on a residential ranch property. The
underwriting guidelines for mini-ranch home Mortgage Loans will place
emphasis on appraised value (relying on comparable sales), condition of the
property, the quality of the borrower's income (primarily non-ranch income)
and favorable credit reports. Mini-ranch home Mortgage Loan amounts will
generally be higher with respect to the appraised value of the residence
and the first five acres, and lower with respect to any additional acreage.
- Condominium/Resort Mortgage Loans. A condominium/resort Mortgage
Loan will be secured by a first lien on a vacation property, including
those located in ski, golf and other recreational resort areas. The
underwriting guidelines for condominium/resort Mortgage Loans will place
emphasis on appraised value (relying on comparable sales with same complex
comparables preferred), same complex rental history, the quality of the
borrower's income and favorable credit reports.
AmREIT has created tailored underwriting guidelines for Mortgage Loans in
the initial target market segments. Such Mortgage Loan underwriting guidelines
will set forth the various characteristics (such as combinations of
loan-to-value levels and credit ranking of borrowers) for Mortgage Loans that
AmREIT is prepared to purchase from Correspondents. These Mortgage Loans
generally will be nonconforming, primarily as a result of the property type,
and, to a lesser extent, the borrower's credit characteristics.
AmREIT intends to draw upon the experience of its executive officers in the
residential mortgage industry to build a network of Correspondents with
expertise in
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market segments targeted by AmREIT. AmREIT will make arrangements to acquire
Mortgage Loans through its relationships with these Correspondents. AmREIT will
identify and work with a number of Correspondents to generate Mortgage Loan
products for the Freedom Program.
The Mortgage Loans acquired pursuant to the Freedom Plan will have certain
distinct risk characteristics and generally lack standardized terms, which may
complicate their structure. The underlying properties themselves may be unique
and more difficult to value than typical residential real estate properties.
Although AmREIT intends to seek geographic diversification of the properties
which are collateral for its Mortgage Loans, it does not intend to set specific
diversification requirements (whether by state, zip code or other geographic
measure). Concentration of the Mortgage Collateral securing a series of Bonds in
any one area will increase exposure to the economic and natural hazard risks
associated with that area.
OTHER LOAN PROGRAMS. In addition to the tailored Mortgage Loan products
described above, AmREIT may also acquire conforming Mortgage Loans and
nonconforming jumbo Mortgage Loans from Correspondents, and purchase Mortgage
Loans on a bulk basis. Conforming Mortgage Loans meet underwriting guidelines
with respect to principal balance, loan repayment schedule and borrower credit
history, as defined by certain government sponsored agencies. These Mortgage
Loans will consist of conventional Mortgage Loans that comply with requirements
for inclusion in certain programs sponsored by the FHLMC or FNMA, and FHA Loans
and VA Loans. The nonconforming Mortgage Loans will be conventional Mortgage
Loans that vary in one or more respects from the requirements for participation
in FHLMC or FNMA programs.
AmREIT may invest in sub-prime Mortgage Loans. Sub-prime Mortgage Loans are
residential Mortgage Loans made to borrowers with credit ratings below the
conforming Mortgage Loan guidelines. Additionally, sub-prime Mortgage Loans
generally are subject to greater frequency of loss and delinquency than
conforming Mortgage Loans. Accordingly, lower credit grade Mortgage Loans
normally bear a higher rate of interest than conforming Mortgage Loans. The
Prospectus Supplement relating to any Series of Bonds secured by sub-prime
Mortgage Loans will set forth the matrix of underwriting criteria under which
such Mortgage Loans were originated separately for each credit-quality category
(e.g., "A--," "B," "C" or "D") applicable to such Mortgage Loans.
No assurance can be given that values of the Mortgaged Properties will
remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties,
securing a Series of Bonds become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions and other factors (which may
or may not affect real property values) may affect the timely payment by
Mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to any Mortgage Collateral. To the extent that such losses are not
covered by subordination provisions, any other credit enhancement or alternative
arrangements described herein and in the related Prospectus Supplement, such
losses will be borne, at least in part, by the holders of the Securities of the
related Series.
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ASSIGNMENT OF MORTGAGE LOANS TO BOND TRUSTEE. Assignments of the mortgages
or deeds of trust in recordable form, naming the Bond Trustee as assignee, will
be executed and, subject to release for recording purposes, delivered to the
Bond Trustee or its Custodian along with certain other original documents
evidencing the Mortgage Loans, including the related Mortgage Notes. The
original mortgage documents will be held by the Bond Trustee or one or more of
its custodians, except to the extent released to the Master Servicer or any
Servicer from time to time in connection with its respective servicing
activities. The Issuer will promptly cause the assignments of the related
Mortgage Loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
Bond Trustee, such recording is not required to protect the Bond Trustee's
interest in such Mortgage Loans against the claim of any subsequent transferee
or any successor to or creditor of the Issuer or the originator of such Mortgage
Loan. In the event an assignment of a Mortgage Loan to the Bond Trustee is not
recorded or the opinion referred to above is not delivered to the Bond Trustee
within the period specified in the related Prospectus Supplement, the Seller
may, if required by the Bond Trustee in accordance with the terms of the
Indenture, be obligated to (i) purchase such Mortgage Loan at a price equal to
the outstanding principal balance thereof on the date of such purchase plus
accrued and unpaid interest thereon to the first day of the month following the
month in which such Mortgage Loan is purchased and deposit such amount in the
Bond Account for the related Series of Securities or (ii) if permitted by the
applicable provisions of the Indenture and the Mortgage Loan Purchase Agreement
with respect to such Series of Securities, replace such Mortgage Loan with an
eligible replacement mortgage loan (a "Replacement Mortgage Loan"). See
"-- SUBSTITUTION OF MORTGAGE COLLATERAL" herein.
The Master Servicer will service the Mortgage Loans, either directly or
through other mortgage servicing institutions ("Servicers"), pursuant to a
Master Servicing Agreement (as defined herein), and will receive a fee for such
services. See "MORTGAGE LOAN PROGRAM" and "SERVICING OF THE MORTGAGE LOANS"
herein. With respect to Mortgage Loans serviced by the Master Servicer through a
Servicer, the Master Servicer will remain liable for its servicing obligations
under the related Master Servicing Agreement as if the Master Servicer alone
were servicing such Mortgage Loans.
The obligations of the Master Servicer with respect to the Mortgage Loans
will consist principally of its contractual master servicing obligations under
the related Master Servicing Agreement (including its obligation to enforce the
obligations of the Servicers) as more fully described herein under "MORTGAGE
LOAN PROGRAM -- REPRESENTATIONS BY SELLERS; REPURCHASES" and its obligation to
make certain cash advances in the event of delinquencies in payments on or with
respect to the Mortgage Loans in the amounts described herein under "SERVICING
OF THE MORTGAGE LOANS -- ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER"
herein. The obligations of the Master Servicer to make advances may be subject
to limitations, to the extent provided herein and in the related Prospectus
Supplement.
AGENCY SECURITIES
GENERAL. The "Agency Securities" supporting a Series of Securities will
consist of (i) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association ("GNMA Certificates"), (ii) certificates
("Guaranteed Mortgage Pass-Through
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Certificates") issued and guaranteed as to timely payment of principal and
interest by the Federal National Mortgage Association ("FNMA Certificates"),
(iii) mortgage participation certificates issued and guaranteed as to timely
payment of interest and, unless otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the Federal Home Loan Mortgage
Corporation ("FHLMC Certificates"), (iv) stripped mortgage-backed securities
representing an undivided interest in all or a part of either the principal
distributions (but not the interest distributions) or the interest distributions
(but not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such distributions) on
certain GNMA, FNMA or FHLMC Certificates and, unless otherwise specified in the
related Prospectus Supplement, guaranteed to the same extent as the underlying
securities, (v) another type of passthrough certificate issued or guaranteed by
GNMA, FNMA or FHLMC and described in the related Prospectus Supplement or (vi) a
combination of such Agency Securities.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States with the Department of Housing and Urban Development. Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the principal
of, and interest on, GNMA Certificates that represent an interest in a pool of
mortgage loans insured by the FHA under the Housing Act or Title V of the
Housing Act of 1949 ("FHA Loans"), or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under such guaranty, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount which
is at any time sufficient to enable GNMA to perform its obligations under its
guaranty.
Each GNMA Certificate included in the Trust Fund Assets a Series of
Securities (which may be issued under either the GNMA I program (each such
certificate, a "GNMA I Certificate") or the GNMA II program (each such
certificate, a "GNMA II Certificate")) will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by a mortgage banking company or
other financial concern ("GNMA Issuer") approved by GNMA or by FNMA as a
seller-servicer of FHA Loans and/or VA Loans. The mortgage loans underlying the
GNMA Certificates will consist of FHA Loans and/or VA Loans. Each such mortgage
loan is secured by a one- to four-family or multifamily residential property.
GNMA will approve the issuance of each such GNMA Certificate in accordance with
a guaranty agreement (a "Guaranty Agreement") between GNMA and the GNMA Issuer.
Pursuant to its Guaranty Agreement, a GNMA Issuer will be required to advance
its own funds in order to make timely payments of all amounts due on each such
GNMA Certificate if the payments received by the GNMA Issuer on the FHA Loans or
VA Loans underlying each such GNMA Certificate are less than the amounts due on
each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the
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payment by or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guaranty fee, which
together equal the difference between the interest on the FHA Loan or VA Loan
and the passthrough rate on the GNMA Certificate. In addition, each payment will
include proportionate pass-through payments of any prepayments of principal on
the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Bond Trustee or its nominee, as registered
holder of the GNMA Certificates securing a Series of Bonds will have the right
to proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate supporting a
Series of Securities will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the registered holder by the 15th day of each month in the case of a GNMA I
Certificate and are required to be mailed to the registered holder by the 20th
day of each month in the case of a GNMA II Certificate. Any principal
prepayments on any FHA Loans or VA Loans underlying a GNMA Certificate securing
a Series of Bonds or any other early recovery of principal on such loans will be
passed through to the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
Buydown Loans for which funds will have been provided (and deposited into escrow
accounts) for application to the payment of a portion of the borrowers' monthly
payments
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during the early years of such mortgage loan. Payments due the registered
holders of GNMA Certificates backed by pools containing Buydown Loans will be
computed in the same manner as payments derived from other GNMA Certificates and
will include amounts to be collected from both the borrower and the related
escrow account. The graduated payment mortgage loans will provide for graduated
interest payments that, during the early years of such mortgage loans, will be
less than the amount of stated interest on such mortgage loans. The interest not
so paid will be added to the principal of such graduated payment mortgage loans
and, together with interest thereon, will be paid in subsequent years. The
obligations of GNMA and of a GNMA Issuer will be the same irrespective of
whether the GNMA Certificates are backed by graduated payment mortgage loans or
Buydown Loans. No statistics comparable to the FHA's prepayment experience on
level payment, non-"buydown" mortgage loans are available in respect of
graduated payment or Buydown Loans. GNMA Certificates related to a Series of
Bonds may he held in book-entry form.
The GNMA Certificates supporting a Series of Securities, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. FNMA originally was established in 1938 as
a United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and
privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan generally must meet the applicable standards of the
FNMA purchase program. Mortgage loans comprising a pool are either provided by
FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates supporting a Series of
Securities will consist of conventional loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 40 years. The original maturities of substantially all of the
fixed rate, level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pools, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses), the annual interest
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rates on the mortgage loans underlying a FNMA Certificate will be between 50
basis points and 250 basis points greater than is its annual pass-through rate
and under a special servicing option (pursuant to which FNMA assumes the entire
risk for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will generally be between 55 basis points and 255
basis points greater than the annual FNMA Certificate pass-through rate. One
"basis point" is equal to one-hundredth of a percentage point (0.01%). If
specified in the related Prospectus Supplement, FNMA Certificates may be backed
by adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guaranties are obligations solely of FNMA and are not backed by, or entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up to
$2.25 billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's operations or to assist FNMA in any other
manner. If FNMA were unable to satisfy its obligations, distributions to holders
of FNMA Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and accordingly, monthly distributions to holders
of FNMA Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates supporting a Series of Securities, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks and its preferred stock is owned by stockholders of the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien, conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of guaranteed mortgage
securities, primarily
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FHLMC Certificates. FHLMC is confined to purchasing, so far as practicable,
mortgage loans that it deems to be of such quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien Conventional Loans, FHA Loans or
VA Loans. FHLMC Certificates are sold under the terms of a Mortgage
Participation Certificate Agreement. A FHLMC Certificate may be issued under
either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates supporting a Series of
Securities will generally consist of mortgage loans with original terms to
maturity of between 10 and 40 years. Each such mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and/or participations comprising another FHLMC
Certificate group. Under the Guarantor Program, any such FHLMC Certificate group
may include only whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable certificate interest rate on the registered holder's pro rata share
of the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Prospectus Supplement for a Series of Bonds, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guaranties, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of any
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guaranty are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders
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of FHLMC Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and, accordingly, monthly distributions to holders
of FHLMC Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such FHLMC Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
SUBSTITUTION OF MORTGAGE COLLATERAL
Substitution of Mortgage Collateral (the "Substitute Collateral") will be
permitted in the event of breaches of representations and warranties with
respect to any original Mortgage Collateral or in the event the documentation
with respect to any Mortgage Collateral is determined by the Bond Trustee to be
incomplete. The period during which such substitution will be permitted
generally will be indicated in the Prospectus Supplement for a Series of
Securities. The Prospectus Supplement for a Series of
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Securities will describe the conditions upon which Mortgage Collateral may be
substituted for Mortgage Collateral initially supporting such Series.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Master Servicer,
the Seller and/or the Company may, at its option, purchase from the Issuer any
Mortgage Loan which is delinquent in payment by more than the number of days
specified in such Prospectus Supplement, at a price specified in such Prospectus
Supplement.
BOND AND DISTRIBUTION ACCOUNTS
A separate Bond Account will be established with the Bond Trustee for each
Series of Securities for receipt of (i) all interest and principal payments
(including, to the extent applicable, any required advances by the Master
Servicer and any Servicers) and all prepayments on the Mortgage Collateral
supporting such Series required to be remitted to the Bond Trustee (including,
to the extent applicable, Insurance Proceeds required to be remitted to the Bond
Trustee and Liquidation Proceeds); (ii) the amount of cash, if any, withdrawn
from any related Reserve Fund; and (iii) if so specified in the related
Prospectus Supplement, the reinvestment income on all of the foregoing. On or
prior to the date specified in the related Prospectus Supplement (each, a
"Distribution Account Deposit Date"), the Master Servicer shall withdraw from
the Bond Account the security distribution amount (the "Security Distribution
Amount") at monthly, quarterly, semi-annually or at such other intervals and on
the dates specified in the prospectus supplement (each a "Distribution Date"),
to the extent of funds available for such purpose on deposit therein, and will
deposit such amount in the Distribution Account.
The Bond Trustee will invest the funds in the Bond Account and the
Distribution Account in Permitted Investments maturing no later than the next
Distribution Date for the related Series of Securities. "Permitted Investments"
may include (i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United States;
(ii) general obligations of or obligations guaranteed by any state of the United
States or the District of Columbia receiving the highest long-term debt rating
of each applicable Rating Agency, or such lower rating which will not result in
a change in the rating then assigned to each related Series of Securities by
each applicable Rating Agency, (iii) commercial paper or finance company paper
which is then receiving the highest commercial or finance company paper rating
of each applicable Rating Agency, or such lower rating as will not result in a
change in the rating then assigned to each related Series of Securities by each
applicable Rating Agency; (iv) certificates of deposit, demand or time deposits,
or bankers' acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term unsecured debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding company, but only
if Moody's Investors Service, Inc. ("Moody's") is not an applicable Rating
Agency) are then rated one of the two highest long-term and the highest
short-term ratings of each such Rating Agency for such securities, or such lower
ratings as will not result in a change in the rating then assigned to each
related Series of Securities by each Rating Agency; (v) demand or time deposits
or certificates of deposit issued by any bank or trust company or savings
institution
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to the extent such deposits are fully insured by the FDIC; (vi) guaranteed
reinvestment agreements issued by any bank, insurance company or other
corporation containing, at the time of the issuance of such agreements, such
terms and conditions as will not result in a change in the rating then assigned
to each related Series of Securities by each applicable Rating Agency; (vii)
repurchase obligations with respect to any security described in clauses (i) and
(ii) above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (iv) above; (viii) securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold at
a discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each applicable Rating Agency (except if the Rating
Agency is Moody's, such rating shall be the highest commercial paper rating of
Moody's for any such securities), or such lower rating as will not result in a
change in the rating then assigned to each related Series of Securities by each
applicable Rating Agency, as evidenced by a signed writing delivered by each
such Rating Agency; (ix) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time such interests
are held in such fund has the highest applicable rating by each applicable
Rating Agency or such lower rating as will not result in a change in the rating
then assigned to each related Series of Securities by each such Rating Agency;
and (x) short term investment funds sponsored by any trust company or national
banking association incorporated under the laws of the United States or any
state thereof which on the date of acquisition has been rated by each applicable
Rating Agency in their respective highest applicable rating category or such
lower rating as will not result in a change in the rating then assigned to each
related Series of Securities by each such Rating Agency; provided that no such
instrument shall be a Permitted Investment if such instrument evidences the
right to receive interest only payments with respect to the obligations
underlying such instrument; and provided, further, that no investment specified
in clause (ix) or clause (x) above shall be a Permitted Investment for any
Pre-Funding Account or any related Capitalized Interest Account (as defined
herein). If a letter of credit is deposited with the Bond Trustee, such letter
of credit will be irrevocable, will name the Bond Trustee, in its capacity as
trustee for the Securityholders, as the sole beneficiary and will be issued by a
bank acceptable to each applicable Rating Agency. (Indenture, Section 1.01)
Unless an Event of Default or an event which if not timely cured will
constitute an Event of Default with respect to a Series of Securities has
occurred and is continuing, funds remaining in the related Bond Account
following a Distribution Date for such Bonds (other than certain amounts not
constituting Available Funds if so specified in the related Prospectus
Supplement or any funds required to be deposited in a related Reserve Fund) will
be subject to withdrawal upon the order of the Issuer free from the lien of the
Indenture.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Bond Trustee on behalf of the related Securityholders, into which the Depositor
will deposit cash in an amount equal to the pre-funded amount on the related
Closing Date (the "Pre-Funded Amount"). The Pre-Funding Account will be
maintained with the Bond Trustee for the related Series of Securities and is
designed solely to hold funds to be applied by such Bond
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Trustee during the "Funding Period" to pay to the Depositor the purchase price
for "Subsequent Mortgage Collateral." Prior to inclusion in the Collateral
supporting a Series of Securities, in accordance with the provisions of the
related Indenture, the Subsequent Mortgage Collateral will be subject to review
by the same parties as reviewed the initial Mortgage Collateral. Specifically,
the Bond Trustee will be required to perform a document review and an
independent firm will certify the fair value of the Subsequent Mortgage
Collateral. In addition, the Issuer will be required to deliver to the Bond
Trustee a legal opinion to the effect that all Indenture requirements have been
met for including the Subsequent Mortgage Collateral in the Collateral.
Monies on deposit in the Pre-Funding Account will not be available to cover
losses on or in respect of the related Mortgage Collateral. The Pre-Funded
Amount will not exceed 50% of the initial aggregate principal amount of the
Securities of the related Series. The Pre-Funded Amount will be used by the
related Bond Trustee to purchase Subsequent Mortgage Collateral from the
Depositor from time to time during the Funding Period. The Funding Period, if
any, for a Series of Securities will begin on the related Closing Date and will
end on the date specified in the related Prospectus Supplement, which in no
event will be later than the date that is one year after the related Closing
Date. Monies on deposit in the Pre-Funding Account may be invested in Permitted
Investments (as such term is defined above under "-- BOND AND DISTRIBUTION
ACCOUNTS") under the circumstances and in the manner described in the related
Agreement. Earnings on investment of funds in the Pre-Funding Account will be
deposited into the related Bond Account or such other trust account as is
specified in the related Prospectus Supplement and losses will be charged
against the funds on deposit in the Pre-Funding Account. Any amounts remaining
in the Pre-Funding Account at the end of the Funding Period will be paid to the
related Securityholders in the manner and priority specified in the related
Prospectus Supplement, as a prepayment of principal of the related Securities.
Certain information with respect to the Subsequent Mortgage Collateral will be
filed with the Commission on Form 8-K within fifteen days after the date such
Subsequent Mortgage Collateral is conveyed to the related Trust.
In addition, if so specified in the related Prospectus Supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the applicable Trustee for the related
Series of Securities and is designed solely to cover the above-mentioned
interest shortfalls. Monies on deposit in the Capitalized Interest Account will
not be available to cover losses on or in respect of the related Mortgage
Collateral. To the extent that the entire amount on deposit in the Capitalized
Interest Account has not been applied to cover shortfalls in interest on the
related Series of Securities by the end of the Funding Period, any amounts
remaining in the Capitalized Interest Account will be paid to the Depositor.
DESCRIPTION OF THE SECURITIES
Each Series of Bonds will be issued pursuant to an indenture ("Indenture")
between the related Bond Issuer and the entity named in the related Prospectus
Supplement as Bond Trustee with respect to such Series, and the related Mortgage
Loans will be serviced by the Master Servicer pursuant to a Master Servicing
Agreement. A form of Indenture
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and Master Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Each Series of Certificates
will be issued pursuant to a separate agreement (a "Trust Agreement") between
the Depositor and the Certificate Trustee. A form of Trust Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part.
The Indentures and Trust Agreements for Series of Securities offered hereby
are referred to collectively as "Agreements" and individually as an "Agreement."
The provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund
Assets. The following are descriptions of the material provisions which may
appear in each Agreement. The descriptions are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Agreement for each
Series of Securities. The Depositor will provide a copy of the Agreement
(without exhibits) relating to any Series without charge upon written request of
a holder of record of a Security of such Series addressed to American
Residential Eagle, Inc., 445 Marine View Avenue, Suite 100, Del Mar, California
92014.
GENERAL
Unless otherwise described in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered form,
in the authorized denominations specified in the related Prospectus Supplement,
will, in the case of Certificates, evidence specified beneficial ownership
interests in, and in the case of Bonds, be secured by, the related Trust Fund
Assets pursuant to the terms of each Agreement and will not be entitled to
payments in respect of the assets included in any other Issuer established by
the Depositor. Unless otherwise specified in the Prospectus Supplement, the
Securities will not represent obligations of the Depositor or any affiliate of
the Depositor. The assets of each Issuer will consist of, to the extent provided
in the related Agreement, (i) the Trust Fund Assets as are subject to the
related Agreement (exclusive of any amounts specified in the related Prospectus
Supplement ("Retained Interest")), including all payments of interest and
principal received with respect to the Mortgage Loans after the Cut-off Date (to
the extent not applied in computing the principal balance of such Mortgage Loans
as of the Cut-off Date (the "Cut-off Date Principal Balance")); (ii) such assets
as from time to time are required to be deposited in the related Account, as
described below under "TRUST FUND ASSETS -- BOND AND DISTRIBUTION ACCOUNTS";
(iii) property which secured a Mortgage Loan and which is acquired on behalf of
the Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, Trust Fund Assets may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a surety bond,
guaranties or similar instruments.
Each Series of Securities will be issued in one or more Classes. Each Class
of Bonds of a Series will be secured by, and each Class of Certificates of a
Series will evidence beneficial ownership of, a specified percentage (which may
be 0%) or portion of future interest payments and a specified percentage (which
may be 0%) or portion of future principal payments on, the related Trust Fund
Assets. A Series of Securities may include one or more Classes that are senior
in right to payment to one or more other Classes of Securities of such Series.
Certain Series or Classes of Securities may be covered by
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insurance policies, surety bonds or other forms of credit enhancement, in each
case as described under "Credit Enhancement" herein and in the related
Prospectus Supplement. One or more Classes of Securities of a Series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more Classes of a Series of Securities may be
made prior to one or more other Classes, after the occurrence of specified
events, in accordance with a schedule or formula or on the basis of collections
from designated portions of the related Trust Fund Assets, in each case as
specified in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among Classes or over time as specified in the related
Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the applicable
Trustee on each Distribution Date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for
Securityholders (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the applicable
Trustee or other person specified in the notice to Securityholders of such final
distribution.
The Securities will be transferable and exchangeable at the Corporate Trust
Office of the applicable Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a Class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Mortgage Loans or a Class of Securities entitled to receive payments of interest
and principal on the Mortgage Loans only after payments to other Classes or
after the occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning of
ERISA and the Code. See "ERISA MATTERS." Unless otherwise specified in the
related Prospectus Supplement, the transfer of Securities of such a Class will
not be registered unless the transferee (i) represents that it is not, and is
not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the applicable Trustee and the
Depositor that the purchase of Securities of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Bond Trustee, the Certificate Trustee, the Master Servicer or
the Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
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DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "CREDIT ENHANCEMENT." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the applicable Trustee out of, and only to the extent of, funds in the
related Distribution Account, including any funds transferred from the Bond
Account and any Reserve Account (a "Reserve Account"). As between Securities of
different classes and as between distributions of principal (and, if applicable,
between distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution Date
will be applied as specified in the related Prospectus Supplement. The
Prospectus Supplement will also describe the method for allocating distributions
among Securities of a particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the applicable Agreement. "Available Funds" for each Distribution
Date will generally equal the amount on deposit in the related Bond Account on
such Distribution Date (net of related fees and expenses payable by the related
Issuer) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
Class of Securities (the "Class Security Balance") entitled to interest from the
date, at the applicable interest rate (which may be a fixed rate or rate
adjustable as specified in such Prospectus Supplement), and for the periods
specified in such Prospectus Supplement. To the extent funds are available
therefor, interest accrued during each such specified period on each class of
Securities entitled to interest (other than a class of Securities that provides
for interest that accrues, but is not currently payable, referred to hereafter
as "Deferred Interest Securities") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate Class
Security Balance of the Securities of such class has been distributed in full
or, in the case of Securities entitled only to distributions allocable to
interest, until the aggregate notional amount of such Securities is reduced to
zero or for the period of time designated in the related Prospectus Supplement.
Except in the case of the Deferred Interest Securities, the original Class
Security Balance of each Security will equal the aggregate distributions
allocable to principal to which such Security is entitled. Distributions
allocable to interest on each Security that is not entitled to distributions
allocable to principal will be calculated based on the notional amount of such
Security. The notional amount of a Security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the
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event interest accrues over a period ending two or more days prior to a
Distribution Date, the effective yield to Securityholders will be reduced from
the yield that would otherwise be obtainable if interest payable on the Security
were to accrue through the day immediately preceding such Distribution Date, and
the effective yield (at par) to Securityholders will be less than the indicated
coupon rate.
With respect to any Class of Deferred Interest Securities, if specified in
the related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Class Security
Balance of such Class of Securities on that Distribution Date. Distributions of
interest on any Class of Deferred Interest Securities will commence only after
the occurrence of the events specified in such Prospectus Supplement. Prior to
such time, the beneficial ownership interest in the Trust Fund Assets or the
principal balance, as applicable, of such Class of Deferred Interest Securities,
as reflected in the aggregate Class Security Balance of such Class of Deferred
Interest Securities, will increase on each Distribution Date by the amount of
interest that accrued on such Class of Deferred Interest Securities during the
preceding interest accrual period but that was not required to be distributed to
such Class on such Distribution Date. Any such Class of Deferred Interest
Securities will thereafter accrue interest on its outstanding Class Security
Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the Classes of Securities entitled to distributions of
principal. The aggregate Class Security Balance of any Class of Securities
entitled to distributions of principal generally will be in the aggregate
original Class Security Balance of such Class of Securities specified in such
Prospectus Supplement, reduced by all distributions reported to the holders of
such Securities as allocable to principal and, (i) in the case of Deferred
Interest Securities, as specified in the related Prospectus Supplement,
increased by all interest accrued but not then distributable on such Deferred
Interest Securities and (ii) in the case of adjustable rate Securities, subject
to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Prospectus Supplement. Any such allocation of Principal Prepayments to such
Class or Classes of Securities will have the effect of accelerating the
amortization of such Securities while increasing the interests of one or more
other classes of Securities in the related Trust Fund Assets. Increasing the
interests of the other Classes of Securities relative to that of certain
Securities is intended to preserve the availability of the subordination
provided by such other Securities. See "CREDIT ENHANCEMENT -- SUBORDINATION."
REDEMPTION OF BONDS
Special Redemption. If so specified in the related Prospectus Supplement,
the Bonds of each Series or Class may be subject to special redemption, in whole
or in part, under the circumstances and in the manner described below or in the
related Prospectus
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Supplement. If applicable, the Issuer will be required to redeem, on the day of
any month specified in the related Prospectus Supplement, outstanding Bonds of a
Series in the amount described below if, as a result of substantial payments of
principal on the Mortgage Loans or the mortgage loans underlying the Agency
Securities pledged as security for such Series of Bonds or low reinvestment
yields, or both, the Bond Trustee determines, based on the procedures and
assumptions specified in the Indenture, that, in the absence of such special
redemption, the amount of cash to be on deposit in the related Bond Account on
the next Distribution Date for such Series of Bonds would be insufficient to
make required payments on the Bonds of such Series on such Distribution Date.
The amount of Bonds required to be so redeemed will not exceed the distributions
on the Mortgage Collateral securing such Series of Bonds received during the Due
Period that would otherwise be required to be applied to the payment of
principal of such Series of Bonds on the following Distribution Date.
All payments of principal pursuant to any special redemption will be made
in the priority and manner specified in the related Prospectus Supplement. Bonds
of the same Class will be redeemed in the manner specified in the related
Prospectus Supplement. Notice of any such redemption must be mailed by the
Issuer or the Bond Trustee at least five days prior to the special redemption
date. The redemption price required to be paid for any Bond to be so redeemed
will be equal to 100% of the principal amount thereof together with accrued
interest.
Optional Redemption. If so provided in the related Prospectus Supplement,
the Bonds of any Class of a Series may be subject to redemption at the option of
the Issuer. Unless otherwise provided in the related Prospectus Supplement,
notice of any such redemption must be given by the Issuer to the Bond Trustee
not less than 30 days prior to the redemption date and must be mailed by the
Issuer or the Bond Trustee to affected Bondholders at least five days prior to
the redemption date. The Prospectus Supplement for each Series will specify the
circumstances, if any, under which the Bonds of such Series may be so redeemed,
the manner of effecting such redemption, the conditions to which such redemption
are subject and the redemption prices for each Class of Bonds to be redeemed
(which will be no lower than 100% of the principal amount of outstanding Bonds,
plus accrued interest).
The Master Servicer or other party specified in the related Prospectus
Supplement, may have the option to purchase the remaining Trust Fund Assets
supporting a Series of Bonds, subject to the principal balance of the related
Trust Fund Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Trust Fund
Assets at the Cut-off Date for the Series. Any such purchase of Trust Fund
Assets and property acquired in respect of Trust Fund Assets evidenced by a
Series of Securities by the Master Servicer or such other person will be at a
price specified in the related Prospectus Supplement (which will be no lower
than 100% of the principal amount of outstanding Bonds, plus accrued interest).
The exercise of such right may cause the Issuer to call for redemption of all or
a portion of the related Series of Bonds secured by such Trust Fund Assets.
EARLY TERMINATION
If the Series of Bonds included in the Trust Fund Assets for a Series of
Certificates are redeemed in full pursuant to a special redemption or optional
redemption, the related Series of Certificates will be retired earlier than
would otherwise be the case. In addition,
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the Depositor may have the option to purchase the remaining outstanding
Securities or the Trust Fund Assets supporting a Series of Certificates, subject
to the principal balance of such Trust Fund Assets being less than the
percentage specified in the related Prospectus Supplement of the Trust Fund
Assets at the Cut-off Date for the Series. The purchase price for such remaining
outstanding Securities or the Trust Fund Assets will be at least equal to 100%
of the aggregate principal balance of the outstanding Certificates, together
with accrued interest thereon. In any such event, the related Issuer of such
Series of Certificates may be terminated and Certificateholders will receive
final distributions as described in the related Prospectus Supplement. There
will be no continuing direct or indirect liability of the Issuer or the
Certificateholders as sellers of the Trust Fund Assets.
CALL PROTECTION AND GUARANTEES
The Issuer may, at its option, obtain for any Series of Securities one or
more guarantees from a company or companies acceptable to each applicable Rating
Agency, which guarantees may provide for (i) call protection (which may include
yield maintenance) for any Class of Securities of such Series or (ii) a
guarantee of a certain prepayment rate with respect to some or all of the
Mortgage Loans or mortgage loans underlying the Agency Securities included in
the Trust Fund Assets for such Series. Any call protection or guarantees may
affect the weighted average life of the Securities of such Series.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
All of the Mortgage Loans supporting a Series of Securities will consist of
mortgage loans which are neither insured nor guaranteed by any governmental
agency ("Conventional Loans"). See "TRUST FUND ASSETS -- THE MORTGAGE LOANS"
herein. The mortgage loans underlying FHLMC Certificates and FNMA Certificates
supporting a Series of Securities will consist of either Conventional Loans, FHA
Loans (as defined herein) or VA Loans (as defined herein), or any combination
thereof. The mortgage loans underlying the GNMA Certificates supporting a Series
of Securities will consist of FHA Loans or VA Loans. Each Mortgage Loan and each
Agency Security will provide by its terms for monthly payments of principal and
interest in the amounts described in "TRUST FUND ASSETS -- THE MORTGAGE LOANS,"
and "-- AGENCY SECURITIES."
Since the aggregate amount of the principal payment required to be made on
a Series of Securities on a Distribution Date will depend on the amount of the
principal payments (including for this purpose prepayments resulting from
refinancing or liquidations due to defaults, casualties, condemnations and
repurchases by the Issuer or AmREIT or other Seller or purchases by the Master
Servicer or the Company) received on the related Mortgage Loans or Agency
Securities, as the case may be, in the related Due Period, the prepayment
experience on the underlying mortgage loans (with respect to a Series of
Securities supported by Agency Securities) or on the Mortgage Loans (with
respect to a Series of Securities supported by Mortgage Loans) will affect (i)
the weighted average life of each Class of Securities and (ii) the extent to
which such Class is paid prior to its Stated Maturity. The prepayment experience
on the Mortgage Loans which support a Series of Securities may be affected by
recoveries on foreclosures or other liquidations of Mortgage Loans and by losses
from defaults and delinquencies on Mortgage Loans. See "SERVICING OF THE
MORTGAGE LOANS" herein. The weighted average life of each outstanding Class of
Securities also may be affected by the actual reinvestment
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income earned on the payments on the Mortgage Collateral, if applicable, if a
portion of the Spread is paid as a principal payment on such Securities and by
the exercise by the Issuer of its right to substitute other Mortgage Collateral
for the Mortgage Collateral originally supporting such Securities. Although any
substitute Mortgage Collateral will have payment terms anticipated to result in
a cash flow substantially similar to, but in no event less than, the anticipated
cash flow of the Mortgage Collateral it replaces, such substitutions may,
individually or in the aggregate, affect the weighted average life of such
Bonds. See "TRUST FUND ASSETS -- SUBSTITUTION OF MORTGAGE COLLATERAL" herein.
Further, the weighted average life of each Class of a Series of Securities
supported by FNMA Certificates may be affected by the exercise by FNMA of its
right to repurchase the mortgage loans backing such FNMA Certificates, as
described under "TRUST FUND ASSETS -- AGENCY SECURITIES" herein. The Stated
Maturity for each Class of Securities is the date determined by the Company to
fall a specified period after the date on which the principal thereof will be
fully paid, assuming (i) timely receipt of scheduled payments (with no
prepayments) on the Mortgage Collateral, (ii) if applicable, such scheduled
payments are reinvested at the Assumed Reinvestment Rate for such Series, (iii)
no Mortgage Collateral is substituted by the Issuer or the Seller in place of
the Mortgage Collateral initially included in the Trust Fund Assets for such
Securities and (iv) if applicable, no portion of the Spread is applied to the
payment of the Securities, unless the related Prospectus Supplement provides
otherwise, in which event such Stated Maturities will be based on the
assumptions specified in such Prospectus Supplement. If so provided in the
related Prospectus Supplement, holders of one or more Classes of Securities of a
Series may have the right, at their option, to receive full payment in respect
of such Securities prior to Stated Maturity, in each case to the extent and
subject to the conditions specified in such Prospectus Supplement.
The rate of principal prepayments on pools of mortgage loans is influenced
by a variety of economic, geographic, social and other factors including,
without limitation, homeowner mobility, economic conditions, the presence and
enforceability of "due-on-sale" clauses, mortgage market interest rates and the
availability of mortgage funds, and no assurance can be given as to the actual
prepayment experience of the Mortgage Collateral. In general, however, if
interest rates vary significantly from those prevailing when the Mortgage Loans
or the mortgage loans underlying the Agency Securities included in the Trust
Fund Assets for a Series of Securities were originated, such Mortgage Loans and
mortgage loans are likely to be subject to higher or lower principal prepayments
than if interest rates remain at or near those prevailing when such Mortgage
Loans and mortgage loans were originated. It should be noted that certain Agency
Securities supporting a Series of Securities may be backed by mortgage loans
with different interest rates, and, similarly, that not all of the Mortgage
Loans supporting a Series of Securities are likely to bear the same interest
rate. Accordingly, the prepayment experience of these Agency Securities and
Mortgage Loans will to some extent be a function of the mix of interest rates of
the underlying mortgage loans and of the Mortgage Loans. Furthermore, the stated
certificate rate on certain Certificates may be less than the weighted average
interest rate of the underlying mortgage loans. See "TRUST FUND ASSETS" herein.
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CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories.
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
PRINCIPAL TYPES
Accretion Directed........................ A Class that receives principal payments
from the accreted interest from specified
Classes of Deferred Interest Securities. For
example, if the aggregate amount of interest
that accrues on a Class of Deferred Interest
Securities in a given period is $100, the
cash saved by not paying such interest in
the current period is used to pay principal
of $100 on an Accretion Directed Class. The
amount of accrued and unpaid interest on the
Class of Deferred Interest Securities is
added to the principal balance of such
Class. An Accretion Directed Class also may
receive principal payments from principal
paid on the underlying Trust Fund Assets for
the related Series.
Component Securities...................... A Class consisting of "Components." The
Components of a Class of Component
Securities may have different principal
and/or interest payment characteristics but
together constitute a single Class. Each
Component of a Class of Component Securities
may be identified as falling into one or
more of the categories of this chart.
Notional Amount Securities................ A Class having little or no principal
balance and bearing interest on the related
notional amount. The notional amount is used
for purposes of the determination of
interest distributions.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Planned Principal Class (also sometimes A Class that is designated to receive
referred to as "PACs").................. principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates for
the underlying Trust Fund Assets. These two
rates are the endpoints for the "structuring
range' for the Planned Principal Class. For
example, if a structuring range for the PAC
is set at constant prepayment rates
generally between 15% and 25%, that Class
generally will receive a predetermined
principal amount (as set forth on the
schedule included in the related Prospectus
Supplement) on each distribution date with
respect to which the constant prepayment
rate on the underlying Trust Fund Assets
falls between 15% and 25%. To the extent the
prepayment experience of the Trust Fund
Assets is less than 15%, an amount of
principal less than the scheduled amount may
be paid, and to the extent the prepayment
experience is higher than 25%, additional
amounts of principal may be distributed to
the PAC holders. The Planned Principal
Classes in any Series of Securities may be
subdivided into different categories (e.g.,
Primary Planned Principal Classes, Secondary
Planned Principal Classes and so forth)
having different effective structuring
ranges and different principal payment
priorities. The structuring range for the
Secondary Planned Principal Class of a
Series of Securities will be narrower than
that for the Primary Planned Principal Class
of such Series.
Sequential Pay............................ Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules
and that under all circumstances receive
payments of principal continuously from the
first Distribution Date on which they
receive principal until they are retired. A
single Class that receives principal
payments before or after all other Classes
in the same Series of Securities may be
identified as a Sequential Pay Class.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Support Class (also sometimes referred to A Class that receives principal payments on
as "Companion Classes")................. any Distribution Date only if scheduled
payments have been made on specified Planned
Principal Classes and/or Targeted Principal
Classes. For example, if a Series of
Securities has a PAC with a structuring
range generally between 15% and 25% constant
prepayment rate, for any given period if the
underlying Trust Fund Assets generally
prepay at a 15% constant prepayment rate
there will be just enough principal
collected to satisfy the scheduled principal
payable to the PAC holders. In that case,
the Support Class for such Series would
receive little or no principal for that
period. On the other hand, if the underlying
Trust Fund Assets generally experience a 25%
constant prepayment rate for a given period,
more principal will be collected than is
needed to satisfy the PAC scheduled payment
and such principal will be paid to the
Support Class holders.
Targeted Principal Class (also sometimes A Class that is designated to receive
referred to as "TACs").................. principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment rate
for the underlying Trust Fund Assets. For
example, a principal schedule could be
created based on the underlying Trust Fund
Assets generally prepaying at a 20% constant
prepayment rate for the life of the assets.
The TAC holders would then generally receive
the scheduled principal amount if the actual
prepayment rate for a given period was 20%.
To the extent the actual prepayment rate is
less than 20%, the TAC holders may receive
less than the scheduled amount, and to the
extent the actual prepayment rate is
greater, they may receive more than the
scheduled amount.
INTEREST TYPES
Deferred Interest......................... A Class that accretes the amount of accrued
interest otherwise distributable on such
Class, which amount will be added as
principal to the principal balance of such
Class on each applicable Distribution Date.
Such accretion may continue until some
specified event has occurred or until such
Deferred Interest Class is retired.
Fixed Rate................................ A Class with an interest rate that is fixed
throughout the life of the Class.
Floating Rate............................. A Class with an interest rate that resets
periodically based upon a designated index
and that varies directly with changes in
such index.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Inverse Floating Rate..................... A Class with an interest rate that resets
periodically based upon a designated index
and that varies inversely with changes in
such index.
Interest Only............................. A Class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets and little or no
principal. Interest Only Classes have a
nominal principal balance and/or a notional
amount. A nominal principal balance
represents actual principal that will be
paid on the Class. It is referred to as
nominal since it is extremely small compared
to other Classes. A notional amount is the
amount used as a reference to calculate the
amount of interest due on an Interest Only
Class.
Variable Rate............................. A Class with an interest rate that resets
periodically and is calculated by reference
to the rate or rates of interest applicable
to specified assets or instruments (e.g.,
the Mortgage Rates borne by the underlying
Mortgage Loans).
Principal Only............................ A Class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Partial Deferred Interest................. A Class that accretes a portion of the
amount of accrued interest thereon, which
amount will be added to the principal
balance of such Class on each applicable
Distribution Date, with the remainder of
such accrued interest to be distributed
currently as interest on such Class. Such
accretion may continue until a specified
event has occurred or until such Partial
Deferred Interest Class is retired.
</TABLE>
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date the
Master Servicer or the applicable Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent applicable
to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, any applicable prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Account, if any, that is included in the amounts distributed to the
Senior Securityholders;
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(v) the outstanding principal balance or notional amount of each Class
of the related Series after giving effect to the distribution of principal
on such Distribution Date;
(vi) the percentage of principal payments on the Mortgage Loans
(excluding prepayment), if any, which each such Class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Mortgage Loans,
if any, which each such Class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Bond Account by the Master Servicer, and the amount of
additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30 days,
(2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to
90 days and (4) 91 or more days, as of the close of business on the last
day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) the applicable interest rate, if adjusted from the date of the
last statement, of any such Class expected to be applicable to the next
distribution to such Class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the applicable interest rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, Pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant Class specified in the related
Prospectus Supplement. The report to Securityholders for any Series of
Securities may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the applicable Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
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BOOK-ENTRY SECURITIES
As described in the related Prospectus Supplement, if not issued in fully
registered form, one or more Classes of Securities of any Series (each, a Class
of "Book-Entry Securities") will be registered as book-entry certificates.
Persons acquiring beneficial ownership interests in the Securities ("Security
Owners") will hold their Securities through the Depository Trust Company ("DTC")
in the United States, or CEDEL or Euroclear (in Europe) if they are participants
of such systems, or indirectly through organizations which are participants in
such systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities and
will initially be registered in the name of Cede & Co., the nominee of DTC.
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank, N.A., will act as depositary for CEDEL and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Except as
described below, no person acquiring a Book-Entry Security (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Security (a "Definitive Security"). Unless and until Definitive Securities are
issued, it is anticipated that the only "Securityholders" of the Securities will
be Cede & Co., as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the applicable Trustee through DTC and DTC
participants. While the Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Securities and is required to receive and transmit distributions
of principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to Securities
are similarly required to make book-entry transfers and receive and transmit
such distributions on behalf of their respective Security Owners. Accordingly,
although Security Owners will not possess certificates, the Rules provide a
mechanism by which Security Owners will receive distributions and will be able
to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities,
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which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of Bonds
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
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Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Security Trustee to Cede & Co., as nominee of DTC.
Distributions with respect to Securities held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "FEDERAL INCOME TAX CONSEQUENCES -- WITHHOLDING WITH RESPECT TO CERTAIN
FOREIGN INVESTORS" and "-- BACKUP WITHHOLDING" herein. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Securities to persons or entities that do not participate in
the depository system may be limited due to the lack of physical certificates
for such Book-Entry Securities. In addition, issuance of the Book-Entry
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary market since certain potential investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
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Monthly and annual reports on the Issuer will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Securities or such beneficial owners are credited.
DTC has advised the Bond Trustee and Certificate Trustee that, unless and
until Definitive Securities are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the applicable Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Bonds are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Securities. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Securityholder under the
applicable Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions with respect to some Securities, at the direction of
the related Participants, which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all
beneficial owners of the occurrence of such event and the availability through
DTC of the Definitive Securities. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Securities and
instructions for re-registration, the applicable Trustee will issue Definitive
Securities, and thereafter the applicable Trustee will recognize the holders of
such Definitive Securities as Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor, the Issuer, the Bond Trustee or
the Certificate 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 Securities held by Cede & Co., as nominee of DTC, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Securities or with respect to the related Mortgage Collateral for the
purpose of (i) maintaining timely payments or providing additional protection
against losses on the Collateral securing such Series of Securities, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on the
payments made in respect of such Collateral or principal payment rate on such
Collateral. Credit enhancement may be in the form of the subordination of one or
more Classes of such Securities, the establishment of one or more Reserve Funds,
use of a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy,
Bankruptcy Bond, cash account, insurance policy, surety bond,
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guaranteed investment contract, cross-collateralization, reinvestment income,
guaranty, letter of credit or derivative arrangement as described herein and in
the related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, no credit enhancement
will provide protection against all risks of loss or guarantee repayment of the
entire principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, Securityholders will bear their allocable share of
any deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, a Series of
Securities may consist of one or more Classes of Senior Securities and one or
more Classes of Subordinated Securities. The rights of the holders of the
Subordinated Bonds of a Series (the "Subordinated Securityholders") to receive
payments of principal and/or interest (or any combination thereof) will be
subordinated to such rights of the holders of the Senior Securities of the same
Series (the "Senior Securityholders") to the extent described in the related
Prospectus Supplement. This subordination is intended to enhance the likelihood
of regular receipt by the Senior Securityholders of the full amount of their
scheduled payments of principal and/or interest. The protection afforded to the
Senior Securityholders of a Series by means of the subordination feature will be
accomplished by (i) the preferential right of such holders to receive, prior to
any payment being made on the related Subordinated Securities, the amounts of
principal and/or interest due them on each Distribution Date out of the funds
available for payment on such date in the related Distribution Account and, to
the extent described in the related Prospectus Supplement, by the right of such
holders to receive future payments that would otherwise have been payable to the
Subordinated Securityholders; or (ii) as otherwise described in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types of losses not covered
by other forms of credit support, such as hazard losses not covered by standard
hazard insurance policies or losses due to the bankruptcy or fraud of the
borrower. The related Prospectus Supplement will set forth information
concerning, among other things, the amount of subordination of a Class or
Classes of Subordinated Securities in a Series, the circumstances in which such
subordination will be applicable and the manner, if any, in which the amount of
subordination will decrease over time.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Collateral and losses with respect to the
Mortgage Collateral will be borne first by the various Classes of Subordinated
Securities and thereafter by the various Classes of Senior Securities, in each
case under the circumstances and subject to the limitations specified in such
Prospectus Supplement. The aggregate payments in respect of delinquent payments
on the Mortgage Collateral over the lives of the Securities or at any time, the
aggregate losses in respect of Mortgage Collateral which must be borne by the
Subordinated Securities by virtue of subordination and the amount of payments
otherwise distributable to the Subordinated Securityholders that will be
distributable to Senior Securityholders on any Distribution Date may be limited
as specified in the related Prospectus Supplement. If aggregate payments in
respect of delinquent payments on the Mortgage Collateral or aggregate losses in
respect of such Mortgage Collateral were to exceed the amount specified in the
related Prospectus Supplement, Senior Securityholders would experience losses on
the Securities.
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If so specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain payments to other Classes of Senior and
Subordinated Securities, respectively.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments may be allocated among such Classes (i) in
accordance with a schedule or formula, (ii) in relation to the occurrence of
events or (iii) otherwise, in each case as specified in the related Prospectus
Supplement. As between Classes of Subordinated Securities, payments to Senior
Securityholders on account of delinquencies or losses and payments to the
Reserve Fund will be allocated as specified in the related Prospectus
Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Issuer will
deposit in one or more accounts to be established with the applicable Trustee
(each, a "Reserve Fund") cash, certificates of deposit, letters of credit,
surety bonds, guaranteed investment contracts or any combination thereof, which
may be used by the applicable Trustee to make payments on such Series of
Securities to the extent funds are not otherwise available. Reserve Funds will
be established if they are deemed by the Issuer to be required to assure timely
payment of principal of, and interest on, its Series of Securities or are
otherwise required as a condition to the rating of such Securities by any Rating
Agency, or if the Issuer chooses to reduce the likelihood of a special
redemption of such Securities. The applicable Trustee will invest any cash in
any Reserve Fund in Permitted Investments maturing no later than the dates
specified in the related Prospectus Supplement. If a letter of credit is
deposited with the applicable Trustee, such letter of credit will be
irrevocable, will name such Trustee, in its capacity as trustee for the
Securityholders, as the sole beneficiary and will be issued by a bank acceptable
to each Rating Agency. If a surety bond is deposited with the applicable
Trustee, such surety bond will represent an obligation of an insurance company
or other corporation whose credit standing is acceptable to each Rating Agency
and will provide that such Trustee may exercise all of the rights of the Issuer
under such surety bond without the necessity of the taking of any action by the
Issuer. Following each Distribution Date for such Series of Securities, amounts
may be withdrawn from the related Reserve Funds and remitted to the Issuer free
from the terms of the applicable Agreement under the conditions and to the
extent specified in the related Prospectus Supplement. Additional information
concerning any Reserve Fund securing a Series of Securities, including without
limitation the manner in which such Reserve Fund shall be funded and the
conditions under which the amounts on deposit therein will be used to make
payments to holders of Securities of a particular Class of the related Series
will be set forth in the related Prospectus Supplement.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a separate mortgage
pool insurance policy or policies ("Mortgage Pool Insurance Policy") may be
obtained for a Series of Securities supported by Mortgage Loans and issued by
the insurer (the "Pool Insurer") named in such Prospectus Supplement. Each
Mortgage Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on the related Mortgage Loans in an
amount equal to a percentage specified in such Prospectus Supplement of the
aggregate principal balance of such Mortgage Loans on the
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Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully described below,
the Master Servicer will present claims thereunder to the Pool Insurer on behalf
of itself, the applicable Trustee and the Securityholders. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss, since claims
thereunder may be made only respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Pool
Insurance Policies will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance of the related
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of such purchase and certain expenses incurred by the Master Servicer on behalf
of the applicable Trustee and Securityholders or (b) to pay the amount by which
the sum of the principal balance of the defaulted Mortgage Loan plus accrued and
unpaid interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Mortgaged Property is damaged, and proceeds, if any, from the related standard
hazard insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Mortgage Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that (i) such restoration will increase the proceeds to
Securityholders on liquidation of the Mortgage Loan after reimbursement of the
Master Servicer for its expenses and (ii) such expenses will be recoverable by
it through proceeds of the sale of the Mortgaged Property or proceeds of the
related Mortgage Pool Insurance Policy or any related Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to repurchase
the defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in
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respect of a defaulted Mortgage Loan occurring when the servicer of such
Mortgage Loan, at the time of default or thereafter, was not approved by the
applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Securities by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Securityholders.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy may be obtained for a Series of Securities supported by
Mortgage Loans and will be issued by the insurer (the "Special Hazard Insurer")
named in such Prospectus Supplement. Each Special Hazard Insurance Policy will,
subject to limitations described below, protect holders of the related
Securities from (i) loss by reason of damage to Mortgaged Properties caused by
certain hazards (including earthquakes and, to a limited extent, tidal waves and
related water damage or as otherwise specified in the related Prospectus
Supplement) not insured against under the standard form of hazard insurance
policy for the respective states in which the Mortgaged Properties are located
or under a flood insurance policy (unless the Mortgaged Property is located in a
federally designated flood area) and (ii) loss caused by reason of the
application of the coinsurance clause contained in standard hazard insurance
policies. No Special Hazard Insurance Policy will cover losses occasioned by
fraud or conversion by either Trustee or the Master Servicer, war, insurrection,
civil war, certain governmental action, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear or chemical reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), nuclear or chemical contamination and certain other risks. The amount of
coverage under any Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement. Each Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the property securing the Mortgage Loan have been kept in force and other
protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or flood insurance
policy, if any, maintained by the mortgagor or the Master Servicer, the Special
Hazard Insurer will pay the lesser of (i) the cost of repair or replacement of
such property or (ii) upon transfer of the property to the Special Hazard
Insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain expenses incurred
by the Master Servicer with respect to such property. If the unpaid principal
balance of a Mortgage Loan plus accrued interest and certain expenses is paid by
the Special Hazard Insurer, the
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amount of further coverage under the related Special Hazard Insurance Policy
will be reduced by such amount less any net proceeds from the sale of the
property. Any amount paid as the cost of repair of such property will further
reduce coverage by such amount. So long as a Mortgage Pool Insurance Policy
remains in effect, the payment by the Special Hazard Insurer of the cost of
repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Securityholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Special Hazard Insurance Policy. The amount
of any Special Hazard Insurance Policy or of the deposit to the special trust
account in lieu thereof relating to such Securities may be reduced so long as
any such reduction will not result in a downgrading of the rating of such
Securities by any applicable Rating Agency.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (the "Bankruptcy Bond") may be obtained for a Series of Securities
supported by Mortgage Loans to cover losses resulting from proceedings under the
federal Bankruptcy Code with respect to a Mortgage Loan will be issued by an
insurer named in such Prospectus Supplement. Each Bankruptcy Bond will cover, to
the extent specified in the related Prospectus Supplement, certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. Coverage under a
Bankruptcy Bond may be cancelled or reduced by the Master Servicer if such
cancellation or reduction would not adversely affect the then current rating or
ratings of the related Securities. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS -- ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS" herein.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account in lieu thereof
relating to such Securities may be reduced so long as any such reduction will
not result in a downgrading of the then current rating of such Securities by any
such Rating Agency.
SECURITY INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If specified in the related Prospectus Supplement, deficiencies in amounts
otherwise payable on Securities of a Series or certain Classes thereof will be
covered by insurance policies and/or surety bonds provided by one or more
insurance companies or sureties (each, a "Security Insurance Policy"). Such
instruments may cover, with respect to one or more Classes of Securities of the
related Series, timely payments of interest and/or full
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payments of principal on the basis of a schedule of principal payments set forth
in or determined in the manner specified in the related Prospectus Supplement.
In addition, if specified in the related Prospectus Supplement, a Series of
Securities may also be covered by insurance or guaranties for the purpose of (i)
maintaining timely payments or providing additional protection against losses on
the Mortgage Collateral supporting such Series, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such Mortgage Collateral or principal payment rate on such
Mortgage Collateral. Such arrangements may include agreements under which
Securityholders are entitled to receive amounts deposited in various accounts
held by the applicable Trustee upon the terms specified in such Prospectus
Supplement. A copy of any such instrument for a Series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed within 15
days of issuance of the Securities of the related Series.
LETTER OF CREDIT
If so specified in the related Prospectus Supplement, credit enhancement
may be provided by a letter of credit. The letter of credit, if any, with
respect to a Series of Securities will be issued by the bank or financial
institution specified in the related Prospectus Supplement (the "L/C Bank").
Under the letter of credit, the L/C Bank will be obligated to honor drawings
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, equal to the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Collateral
supporting the related Series of Securities on the related Cut-off Date or of
one or more Classes of Securities (the "L/C Percentage"). If so specified in the
related Prospectus Supplement, the letter of credit may permit drawings in the
event of losses not covered by insurance policies or other credit support, such
as losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the federal Bankruptcy Code, or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a Mortgage Loan. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder. The obligations of the L/C Bank under the letter of credit for each
Series of Securities will expire at the date specified in the related Prospectus
Supplement. A copy of the letter of credit for a Series, if any, will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Securities of the related Series.
OVER-COLLATERALIZATION
If so specified in the related Prospectus Supplement, credit enhancement
may consist of over-collateralization whereby the aggregate principal balance of
the related Mortgage Collateral exceeds the aggregate principal balance of the
Securities of the related Series. Such over-collateralization may exist on the
related Closing Date or develop thereafter as a result of the application of a
portion of the interest payments on each Mortgage Loan or Agency Security, as
the case may be, as an additional payment in respect of principal to reduce the
principal balance of a certain Class or Classes of Securities and, thus,
accelerate the rate of payment of principal on such Class or Classes of
Securities.
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CROSS-COLLATERALIZATION
If so specified in the related Prospectus Supplement, separate groups of
Mortgage Collateral may support separate Classes of the related Series of
Securities. In such case, credit support may be provided by a
cross-collateralization feature which requires that payments be made with
respect to Securities supported by one or more groups of Mortgage Collateral
prior to distributions to Subordinated Securities secured by one or more other
groups of Mortgage Collateral. Cross-collateralization may be provided by (i)
the allocation of certain excess amounts generated by one or more groups of
Mortgage Collateral to one or more other groups of Mortgage Collateral or (ii)
the allocation of losses with respect to one or more groups of Mortgage
Collateral, to one or more other groups of Mortgage Collateral. Such excess
amounts will be applied and/or such losses will be allocated to the Class or
Classes of Subordinated Securities of the related Series then outstanding having
the lowest rating assigned by any applicable Rating Agency or the lowest payment
priority, in each case to the extent and in the manner more specifically
described in the related Prospectus Supplement. The Prospectus Supplement for a
Series which includes a cross-collateralization feature will describe the manner
and conditions for applying such cross-collateralization feature.
EXCESS SPREAD
"Excess Spread" refers to the positive spread that may exist to the extent
specified in the related Prospectus Supplement between the weighted average of
the interest rates (less servicing or other applicable fees) on the Mortgage
Collateral and the weighted average of the Security Interest Rates. Whether at
any time any such positive spread exists will depend on a variety of factors,
including, with respect to a Series of Securities with respect to which both the
Securities and the Mortgage Collateral bear interest at adjustable rates, the
relationship of the movements in the indices applicable to the Mortgage
Collateral and those applicable to the Securities, over which no prediction can
be made or assurance given.
If so specified in the related Prospectus Supplement, the coverage provided
by one or more of the forms of credit enhancement described in this Prospectus
may apply concurrently to two or more separate Series of Securities. If
applicable, the related Prospectus Supplement will identify the Series of
Securities to which such credit enhancement relates and the manner of
determining the amount of coverage provided to such Series of Securities thereby
and of the application of such coverage to the identified Series of Securities.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If so specified in the related Prospectus Supplement, an Issuer may enter
into an agreement with an institution pursuant to which such institution will
provide such funds as may be necessary to enable such Issuer to make principal
payments on the Securities of the related Series at a minimum rate set forth in
such Prospectus Supplement.
DERIVATIVE ARRANGEMENTS
If so specified in the related Prospectus Supplement, credit enhancement
may be provided with respect to one or more Classes of Securities of a Series or
with respect to the Mortgage Collateral securing a Series of Securities in the
form of one or more
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derivative arrangements. A derivative arrangement is a contract or agreement,
the price of which is directly dependent upon (i.e., "derived from") the value
of one or more underlying assets, including securities, equity indices, debt
instruments, commodities, other derivative instruments, or any agreed upon
pricing index or arrangement (e.g., the movement over time of the Consumer Price
Index or interest rates). Derivatives involve rights or obligations based on the
underlying asset, but do not necessarily result in a transfer of the underlying
asset. Derivative arrangements include swap agreements, interest rate swaps,
interest rate caps, interest rate floors, interest rate collars and currency
swap agreements. A "swap agreement" is a contractual agreement providing for a
series of exchanges of principal and/or interest in the same or different
currencies. At a more general level, the term "swap agreement" includes the
exchange of fixed-for-floating payments on a given quantity of a specified
commodity, security or other asset. An "interest rate swap" is a swap agreement
between two parties to engage in a series of exchanges of interest payments on
the same notional principal amount denominated in the same currency based,
respectively, on variable and fixed rates of interest. An "interest rate cap" is
an agreement providing for multi-period cash settled options on interest rates.
The cap purchaser receives a cash payment whenever the reference rate exceeds
the ceiling rate on a fixing date. An "interest rate floor" is an agreement
providing for a multi-period interest rate option that provides a cash payment
to the holder of the option whenever the reference rate is below the floor on a
fixing date. An "interest rate collar" is an agreement providing for a
combination of an interest rate cap and an interest rate floor such that a cap
is purchased and a floor is sold or vice versa. The effect of an interest rate
collar is to place upper and lower bounds on the cost of funds. A "currency swap
agreement" is a swap agreement between two parties for the exchange of a future
series of interest and principal payments in which one party pays in one
currency and the other party pays in a different currency. The exchange rate is
fixed over the life of the currency swap agreement.
The derivative arrangements described above will support the payments on
the Securities to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no credit enhancement will provide protection against all risks of
loss or guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of any deficiencies.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or through affiliates, from Sellers (including AmREIT). The Mortgage
Loans so acquired by the Depositor will have been originated substantially in
accordance with the underwriting criteria specified below under "Underwriting
Standards." All Mortgage Loans will have been originated by entities that
satisfy the criteria for originators of loans that are eligible for inclusion in
"mortgage-related securities."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders
generally during the period of
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origination. For Mortgage Loans acquired from AmREIT that have been originated
by Correspondents under the Freedom Program (as described above under "TRUST
FUND ASSETS -- THE MORTGAGE LOANS"), the Prospectus Supplement will set forth
the matrix of specific underwriting standards applied to such Mortgage Loans,
based on the applicable combination of underwriting characteristics described
below. For Mortgage Loans acquired from AmREIT that it has purchased as
described under "TRUST FUND ASSETS -- THE MORTGAGE LOANS -- OTHER LOAN
PROGRAMS," the related Prospectus Supplement will include detailed information
with respect to the underwriting standards employed by the applicable
originators of the Mortgage Loans, to the extent such information is reasonably
available to the Depositor. Such information may include, as applicable,
underwriting guidelines with respect to required borrower income, debt to income
ratios, credit histories, loan-to-value ratios and documentation and
verification requirements.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial conditions, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
The Company may elect to have the borrower's credit report reviewed, and a
credit score produced, by an independent credit-scoring firm, such as Fair,
Issac and Company ("FICO"). The Company has not engaged FICO or discussed any
such engagement with FICO. Credit scores estimate, on a relative basis, which
borrowers are most likely to default on Mortgage Loans. Lower scores imply
higher default risks relative to higher scores. FICO scores are empirically
derived from historical credit bureau data and represent a numerical weighing of
a borrower's credit characteristics over a two-year period. A FICO score is
generated through the statistical analysis of a number of credit-related
characteristics or variables. Common characteristics include the following: the
number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indebtedness, types of credit and
length of credit history. Attributes are the specific values of each
characteristic. A scoreboard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by summing together the attribute weights for that applicant.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of
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replacing the home. The value of the property being financed, as indicated by
the appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance. The maximum Loan-to-Value
Ratio is generally not expected to exceed 95%. Mortgage Loans with Loan-to-Value
Ratios in excess of 80% at origination may be covered by private mortgage
insurance insuring the balance thereof down to a 75% Loan-to-Value Ratio. The
method of calculating the "Loan-to-Value Ratio" of a Mortgage Loan will be
described in the Prospectus Supplement for a Series of Securities supported by
Mortgage Loans.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the Mortgaged Property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The maximum housing expense to income ratio referred to in (i)
is generally not expected to exceed 40% and the maximum debt to income ratio
described in (ii) is generally not expected to exceed 55%. The underwriting
standards applied by Sellers may be varied in appropriate cases where factors
such as low Loan-to-Value Ratios or other favorable credit issues exist.
The Depositor expects that a portion of the Mortgage Loans it purchases
will be "jumbo" loans, i.e., loans that exceed the maximum balance for purchase
by FNMA or FHLMC. Under current regulations, the maximum principal balance
allowed on loans eligible for purchase by FNMA or FHLMC ranges from $240,000
($360,000 for mortgage loans secured by mortgaged properties located in either
Alaska or Hawaii) for one-unit to $461,300 ($691,950 for mortgage loans secured
by mortgaged properties located in either Alaska or Hawaii) for four-unit
residential loans. The maximum loan amount is generally not expected to exceed
$1,500,000 in the case of any of the foregoing types of loans.
A lender may originate mortgage loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain underwriting documentation concerning income and employment verification
is waived.
In the case of a loan secured by a leasehold interest in a real property,
the title to which is held by a third party lessor, generally, the Seller will
be required to represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term of the mortgage loan.
Certain of the types of loans which may be included in the Mortgage
Collateral are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase. These types of loans may also be underwritten primarily upon
the basis of Loan-to-Value Ratios or other favorable credit factors rather than
on the borrower's credit standing or income ratios.
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QUALITY CONTROL
The Depositor's parent, AmREIT, has developed a quality control program to
monitor the quality of loan underwriting at the time of acquisition and on an
ongoing basis. All loans purchased by the Depositor will be subject to this
quality control program. A legal document review of each loan acquired will be
conducted to verify the accuracy and completeness of the information contained
in the mortgage notes, security instruments and other pertinent documents in the
file. A sample of loans to be acquired, selected by focusing on those loans with
higher risk characteristics, will normally be submitted to a third party
nationally recognized underwriting review firm for a compliance check of
underwriting and review of income, asset and appraisal information.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
mortgage loans sold by such Seller and included in the Mortgage Loans supporting
a Series of Securities. Except as otherwise provided in the related Prospectus
Supplement, such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) and any required hazard insurance policy and Primary
Mortgage Insurance Policy (as defined herein) were effective at the origination
of each mortgage loan other than Cooperative Loans, and that each policy (or
certificate of title as applicable) remained in effect on the date of purchase
of the mortgage loan from the Seller by or on behalf of the Company; (ii) that
the Seller had good title to each such mortgage loan and such mortgage loan was
subject to no offsets, defenses, counterclaims or rights of rescission except to
the extent that any buydown agreement described herein may forgive certain
indebtedness of the obligors on such Mortgage Loans (each, a "Mortgagor"); (iii)
that each mortgage loan constituted a valid first or junior lien, as the case
may be, on the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the Master
Servicing Agreement) and that the Mortgaged Property was free from damage and
was in good repair; (iv) that there were no delinquent tax or assessment liens
against the Mortgaged Property; (v) that no required payment on a mortgage loan
was 60 or more days delinquent at any time during the twelve months prior to the
date it is pledged to secure the related Series of Bonds; and (vi) that each
mortgage loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
If the Seller cannot cure a breach of any representation or warranty made
by it in respect of a Mortgage Loan that materially and adversely affects the
interests of the Securityholders in such Mortgage Loan within 90 days after
notice of such breach, then such Seller will be obligated to either (i)
substitute a similar mortgage loan for such Mortgage Loan under the conditions
specified in the related Prospectus Supplement or (ii) repurchase such Mortgage
Loan from the Issuer at a price (the "Purchase Price") equal to 100% of the
outstanding principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month in
which such Mortgage Loan is repurchased at the Mortgage Rate (less any
unreimbursed advances or amount payable as related master servicing compensation
if the Seller is the Master Servicer with respect to such Mortgage Loan). The
Master Servicer will be required under the applicable Master Servicing Agreement
and Indenture to enforce this obligation for the benefit of the Securityholders,
following the practices it would employ in
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its good faith business judgment were it the owner of such Mortgage Loan. These
substitution or repurchase obligations will constitute the sole remedies
available to Securityholders for a breach of representation by a Seller.
Each Series of Bonds will be issued pursuant to an indenture (the
"Indenture") between the related Bond Issuer and the entity named in the related
Prospectus Supplement as Bond Trustee with respect to such Series, and the
related Mortgage Loans will be serviced by the Master Servicer pursuant to a
Master Servicing Agreement. A form of Indenture and Master Servicing Agreement
has been filed as an exhibit to the Registration Statement on which this
Prospectus forms a part.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer of the Mortgage Loans, if any, securing a Series of
Securities will be responsible for servicing such Mortgage Loans in accordance
with the terms set forth in a master servicing agreement (the "Master Servicing
Agreement") among the Issuer, the Master Servicer and the Bond Trustee. The
Master Servicer with respect to a Series of Securities will be identified in the
related Prospectus Supplement. The Master Servicer may perform certain servicing
obligations directly pursuant to the Master Servicing Agreement through one or
more servicers (each, a "Servicer") pursuant to one or more mortgage servicing
agreements (each, a "Servicing Agreement"). Notwithstanding any such servicing
arrangements, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer will remain liable for its servicing duties and obligations
under the Master Servicing Agreement.
No Servicing Agreement will contain any terms inconsistent with the related
Master Servicing Agreement. For Mortgage Loans acquired from AmREIT, each
Servicing Agreement will typically be a contract solely between AmREIT and the
Servicer. AmREIT will assign all of its rights under each Servicing Agreement to
the Depositor under the related Mortgage Loan Purchase Agreement and such rights
will be assigned to the Bond Trustee pursuant to the Indenture. The Master
Servicing Agreement relating to a Series of Securities will provide that the
Master Servicer and, if for any reason such Master Servicer is no longer the
Master Servicer of the related Mortgage Loans, the Bond Trustee or any successor
Master Servicer must recognize the Servicer's rights and obligations under such
Servicing Agreement. As an independent contractor, each Servicer will perform
servicing functions for the Mortgage Loans including collection and remittance
of principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure.
The Master Servicer may permit Servicers to contract with subservicers to
perform some or all of the Servicer's servicing duties, but the Servicer will
not thereby be released from its obligations under the related Servicing
Agreement. The Master Servicer also may enter into servicing contracts directly
with an affiliate of a Servicer or permit a Servicer to transfer its servicing
rights and obligations to a third party. In such instances, the affiliate or
third party, as the case may be, will perform servicing functions comparable to
those normally performed by the Servicer as described above, and the Servicer
will not be obligated to perform such servicing functions. When used herein with
respect to servicing obligations, the term Servicer includes any such affiliate
or third party. The Master
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Servicer may perform certain supervisory functions with respect to servicing by
the Servicers directly or through an agent or independent contractor.
On or before the related Closing Date, the Master Servicer will establish
into which each Servicer will remit collections on the Mortgage Loans serviced
by it (net of its related servicing compensation, amounts retained to pay
certain insurance premiums and amounts retained by such Servicer as
reimbursement for certain advances it has made). For purposes of the Master
Servicing Agreement, the Master Servicer will be deemed to have received any
amounts with respect to the Mortgage Loans that are received by a Servicer
regardless of whether such amounts are remitted by the Servicer to the Master
Servicer. The Master Servicer will have the right under the Master Servicing
Agreement to remove the Servicer servicing any Mortgage Loans in the event such
Servicer defaults under its Servicing Agreement and will exercise that right if
the Master Servicer considers such removal to be in the best interest of the
Securityholders. In the event that the Master Servicer removes a Servicer, the
Master Servicer will continue to be responsible for servicing the related
Mortgage Loans.
A form of Master Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Master
Servicing Agreement with respect to a Series of Securities secured by Mortgage
Loans will be assigned to the Bond Trustee as security for such Series. The
following summaries describe certain provisions of the form of Master Servicing
Agreement. The summaries are qualified in their entirety by reference to the
form of Master Servicing Agreement. Where particular provisions or terms used in
the form of Master Servicing Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference as part of such
summaries.
PAYMENTS ON MORTGAGE LOANS
Pursuant to the Master Servicing Agreement with respect to a Series of
Securities, the Master Servicer will be required to establish and maintain the
Bond Account as a separate Eligible Account or Eligible Accounts into which it
will deposit or cause to be deposited on a daily basis, or such other basis as
may be specified in the related Prospectus Supplement, payments of principal and
interest (net of servicing compensation, amounts retained to pay certain
insurance premiums and amounts retained by the Master Servicer or any Servicer
as reimbursement for certain advances it has made) received with respect to the
related Mortgage Loans. Such amounts will include principal prepayments, certain
Insurance Proceeds and Liquidation Proceeds and amounts paid by the Servicer or
the Company in connection with any optional purchase by the Servicer or the
Company of any defaulted Mortgage Loans.
An "Eligible Account" is an account either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which, but only if Moody's is not an
applicable Rating Agency) are rated in the highest short-term rating category by
each applicable Rating Agency, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF to the limits established by
the FDIC, and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Bond Account or a perfected first priority security
interest against any
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collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Bond Account is maintained, (iv) a trust account or accounts maintained with the
trust department of a federal or a state chartered depository institution or
trust company, acting in a fiduciary capacity or (v) an account or accounts
otherwise acceptable to each applicable Rating Agency. The collateral eligible
to secure amounts in the Bond Account is limited to Permitted Investments. A
Bond Account may be maintained as an interest bearing account or the funds held
therein may be invested pending each succeeding Distribution Date in Permitted
Investments. If so specified in the related Prospectus Supplement, the Master
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Bond Account as additional compensation and will
be obligated to deposit in the Bond Account the amount of any loss immediately
as realized.
Pursuant to the Master Servicing Agreement, the Master Servicer will be
required to remit to the applicable Trustee (to the extent not previously
remitted), on or before each Distribution Account Deposit Date, the Security
Distribution Amount for the related Distribution Date for deposit in the
Distribution Account for such Series of Securities maintained with the
applicable Trustee.
Any amounts received by the Master Servicer as Insurance Proceeds or as
Liquidation Proceeds, net of any expenses and other amounts reimbursable to the
Master Servicer pursuant to the Master Servicing Agreement, will (unless applied
to the repair or restoration of a Mortgaged Property) be deemed to be payments
received with respect to the Mortgage Loans securing the related Series of
Securities and will be deposited in the related Bond Account.
Prior to each Distribution Date for a Series of Securities, the Master
Servicer will furnish to the applicable Trustee a statement setting forth
certain information with respect to payments received with respect to the
Mortgage Loans.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Servicers, will make
reasonable efforts to collect all payments called for under the Mortgage Loans
and will, consistent with each Master Servicing Agreement and any Mortgage Pool
Insurance Policy, Primary Mortgage Insurance Policy and Bankruptcy Bond or
alternative arrangements, follow such collection procedures as are customary
with respect to mortgage loans that are comparable to the Mortgage Loans.
Consistent with the above, the Master Servicer or applicable Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Pool Policy, Primary
Mortgage Insurance Policy or Bankruptcy Bond or alternative arrangements, if
applicable, arrange with a Mortgagor a schedule for the liquidation of
delinquencies running for no more than 180 days (unless a longer period is
specified in the related Prospectus Supplement) after the applicable due date
for each payment. To the extent the Master Servicer is obligated to make or to
cause to be made advances, such obligation will remain during any period of such
an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Mortgage Loan has been, or is about to be,
conveyed by the Mortgagor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity
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of such Mortgage Loan under any due-on-sale clause applicable thereto, but only
if the exercise of such rights is permitted by applicable law and will not
impair or threaten to impair any recovery under any related Primary Mortgage
Insurance Policy. If these conditions are not met or if the Master Servicer
reasonably believes it is unable under applicable law to enforce such
due-on-sale clause, the Master Servicer will enter into or cause to be entered
into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan and, to the extent permitted
by applicable law, the Mortgagor also remains liable thereon. If a Mortgaged
Property is sold or transferred, the Master Servicer will be required promptly
to notify the Bond Trustee and the respective issuers of any hazard insurance
policies, mortgagor bankruptcy insurance and mortgage insurance policies to
assure that all required endorsements to each insurance policy are obtained and
that coverage under each such policy will remain in effect after the occurrence
of such sale or transfer. Any fee collected by or on behalf of the Master
Servicer for entering into an assumption agreement will be retained by or on
behalf of the Master Servicer as additional servicing compensation. See "CERTAIN
LEGAL ASPECTS OF MORTGAGE LOANS -- "DUE-ON-SALE" Clauses" herein. In connection
with any such assumption, the terms of the related Mortgage Loan may not be
changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS" herein. This approval is usually based on the purchaser's income and net
worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
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JUNIOR MORTGAGES
In the case of single family loans secured by junior liens on the related
Mortgaged Properties, the Master Servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Bond Trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of redemption.
The Master Servicer also will be required to notify any superior lienholder in
writing of the existence of the Mortgage Loan and request notification of any
action (as described below) to be taken against the Mortgagor or the Mortgaged
Property by the superior lienholder. If the Master Servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related Senior Lien, or has declared or intends to declare a
default under the mortgage or the promissory note secured thereby, or has filed
or intends to file an election to have the related Mortgaged Property sold or
foreclosed, then the Master Servicer will be required to take, on behalf of the
related Issuer, whatever actions are necessary to protect the interests of the
related Securityholders, and/or to preserve the security of the related Mortgage
Loan. The Master Servicer will generally be required to advance the necessary
funds to cure the default or reinstate the superior lien, if such advance is in
the best interests of the related Securityholders and the Master Servicer
determines such advances are recoverable out of payments on or proceeds of the
related Mortgage Loan.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Securities will be
equal to a percentage per annum (which may vary under certain circumstances) of
the outstanding principal balance of each Mortgage Loan supporting such Series
of Securities or such other amount, all as described in the related Prospectus
Supplement (the "Master Servicing Fee"). As compensation for its servicing
duties, any Servicer or subservicer will generally be entitled to a monthly
servicing fee as described in the related Prospectus Supplement. In addition,
the Master Servicer, any Servicer or any subservicer will retain as additional
compensation all prepayment charges, assumption fees and late payment charges,
to the extent collected from Mortgagors, and any benefit that may accrue as a
result of the investment of funds in the applicable Bond Account (unless
otherwise specified in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Series of Securities and incurred by it in connection with
its responsibilities under the related Master Servicing Agreement, including,
without limitation, payment of any fee or other amount payable in respect of any
credit enhancement arrangements, payment of the fees and disbursements of the
Bond Trustee and the Certificate Trustee, any custodian appointed by the Bond
Trustee, the certificate registrar and any paying agent, and payment of expenses
incurred in enforcing the obligations of Servicers and Sellers. The Master
Servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of Servicers under certain limited circumstances. In addition, as
indicated in the preceding section, the Master Servicer will be entitled to
reimbursement of expenses incurred by it in connection with any defaulted
Mortgage Loan as to which it has determined that all recoverable Liquidation
Proceeds and Insurance Proceeds have been received (a "Liquidated Mortgage"),
and in connection with the restoration of Mortgaged
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Properties, such right of reimbursement being prior to the rights of
Securityholders to receive any related Liquidation Proceeds (including Insurance
Proceeds).
PREPAYMENTS
In general, when a borrower prepays a mortgage loan between due dates, the
borrower is required to pay interest on the amount prepaid only to the date of
prepayment and not thereafter. In the event such prepayments, together with
other prepayments (including for this purpose prepayments resulting from
refinancing or liquidations of the Mortgage Loans or the mortgage loans
underlying the Agency Securities, as the case may be, due to defaults,
casualties, condemnations, repurchases by the Seller, the Issuer or AmREIT or
purchases thereof by the Master Servicer or the Company), result in a shortfall
in the amount of interest available on a Distribution Date for the Securities of
a Series, the Master Servicer may be required to cover the shortfall, but only
if and to the extent specified in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Master Servicing Agreement and Indenture will provide that on or
before a specified date in each year, a firm of independent public accountants
will furnish a statement to the Issuer and the Bond Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers, the
Audit Program for Mortgages serviced for FHLMC or such other procedures as may
be specified in the related Prospectus Supplement, the servicing by or on behalf
of the Master Servicer of Mortgage Loans under agreements substantially similar
to each other (including the related Master Servicing Agreement) was conducted
in compliance with such agreements except for any significant exceptions or
errors in records that, in the opinion of the firm, the Audit Program for
Mortgages serviced for FHLMC, the Uniform Single Attestation Program for
Mortgage Bankers or such other procedure, requires it to report. In rendering
its statement such firm may rely, as to matters relating to the direct servicing
of Mortgage Loans by Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers, the Audit Program for Mortgages serviced for FHLMC
or such other procedure, (rendered within one year of such statement) of firms
of independent public accountants with respect to the related Servicer.
Each Master Servicing Agreement and Indenture will also provide for
delivery to the Issuer and the Bond Trustee, on or before a specified date in
each year, of an annual statement signed by two officers of the Master Servicer
to the effect that the Master Servicer has fulfilled its obligations under the
Master Servicing Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Company at its principal executive
offices.
ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER
Subject to any limitations set forth in the related Prospectus Supplement,
each Master Servicing Agreement will require the Master Servicer to advance on
or before each
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Distribution Date (from its own funds, funds advanced by Servicers or funds held
in the Bond Account for future distribution to Securityholders), an amount equal
to the aggregate of payments of principal and interest that were delinquent on
the related Determination Date, subject to the Master Servicer's determination
that such advances will be recoverable out of late payments by obligors on the
Mortgage Collateral, Liquidation Proceeds, Insurance Proceeds or otherwise. In
the case of Cooperative Loans, the Master Servicer also will be required to
advance any unpaid maintenance fees and other charges under the related
proprietary leases as specified in the related Prospectus Supplement.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to Securityholders, rather
than to guarantee or insure against losses. If Advances are made by the Master
Servicer from cash being held for future distribution to Securityholders, the
Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Bond Account on such
Distribution Date would be less than the amount required to be available for
distributions to Securityholders on such date. Any Advances will be reimbursable
to the Master Servicer out of recoveries on the specific Mortgage Collateral
with respect to which such Advances were made (e.g., late payments made by the
related obligors, any related Insurance Proceeds, Liquidation Proceeds or
proceeds of any Mortgage Loan repurchased pursuant to the related Master
Servicing Agreement). In addition, Advances by the Master Servicer (and any
advances by a Servicer) also will be reimbursable to the Master Servicer (or
Servicer) from cash otherwise distributable to Securityholders to the extent
that the Master Servicer determines that any such Advances previously made are
not ultimately recoverable as described in the immediately preceding sentence.
The Master Servicer also will be obligated to make Advances, to the extent
recoverable out of Insurance Proceeds, Liquidation Proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced are reimbursable to the Master Servicer to the
extent permitted by the Master Servicing Agreement. If specified in the related
Prospectus Supplement, the obligations of the Master Servicer to make Advances
may be supported by a cash advance reserve fund, a surety bond or a letter of
credit, in each case as described in such Prospectus Supplement.
RESIGNATION OF MASTER SERVICER
A Master Servicer may not resign from its obligations and duties under a
Master Servicing Agreement or assign or transfer such duties or obligations
except (i) upon a determination that its duties thereunder are no longer
permissible under applicable law or (ii) upon a sale of its servicing rights
with respect to the Mortgage Loans with the prior written consents of the Bond
Trustee, the Issuer and any applicable Mortgage Insurer. No such resignation
will become effective until the Bond Trustee, as Stand-by Master Servicer, or a
Successor Master Servicer (as such terms are defined below) has assumed the
Master Servicer's obligations and duties under such Master Servicing Agreement.
Each Master Servicing Agreement will provide that such a successor master
servicer (the "Successor Master Servicer") must be satisfactory to the Issuer,
the Bond Trustee and any applicable Mortgage Insurer, in the exercise of their
reasonable discretion and must be approved to act as a mortgage servicer for
FHLMC or FNMA.
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STAND-BY MASTER SERVICER
If so specified in the related Prospectus Supplement, the Bond Trustee will
act as stand-by Master Servicer (the "Stand-by Master Servicer") with respect to
each Series of Securities supported by Mortgage Loans. As Stand-by Master
Servicer, the Bond Trustee will succeed to the rights and obligations of the
Master Servicer with respect to the Mortgage Loans securing such Series upon a
default by the Master Servicer or upon resignation by the Master Servicer until
the appointment of a Successor Master Servicer.
SPECIAL SERVICING AGREEMENT
The Company may appoint a Special Servicer to undertake certain
responsibilities with respect to certain defaulted Mortgage Loans securing a
Series. The Special Servicer may engage various independent contractors to
perform certain of its responsibilities, provided, however, the Special Servicer
remains fully responsible and liable for all its requirements under the special
servicing agreement (the "Special Servicing Agreement"). As may be further
specified in the related Prospectus Supplement, the Special Servicer, if any,
may be entitled to various fees, including, but not limited to, (i) a monthly
engagement fee applicable to each Mortgage Loan, (ii) a special servicing fee,
or (iii) a performance fee applicable to each liquidated Mortgage Loan, in each
case calculated as set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
Each Master Servicing Agreement will provide that neither the Master
Servicer, the Company, the applicable Trustee nor any director, officer,
employee or agent of the Master Servicer, the Company or the applicable Trustee
will be under any liability to the related Securityholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
Master Servicing Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer, the Company, the applicable Trustee nor any such
person will be protected against any liability that would otherwise be imposed
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. Each Master Servicing Agreement will further provide that the Master
Servicer, the Company, the applicable Trustee and any director, officer,
employee or agent of the Master Servicer, the Company or the applicable Trustee
will be entitled to indemnification by the related Issuer and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Master Servicing Agreement or the Securities, other
than any loss, liability or expense related to any specific Mortgage Collateral
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Master Servicing Agreement) and 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, each Master Servicing Agreement will provide that
neither the Master Servicer, the Company nor the applicable Trustee will be
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its respective responsibilities under the Master Servicing
Agreement and which in its opinion may involve it in any expense or liability.
The Master Servicer, the Company or the applicable Trustee may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Master Servicing Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action
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and any liability resulting therefrom will be expenses, costs and liabilities of
the related Issuer, and the Master Servicer, the Company or the applicable
Trustee, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Securityholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Master
Servicing Agreement, provided that such person is qualified to sell mortgage
loans to, and service mortgage loans on behalf of, FNMA or FHLMC and further
provided that such merger, consolidation or succession does not adversely affect
the then current rating or ratings of the Securities of such Series.
SERVICING DEFAULTS
Events of default under the Master Servicing Agreement (each, a "Servicing
Default") for a Series of Securities will include (i) any failure of the Master
Servicer to deposit in the Bond Account or remit to the applicable Trustee any
required payment (other than an Advance) which continues unremedied for one
business day after the giving of written notice of such failure to the Master
Servicer by the applicable Trustee or the Issuer; (ii) any failure by the Master
Servicer to make an Advance as required under the Master Servicing Agreement,
unless cured as specified therein; (iii) any failure by the Master Servicer duly
to observe or perform in any material respect any of its other covenants or
agreements in the Master Servicing Agreement which continues unremedied for
thirty days after the giving of written notice of such failure to the Master
Servicer by the applicable Trustee or the Issuer; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON SERVICING DEFAULT
If a Servicing Default under a Master Servicing Agreement shall have
occurred and be continuing, the Bond Trustee may terminate all of the rights and
obligations of the Master Servicer under such Master Servicing Agreement,
including the Master Servicer's rights to receive any Master Servicing Fees.
Upon such termination, the Bond Trustee, as Stand-by Master Servicer, or any
Successor Master Servicer duly appointed by the Bond Trustee will succeed to all
the responsibilities, duties and liabilities of the Master Servicer under such
Master Servicing Agreement and will be entitled to similar compensation
arrangements. Neither the Issuer nor the Bond Trustee shall have any right to
waive any Servicing Default, except under certain circumstances specified in the
Master Servicing Agreement.
AMENDMENT OF MASTER SERVICING AGREEMENT
A Master Servicing Agreement with respect to any Series of Securities
supported by Mortgage Loans may not be amended, changed, modified, terminated or
discharged, except by an instrument in writing signed by all parties thereto,
and with prior written notice to any applicable Mortgage Insurer.
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THE AGREEMENTS
The following is a general summary of certain provisions of the Agreements
for each Series of Securities not described elsewhere in this Prospectus. The
summaries are qualified in their entirety by reference to the respective
provisions of the Agreements. Where particular provisions or terms used in the
Indenture are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summaries. The final
Agreements relating to each Series of Securities will be filed with the
Securities and Exchange Commission within fifteen days of the closing of the
sale of such Series of Securities. In connection with the following summaries,
it should be noted that for each Series of Certificates, any actions or votes
required or permitted to be taken by Bondholders under the Indenture for the
Bonds included in the Trust Fund Assets for such Series of Certificates will be
authorized to be taken by Certificateholders of such Series, as beneficial
holders of the Bonds.
MODIFICATION OF AGREEMENTS
With the consent of the holders of not less than 66 2/3% of the then
outstanding principal amount of the Class of Securities of the related Series
specified in the related Prospectus Supplement to be the "Controlling Class",
the applicable Trustee and the Issuer may execute an amendment to the related
Agreements to add provisions to, or change in any manner or eliminate any
provisions of, the Agreements with respect to the Securities of such Series or
modify (except as provided below) in any manner the rights of the
Securityholders.
Without the consent of the holder of each outstanding Security affected,
however, no such amendment shall (a) change the Stated Maturity of the principal
of, or any installment of interest on, any Security or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto, or change the earliest date on which any Security may be
redeemed at the option of the Issuer, or any place of payment where, or the coin
or currency in which, any affected Security or any interest thereon is payable,
or impair the right to institute suit for the enforcement of the provisions of
the Agreement regarding payment, (b) reduce the percentage of the aggregate
amount of the outstanding Securities, the consent of the holders of which is
required for any such amendment, or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the Agreements
or certain defaults thereunder and their consequences provided for in the
Agreements, (c) modify the provisions of the Agreements specifying the
circumstances under which such an amendment may not change the provisions of the
Agreement without the consent of each outstanding Security affected thereby, or
the provisions of the Agreements with respect to certain remedies available in
an Event of Default (as defined herein), except to increase any percentage
specified therein or to provide that certain other provisions of the Agreements
cannot be modified or waived without the consent of the holder of each
outstanding Security affected thereby, (d) modify or alter the provisions of the
Agreements defining when Securities are outstanding, (e) permit the creation of
any lien (other than certain permitted liens) ranking prior to or on a parity
with the lien of the Indenture with respect to any part of the property subject
to lien under the Indenture, or terminate the lien of the Indenture on any
property at any time subject thereto or deprive the holder of any Security of
the security afforded by the lien of the Indenture (other than in connection
with a permitted substitution of Mortgage Collateral) or (f) modify any of the
provisions of the Agreements in such manner as to affect the calculation of the
debt
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service requirement for any Security or the rights of the Securityholders to the
benefits of any provisions for the mandatory redemption of Securities contained
therein.
The Issuer and the applicable Trustee may also enter into amendments to the
Agreements, without obtaining the consent of Securityholders (i) to cure any
ambiguity; (ii) to correct a defective provision or correct or supplement any
provision therein which may be inconsistent with any other provision therein;
(iii) to make any other revisions with respect to matters or questions arising
under the Agreements which are not inconsistent with the provisions thereof; or
(iv) to comply with any requirements imposed by the Code or any regulation
thereunder, provided, however, that no such amendments (except those pursuant to
clause (iv)) will adversely affect in any material respect the interests of any
Securityholder of that Series. An amendment will be deemed not to adversely
affect in any material respect the interests of the Securityholders if the
applicable Trustee receives a letter from each Rating Agency requested to rate
the class or classes of Securities of such Series stating that such amendment
will not result in the downgrading or withdrawal of the respective ratings then
assigned to such Securities.
EVENTS OF DEFAULT
An event of default (an "Event of Default") with respect to any Series of
Bonds will be defined in the Indenture as being: (a) the failure (i) to pay any
principal of, or interest on, any Bond of such Series then due, (ii) if
applicable, to call for special redemption any Bonds that are required to be so
redeemed or (iii) to pay the redemption price of any Bonds called for
redemption; (b) a default in the observance of certain negative covenants in the
Indenture; (c) a default in the observance of any other covenant of the Issuer,
and the continuation of any such default for a period of 30 days after notice
thereof is given to the Issuer by the Bond Trustee or by the holders of more
than 50% in outstanding principal amount of the Controlling Class of Bonds of
such Series; (d) any representation or warranty made by the Issuer in the
Indenture or in any certificate delivered pursuant thereto being incorrect in a
material respect as of the time made, and the circumstances in respect of which
such representation or warranty is incorrect are not cured within 30 days after
notice thereof is given to the Issuer by the Bond Trustee or by the holders of
more than 50% in outstanding principal amount of the Controlling Class of Bonds
of such Series; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
RIGHTS UPON EVENTS OF DEFAULT
In case an Event of Default shall occur and be continuing with respect to a
Series of Bonds, the applicable Trustee or holders of more than 50% in
outstanding principal amount of the Controlling Class of Securities of the
related Series of Securities may declare the principal of such Series of Bonds
to be due and payable. Such declaration may under certain circumstances be
rescinded by the holders of a majority in principal amount of the outstanding
Securities of such Series.
Upon an Event of Default and the acceleration of the payments due on the
Bonds, the Bond Trustee may, in its discretion, sell the Collateral for such
Series, in which event the Bonds of such Series will be payable pro rata,
without regard to their Stated Maturities, or in such other manner as is
specified in the related Prospectus Supplement, out of the collections on, or
the proceeds from the sale of, such Collateral and will, to the extent permitted
by applicable law, bear interest at the interest rate specified in the
Indenture. If so specified in the related Prospectus Supplement, following an
Event of Default and
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acceleration of the payments due on the Bonds, the Bond Trustee may, in its
discretion, refrain from selling the Collateral, including the Mortgage
Collateral, for such Series and continue to apply all amounts received on the
Collateral to payments due on the Bonds of such Series in accordance with their
terms, notwithstanding the acceleration of the maturity of such Bonds.
(Indenture, Section 5.05) Each Trust Fund will allocate payments received on the
related Bonds among the Classes of Certificates pro rata, or in such other
manner as is specified in the related Prospectus Supplement.
In case an Event of Default shall occur and be continuing, the Bond Trustee
shall be under no obligation to expend or risk its own funds or otherwise incur
any financial liability in the performance of its duties under the Indenture if
it has reasonable grounds for believing that it has not been assured of adequate
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority in
principal amount outstanding of the Controlling Class of outstanding Securities
of a Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Bond Trustee or
exercising any trust or power conferred on the Bond Trustee with respect to the
Securities of such Series; and the holders of a majority in principal amount of
the Controlling Class of Securities of a Series then outstanding may, in certain
cases, waive any default with respect thereto, except a default in payment of
principal or interest or a default in respect of a covenant or provision of the
Agreements that cannot be modified without the consent of each holder of
Securities affected.
No holder of Securities will have the right to institute any proceeding
with respect to the Agreements, unless (a) such holder previously has given to
the applicable Trustee written notice of an Event of Default, (b) the holders of
more than 50% in outstanding principal amount of the Controlling Class of Class
of Securities of the Series have made written request upon the Bond Trustee to
institute such proceedings in its own name as Bond Trustee and have offered the
Bond Trustee indemnity in full, (c) the Bond Trustee has for 60 days neglected
or refused to institute any such proceeding and (d) no direction inconsistent
with such written request has been given to the Bond Trustee during such 60-day
period by the holders of a majority in principal amount of the outstanding
Securities of such Series, but the holder of a Bond has a right which is
absolute and unconditional to receive payment of principal and interest on or
after the due dates thereof and to institute suit for the enforcement thereof.
CERTAIN INDENTURE COVENANTS OF THE ISSUER
Each Bond Issuer covenants in the Indenture, among other matters, that it
will not (a) sell, exchange or otherwise dispose of any portion of the
Collateral for a Series of Bonds except as expressly permitted by the Indenture
or the Master Servicing Agreement, (b) amend certain sections of the Bond
Issuer's trust agreement described below without the consent of the holders of
66 2/3% in outstanding principal amount of each Class of Securities affected
thereby or (c) incur, assume or guarantee any indebtedness other than in
connection with the issuance of the Bonds. Each Bond Issuer's trust agreement
further provides that the trust shall not have the power to perform any act or
engage in any business whatsoever except to issue and administer the Bonds of a
Series, to receive and own the Collateral, to maintain and administer the
Collateral, to pledge the Collateral to support such Bonds pursuant to the
Indenture and to take certain other actions incidental thereto. Section 11.01 of
the Issuer's trust agreement prohibits the amendment of the trust agreement if
the trustee thereunder determines that such amendment will adversely affect
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any right, duty or liability of, or immunity or indemnity in favor of, such
trustee under the Issuer's trust agreement, or will cause or result in any
conflict with or breach of any terms of, or default under, the charter documents
or bylaws of such trustee or any document to which such trustee is a party.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
Each Issuer will be required to file annually with the applicable Trustee a
written statement as to fulfillment of its obligations under the related
Agreement.
BOND TRUSTEE'S ANNUAL REPORT
Each Bond Trustee will be required to mail each year to all Securityholders
a brief report relating to its eligibility and qualifications to continue as the
Bond Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by the Issuer to the Bond Trustee in its individual capacity, the property
and funds physically held by the Bond Trustee as such, and any action taken by
it which materially affects the Bonds and which has not been previously
reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Collateral securing
the Bonds of a Series upon the delivery to the Bond Trustee for cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Bond Trustee of funds sufficient for the payment in full of all of the Bonds
of such Series.
TERMINATION OF TRUST AGREEMENT
Unless otherwise specified in the related Trust Agreement, the obligations
created by each Trust Agreement for each Series of Securities will terminate
upon the payment to the related Securityholders of all amounts held in the Bond
Account or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment of or other
liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets and (ii) if specified in the related Prospectus Supplement, the purchase
by the holder of the FASIT ownership interest or any other party specified to
have such rights (see "FEDERAL INCOME TAX CONSEQUENCES" below), of all of the
remaining Trust Fund Assets and all property acquired in respect of such Trust
Fund Assets.
Any such purchase of Trust Fund Assets and property acquired in respect of
Trust Fund Assets evidenced by a Series of Securities will be made at a price
specified in the related Prospectus Supplement (which will be no lower then 100%
of the principal amount of outstanding Securities plus accrued interest. The
exercise of such right will effect early retirement of the Securities of that
Series, but the right to so purchase is subject to the principal balance of the
related Trust Fund Assets being less than the percentage specified in the
related Prospectus Supplement of the aggregate principal balance of the Trust
Fund Assets at the Cut-off Date for the Series.
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THE TRUSTEES
The applicable Trustee under each Agreement will be named in the Prospectus
Supplement. The same entity may serve as both the Bond Trustee and the
Certificate Trustee for the same Series of Securities. Any entity selected to
serve as a Trustee may have normal banking relationships with the Depositor, the
Master Servicer and any of their respective affiliates.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially from state to state),
the summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which Mortgaged
Properties may be located. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
If any Series of Securities is supported by manufactured housing Mortgage Loans,
the related Prospectus Supplement will describe the material legal aspects of
such loans.
GENERAL
The Mortgage Loans will consist of notes and either mortgages, deeds of
trust, security deeds or deeds to secure debts, depending upon the prevailing
practice in the state in which the underlying Mortgaged Property is located.
Deeds of trust are used almost exclusively in California instead of mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage, which
lien is generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage:
the mortgagor, who is the borrower and owner of the mortgaged property; and the
mortgagee, who is the lender. Under a mortgage instrument, the mortgagor
delivers to the mortgagee (i) a note or bond evidencing the loan and (ii) the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has
three parties: the borrower-property owner, called the trustor (similar to a
mortgagor); a lender (similar to a mortgagee) called the beneficiary; and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid. The trustee's authority under
a deed of trust, the mortgagee's authority under a mortgage and the grantee's
authority under a security deed or deed to secure a debt are governed by law,
and, with respect to some deeds of trust, the directions of the beneficiary.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative owns all the real property that comprises the project, including the
land, separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize
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with a significant portion of principal being due in one lump sum at final
maturity. The inability of the Cooperative to refinance this mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee providing the financing. A foreclosure in either event by the holder
of the blanket mortgage could eliminate or significantly diminish the value of
any collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of any Mortgage
Collateral supporting a Series of Securities that includes Cooperative Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares if filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
JUNIOR MORTGAGES
Certain of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Mortgage Collateral. The rights of the Securityholders as the
beneficiaries of a junior deed of trust or a junior mortgage are subordinate in
lien priority and in payment priority to those of the holder of the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds and,
upon default of the mortgagor, to cause a foreclosure on the property. Upon
completion of the foreclosure proceedings by the holder of the senior mortgage
or the sale pursuant to the deed of trust, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior lienholder satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. See "-- FORECLOSURE/ REPOSSESSION" below.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the rights to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To
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the extent a senior mortgagee expends such sums, such sums will generally have
priority over all sums due under the junior mortgage.
FORECLOSURE/REPOSSESSION
DEED OF TRUST. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states, such as California, 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 any notice of default and
notice of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states, including California, the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
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. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. 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, including California, published for a specific 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 property and sent to all parties
having an interest of record in the real property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished, or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such
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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 burden of ownership, including obtaining hazard insurance and making
such repairs at its own expense as are necessary to render the 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 property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. See "TRUST FUND
ASSETS" herein.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those mortgage loans which are
junior mortgage loans, if the lender purchases the property, the lender's title
will be subject to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
COOPERATIVE LOANS. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement.
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A default by the tenant-stockholder under the proprietary lease or occupancy
agreement will usually constitute a default under the security agreement between
the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "-- Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California,
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this right of redemption applies only to sales following judicial foreclosure,
and not to sales pursuant to a non-judicial power of sale. In most states where
the right of redemption is available, statutory redemption may occur upon a
payment of the foreclosure purchase price, accrued interest and taxes. In some
states, the right to redeem is an equitable right. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
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 judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions 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 or sale under a deed of trust. 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 current fair market value of the
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting mortgagors.
Some state statutes may 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.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. In certain
instances, a rehabilitation plan proposed by the debtor may reduce the secured
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indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Mortgage Loans supporting a Series of
Securities and possible reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include 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 regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans. In
particular, liability extends to assignees with respect to "consumer credit
contracts" and "purchase money loans" as defined in 16 C.F.R. Section 433.1 and
to certain "mortgages" as defined in 15 U.S.C. 1602(aa)
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Multifamily and mixed use mortgage loan transactions often provide for an
assignment of the leases and rents pursuant to which the borrower typically
assigns its right, title and interest, as landlord under each lease and the
income derived therefrom, to the lender while either obtaining a license to
collect rents for so long as there is no default or providing for the direct
payment to the lender. Local law, however, may require that the lender take
possession of the property and appoint a receiver before becoming entitled to
collect the rents under the lease.
FEDERAL BANKRUPTCY AND OTHER LAWS AFFECTING CREDITORS' RIGHTS
GENERAL. In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
federal Soldiers' and Sailors' Relief Act, and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
under the Bankruptcy Code rehabilitative plan to cure a monetary default with
respect to 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 the lender has taken all steps to
realize upon his security (provided no sale of the property has yet occurred)
prior to the filing of the debtor's Chapter 13 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
permitting the obligor to pay arrearages over a number of years.
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Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. These courts have suggested that
such modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule 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. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to the other collateral and/or be limited in amount to
the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate due-
on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include 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 regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
FEDERAL BANKRUPTCY LAWS RELATING TO MORTGAGE LOANS SECURED BY MULTIFAMILY
AND MIXED USE PROPERTY. Certain provisions of the Bankruptcy Code may apply in
the case of Multifamily and Mixed Use Mortgage Loans. Section 365(a) of the
Bankruptcy Code generally provides that a trustee or a debtor-in- possession in
a bankruptcy or reorganization case under the Bankruptcy Code has the power to
assume or to reject an executory contract or an unexpired lease of the debtor,
in each case subject to the approval of the bankruptcy court administering such
case. If the trustee or debtor-in-possession rejects an executory contract or an
unexpired lease, such rejection generally constitutes a breach of the executory
contract or unexpired lease immediately before the date of the filing of the
petition. As a consequence, the other party or parties to such executory
contract or unexpired lease, such as the Mortgagor, as lessor under a lease,
would have only an unsecured claim against the debtor for damages resulting from
such breach, which could adversely affect the security for the related Mortgage
Loan. Moreover, under Section 502(b)(6) of the Bankruptcy Code, the claim of a
lessor for such damages from the termination of a lease of property will be
limited to the sum of (i) the rent reserved by such lease, without acceleration,
for the greater of one year or 15 percent, not to exceed three years, of the
remaining term of such lease, following the earlier of the date of the filing of
the petition and the date on which such lender repossessed, or the lessee
surrendered, the leased property, and (ii) any unpaid rent due under such lease,
without acceleration, on the earlier of such dates.
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Under Section 365(h) of the Bankruptcy Code, if a trustee for a lessor, or
a lessor as a debtor-in-possession, rejects an unexpired lease of real property,
the lessee may treat such lease as terminated by such rejection or, in the
alternative, may remain in possession of the leasehold for the balance of such
term and for any renewal or extension of such term that is enforceable by the
lessee under applicable nonbankruptcy law. The Bankruptcy Code provides that if
a lessee elects to remain in possession after such rejection of a lease, the
lessee may offset against rents reserved under the lease for the balance of the
term after the date of rejection of the lease, and any such renewal or extension
thereof, any damages occurring after such date caused by the nonperformance of
any obligation of the lessor under the lease after such date.
Under Section 365(f) of the Bankruptcy Code, if a trustee assumes an
executory contract or an unexpired lease of the debtor, the trustee or
debtor-in-possession generally may assign such executory contract or unexpired
lease, notwithstanding any provision therein or in applicable law that
prohibits, restricts or conditions such assignment, provided that the trustee or
debtor-in-possession provides adequate assurance of future performance by the
assignee. In addition, no party to an executory contract or an unexpired lease
may terminate or modify any rights or obligations under an executory contract or
an unexpired lease at any time after the commencement of a case under the
Bankruptcy Code solely because of a provision in the executory contract or
unexpired lease or in applicable law conditioned upon the assignment of the
executory contract or unexpired lease. Thus, an undetermined third party may
assume the obligations of the lessee or a Mortgagor under a lease in the event
of commencement of a proceeding under the Bankruptcy Code with respect to the
lessee or a Mortgagor, as applicable.
Under Sections 363(b) and (f) of the Bankruptcy Code, a trustee for a
lessor, or a lessor as debtor-in-possession, may, despite the provisions of the
related Mortgage Loan to the contrary, sell the Mortgaged Property free and
clear of all liens, which liens would then attach to the proceeds of such sale.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred cleanup costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner or operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property even though the environmental damage or threat was caused by
a prior or current owner or operator or a third-party. CERCLA imposes liability
for such costs on any and all "responsible parties," including "owners or
operators." However, CERCLA excludes from the definition of "owner or operator"
a secured creditor "who without participating in the management of the
facility," holds indicia of ownership primarily to protect its security interest
(the "secured creditor exclusion"). Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an
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"owner or operator" under CERCLA. Similarly, if a lender forecloses and takes
title to a contaminated facility or property, the lender may incur CERCLA
liability in various circumstances, including, but not limited to, when it holds
the facility or property as an investment (including leasing the facility or
property to a third party), or fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the day-to-day
management of all operational functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would become a liability of the Issuer and
occasion a loss to Securityholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to the holders of security interests in
underground storage tanks. It should be noted, however, that liability for
cleanup of petroleum contamination may be governed by state law, which may not
provide for any specific protection for secured creditors.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans or the mortgage loans underlying the Agency
Securities, as the case may be, were originated, no environmental assessment or
a very limited environmental assessment of the Mortgage Properties or the real
property constituting security for such mortgage loans, respectively, was
conducted.
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DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Mortgaged
Property, the loan may be accelerated by the mortgagee. In recent years, court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, for various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Garn-St
Germain Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
Mortgaged Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate below
the current market rate being assumed by a new home buyer, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
ENFORCEABILITY OF PREPAYMENT CHARGES AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid.
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to Fixed Rate Mortgage Loans having higher interest rates, may
increase the likelihood of refinancing or other early retirement of
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such loans or contracts. Late charges and prepayment fees are typically retained
by servicers as additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 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. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. 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 mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any shortfall
in interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Securities. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasion by the inability to realize upon the
Mortgaged Property in a timely fashion.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the purchase, ownership and disposition of the Securities. This summary has
been reviewed by Jeffers, Wilson, Shaff & Falk, LLP, tax counsel to the Company
and the Issuer, and, to the extent that it states legal conclusions, represents
the opinion of such tax counsel, subject to the limitations and qualifications
set forth herein and in the applicable Prospectus Supplement. In particular,
based on certain factual representations on behalf of the Company relating to
the issuance, terms and treatment of the Bonds, and when applicable, the timely
election of FASIT treatment, as described in the related Prospectus Supplement
and based on the assumptions of the legal capacity of all natural persons, the
genuineness of all signatures, the authenticity of all documents submitted to
tax counsel as originals, the conformity to original documents of all documents
submitted to tax counsel as certified, conformed or other copies, and the
authenticity of the originals of such copies, tax counsel is of the opinion that
(a) the Bonds issued by the Issuer will be treated as indebtedness for federal
income tax purposes, and (b), in connection with a series of Securities issued
as a FASIT, that the applicable Trust Fund Assets will be classified as a FASIT
for federal income tax purposes. The summary is based on the Internal Revenue
Code of 1986, as amended (the "Code"), regulations, rulings and decisions in
effect as of the date of this Prospectus, all of which are subject to change.
The summary in particular takes into account the Treasury regulations regarding
the taxation of debt instruments with original issue discount (the "OID
Regulations"). The summary does not purport to address federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. In addition, the summary is limited to investors who
will hold the Securities as "capital assets" (generally, property held for
investment) as defined in Section 1221 of the Code. 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
Securities. As applied to any particular Security, the summary is subject to
further discussion or change as provided in the related Prospectus Supplement.
CLASSIFICATION OF THE ISSUER AND THE BONDS
No regulations, published rulings or judicial decisions discuss the
characterization for federal income tax purposes of securities with terms
substantially the same as the Bonds. Upon the issuance of each Series of Bonds,
however, Jeffers, Wilson, Shaff & Falk, LLP, tax counsel to the Issuer, will
advise the Issuer that in its opinion such Bonds will be treated for federal
income tax purposes as indebtedness and not as an ownership interest in the
Trust Fund Assets of the Issuer (the "Trust Fund"), or an equity interest in the
Issuer or in a separate association taxable as a corporation.
Under the taxable mortgage pool ("TMP") rules in the Code, certain entities
that issue debt secured by real estate mortgages are subject to special tax
treatment that can result in entity level federal income taxation. An entity
will be classified as a TMP if it does not make an election to be classified as
a "real estate mortgage investment conduit" (a "REMIC") and (i) substantially
all of its assets consist of debt obligations and more than 50% of such debt
obligations are real estate mortgages or interests therein, (ii) the entity
issues debt obligations with two or more maturities and (iii) payments on the
debt obligations issued by it bear a relationship to payments received on the
debt obligations owned by it. In certain situations, pools of assets within an
entity can also be treated as separate TMPs.
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The Company does not intend to make an election for any Issuer to be
classified as a REMIC. Further, the Company intends to structure all issuances
of Bonds, unless otherwise specified in the related Prospectus Supplement, so as
to not constitute a TMP. However, it is possible that the Issuer or a portion of
the Issuer relating to a specific pool of Mortgage Collateral and the Bonds
related thereto could be treated as a TMP. If an Issuer were to be classified as
a TMP, it is anticipated that it would nonetheless qualify as a "qualified REIT
subsidiary" (within the meaning of Section 856(i) of the Code) and thus would
not be subject to entity level federal income taxes. If so, only AmREIT or its
shareholders would be required to include in income any "excess inclusion
income" generated by the TMP. On the other hand, if the Issuer were to be
classified as a TMP but did not maintain its status as a "qualified REIT
subsidiary", it would not be permitted to be included in the consolidated
federal income tax return of any other corporation and its net income would be
subject to entity level federal income taxes. Each Prospectus Supplement will
specify whether or not the Issuer for that Series of Bonds is expected to be
classified as a TMP. No assurance is given in this discussion as to whether any
Issuer classified as a TMP will continue to qualify as a "qualified REIT
subsidiary" or whether AmREIT will continue to qualify as a REIT for federal
income tax purposes.
Because the Bonds will be treated as indebtedness of the Issuer for federal
income tax purposes, (i) Bonds held by a thrift institution taxed as a domestic
building and loan association will not constitute "loans . . . secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v),
(ii) interest on Bonds held by a real estate investment trust will not be
treated as "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B), and
Bonds will not constitute "real estate assets" or "Government securities" within
the meaning of Code Section 856(c)(5)(A), and (iii) Bonds held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
TAXATION OF THE FASIT AND ITS HOLDERS
If a FASIT election is made with respect to a Series of Securities and such
Series is issued, treated and maintained as the Company has determined herein
and in the related Prospectus Supplement, then the arrangement by which the
Securities of that Series are issued will be treated as a FASIT. The regular
FASIT interests will be treated as debt for federal income tax purposes.
Sections 860H through 860L of the Code (the "FASIT Provisions") provide for
an entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). Although the FASIT Provisions of
the Code became effective on September 1, 1997, no Treasury regulations or other
administrative guidance have been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of FASIT regular interest holders. Investors should also
note that the FASIT discussion contained herein constitutes only a summary of
the U.S. federal income tax consequences to holders of FASIT interests. With
respect to each Series of FASIT regular interests, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT interests will be classified as either FASIT regular interests, which
generally will be treated as debt for federal income tax purposes, or FASIT
ownership interests,
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which generally are not treated as debt for such purposes, but rather as
representing rights and responsibilities with respect to the taxable income or
loss of the related FASIT. The Prospectus Supplement for each Series of
Securities will indicate which Securities of such Series will be designated as
regular interests, and which, if any, will be designated as the ownership
interest.
Qualification as a FASIT. A Trust Fund will qualify as a FASIT if (i) a
FASIT election is in effect, (ii) certain tests concerning (A) the composition
of the FASIT's assets and (B) the nature of the investors' interests in the
FASIT are met on a continuing basis, and (iii) the Trust Fund is not a regulated
investment company as defined in Section 851(a) of the Code.
Asset Composition. For a Trust Fund to be eligible for FASIT status,
substantially all of the Trust Fund Assets must consist of "permitted assets" as
of the close of the third month beginning after the closing date and at all
times thereafter (the "FASIT Qualification Test"). Permitted assets include (i)
cash or cash equivalents, (ii) debt instruments with fixed terms that would
qualify as regular interests if issued by a REMIC (generally, instruments that
provide for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only ("IO") type rate), (iii) foreclosure property, (iv)
certain hedging instruments (generally interest and currency rate swaps and
credit enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying hedging
instruments, (vi) FASIT regular interest, and (vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of the
FASIT's ownership interest or by any person related to such holder. Neither the
Company nor AmREIT will be permitted to hold ownership interests in a FASIT.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interest or (ii) a single class of ownership interest
that is held by a fully taxable domestic C Corporation (and not by a REIT such
as AmREIT).
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (iv) the yield to maturity of the interest is less than the applicable
federal rate published by the IRS for the month of issue, plus 5%, and (vi) if
it pays interest, such interest is payable at either (A) a fixed rate with
respect to the principal amount of the regular interest or (B) a permissible
variable rate with respect to such principal amount. Permissible variable rates
for FASIT regular interests are the same as those for REMIC regular interests
(certain qualified floating rates and weighted average rates). Interest will be
considered to be based on a permissible variable rate if generally, (i) such
interest is unconditionally payable at least annually, (ii) the issue price of
the debt instrument does not exceed the total noncontingent principal payments
and (iii) interest is based on a "qualified floating rate," an "objective rate,"
a combination of a single fixed rate and one or more "qualified floating rate,"
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such FASIT regular interest.
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If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "High-Yield Interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by domestic C Corporations that are fully subject to
corporate income tax ("Eligible Corporations"), other FASITs, and dealers in
securities who acquire such interests as inventory, rather than for investment.
In addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "-- TAXATION OF HIGH-YIELD
INTERESTS."
Consequences of Disqualification. If a Trust Fund fails to comply with one
or more ongoing requirements for FASIT status during any taxable year, the Code
provides that its FASIT status may be lost for that year and thereafter. If
FASIT status is lost, the treatment of the former FASIT and interests therein
for federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
requirements for FASIT status are not satisfied.
TREATMENT OF FASIT REGULAR SECURITIES
Payments received by holders of FASIT regular interests generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT regular interests must report income
from such Securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. If the
FASIT regular interest is sold, the Holder generally will recognize gain or loss
upon the sale. See "TAXATION OF DEBT SECURITIES" above.
TAXATION OF HIGH-YIELD INTERESTS
High-Yield Interests are subject to special rules regarding eligibility of
holders of such interest, and the ability of such holders to offset income
derived from those interests with losses. High-Yield Interests only may be held
by Eligible Corporations, other FASITs, and dealers in securities who acquire
such interests as inventory. If a securities dealer (other than an Eligible
Corporation) initially acquires a High-Yield Interest as inventory, but later
begins to hold it for investment, the dealer will be subject to an excise tax
equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor will continue to be treated as the holder of the High-Yield
Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes
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corporate income tax on income derived from a FASIT regular interest that is
held by a pass-through entity (other than another FASIT) that issues debt or
equity securities backed by the FASIT regular interest and that have the same
features as High-Yield Interests.
TAXATION OF FASIT OWNERSHIP SECURITIES
A FASIT ownership interest represents the residual equity interest in a
FASIT. As such, the holder of a FASIT ownership interest determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT ownership interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
ownership interest must determine the amount of interest, OID, market discount,
and premium recognized with respect to the FASIT's assets and the FASIT regular
interests issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT regular interests as are holders of High-Yield
Interest.
Rules similar to the wash sale rules applicable to REMIC residual interests
also will apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership generally will be disallowed where within six
months before or after the disposition, the seller of such interest acquires any
other FASIT ownership interest that is economically comparable in the disposed
FASIT ownership interest. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT ownership interest
was required to be marked-to-market under Section 475 of the Code by such
holder, then Section 475 of the Code generally will continue to apply to such
securities. Special valuation rules generally require that the value of debt
instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually, until another discount rate is issued by
regulations.
The holder of a FASIT ownership interest will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series of Securities for which a FASIT election is made
generally will be structured in order to avoid application of the prohibited
transaction tax.
INTEREST AND ORIGINAL ISSUE DISCOUNT
GENERAL. The Prospectus Supplement for each Series of Securities will
disclose whether any Class of such Bonds is anticipated to be issued with
"original issue discount" within the meaning of Code Section 1273(a) ("OID").
Interest on any Class of Securities other than OID will be includible in income
by the Holder thereof in accordance with such Holder's applicable method of
accounting. Holders of any Class of Securities having
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OID must generally include OID in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash attributable to such
income. Each Issuer will indicate on the face of each Security issued by it
information concerning the application of the OID rules to such Security and
certain other information that may be required. The Issuer will report annually
to the Internal Revenue Service (the "IRS") and to holders of record of such
Securities information with respect to the OID accruing on such Securities
during the reporting period.
Rules governing OID are set forth in Code Sections 1271 through 1273, 1275
and 1281 through 1283. In addition, the discussion of federal income tax
consequences set forth below is based in part on the OID Regulations. The Code
or the OID Regulations either do not address, or are subject to varying
interpretations with respect to, several issues relevant to obligations, such as
the Securities, that are subject to prepayment. Therefore, there is some
uncertainty as to the manner in which the OID rules of the Code will be applied
to the Securities.
ORIGINAL ISSUE DISCOUNT DEFINED. In general, each Security will be treated
as a single installment obligation for purposes of determining the OID
includible in a Securityholder's income. The amount of OID on such a Security is
the excess of the stated redemption price at maturity of the Security over its
issue price. The issue price of a Security is the initial offering price to the
public at which a substantial amount of the Securities of that Class are first
sold to the public (excluding bond houses, brokers, underwriters or
wholesalers), generally as set forth on the cover page of the Prospectus
Supplement for a Series of Securities. (The portion of the initial offering
price which consists of interest accrued on the Securities from the date of
issuance to the Closing Date may, at the option of the Securityholder, be
subtracted from the issue price of the Securities and treated as an offset of
interest received on the first Distribution Date.) The stated redemption price
at maturity of a Security is equal to the total of all payments to be made on
the Security other than "qualified stated interest payments." "Qualified stated
interest payments" are payments on the Securities which are paid at least
annually and are based on either a fixed rate or a "qualified variable rate."
Under the OID Regulations, interest is treated as payable at a "qualified
variable rate" and not as contingent interest if, generally, (i) such interest
is unconditionally payable at least annually, (ii) the issue price of the
Security does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Security.
Generally, the stated redemption price at maturity of a Security (other than a
Deferred Interest Security or a Payment Lag Security, as defined below) is its
stated principal amount; the stated redemption price at maturity of a Deferred
Interest Security is the sum of all payments (regardless of how denominated)
scheduled to be received on such Security under the Tax Prepayment Assumption
(as defined below). Any payment of interest that is not a qualified stated
interest payment is a "contingent interest payment." The related Prospectus
Supplement will discuss whether the payments of interest on a Security are
qualified stated interest payments and the treatment for federal income tax
purposes of any contingent interest payments.
DE MINIMIS ORIGINAL ISSUE DISCOUNT. Notwithstanding the general definition
of OID above, any OID with respect to a Security will be considered to be zero
if such discount is less than 0.25% of the stated redemption price at maturity
of the Security multiplied by its weighted average life (a "de minimis" amount).
The weighted average life of a Security for this purpose is the sum of the
following amounts (computed for each payment included
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in the stated redemption price at maturity of the Security): (i) the number of
complete years (rounded down for partial years) from the Closing Date until the
date on which each such payment is scheduled to be made under the Tax Prepayment
Assumption, multiplied by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the Security's stated redemption
price at maturity. Securityholders generally must report de minimis OID pro rata
as principal payments are received, and such income will be capital gain if the
Security is held as a capital asset. However, accrual method holders may elect
to accrue all interest on a Security, including de minimis OID and market
discount and as adjusted by any premium, under a constant yield method.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. The amount and rate of accrual of OID
must be calculated based on a reasonable assumed prepayment rate for the
Mortgage Loans, the mortgage loans underlying the Agency Securities and/or other
Mortgage Collateral supporting the Securities (the "Tax Prepayment Assumption")
and to prescribe a method for adjusting the amount and rate of accrual of such
discount. However, if such mortgage loans prepay at a rate slower than the Tax
Prepayment Assumption, no deduction for OID previously accrued, based on the Tax
Prepayment Assumption, is allowed. The Tax Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. It is anticipated that the regulations will require that the Tax
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such Securities. The related Prospectus Supplement
for each Series of Securities will specify the Tax Prepayment Assumption
determined by the Issuer for the purposes of determining the amount and rate of
accrual of OID. No representation is made that the Mortgage Collateral will
prepay at the Tax Prepayment Assumption or at any other rate.
Generally, a Securityholder must include in gross income the sum of the
"daily portions," as determined below, of the OID that accrues on a Security for
each day the Securityholder holds that Security, including the purchase date but
excluding the disposition date. In the case of an original holder of a Security,
a calculation will be made of the portion of the OID that accrues during each
successive period (or shorter period from date of original issue) (an "accrual
period") that ends on the day in the calendar year corresponding to each of the
Distribution Dates on the Securities (or the date prior to each such date). This
will be done, in the case of each full accrual period, by adding (A) the present
value at the end of the accrual period of all remaining payments to be received
(based on (i) the yield to maturity of the Security at the issue date, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Tax Prepayment Assumption) and (B) any payments
received during such accrual period, other than payments of qualified stated
interest, and subtracting from that total the "adjusted issue price" of the
Securities at the beginning of such accrual period. The adjusted issue price of
a Security at the beginning of the initial accrual period is its issue price;
the adjusted issue price of a Security at the beginning of a subsequent accrual
period is the adjusted issue price at the beginning of the immediately preceding
accrual period plus the amount of OID allocable to the accrual period and
reduced by the amount of any payment other than a payment of qualified stated
interest made at the end of or during that accrual period. The OID accrued
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of OID for each day in the period. With
respect to an initial accrual period shorter than a full accrual period, the
daily portions of OID must be determined according to any reasonable method,
provided that such method is consistent with the method used to determine yield
on the Securities.
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With respect to any Security that is a variable rate debt instrument, the
sum of the daily portions of OID that is includible in the holder's gross income
is determined under the same principles described above, with the following
modifications: the yield to maturity on the Securities should be calculated as
if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate debt instrument as a result of prepayments is uncertain, holders of such
instruments should consult their own tax advisors regarding the appropriate
treatment of such Securities for federal income tax purposes.
Purchasers of Securities with the above key features for which the period
between the Closing Date and the first Distribution Date does not exceed the
Distribution Date Interval would nevertheless pay upon purchase of the
Securities an additional amount of accrued interest as compared with the accrued
interest that would be paid if interest accrued from Distribution Date to
Distribution Date. This accrued interest (together with any accrued interest
with respect to which the Securityholder chooses not to treat as an offset to
interest paid on the first Distribution Date, as described above) should be
treated for federal income tax purposes as part of the initial purchase price of
the Securities. Securities described in this paragraph issued or purchased at a
discount would be treated as being issued or purchased at a smaller discount or
at a premium, and such Securities issued or purchased at a premium would be
treated as being issued or purchased at a larger premium.
SUBSEQUENT PURCHASERS. A subsequent purchaser of a Deferred Interest
Security or a subsequent purchaser of any other Security issued with OID who
purchases the Security at a cost less than the remaining stated redemption price
at maturity, will also be required to include in gross income for all days
during his or her taxable year on which such Security is held, the sum of the
daily portions of OID on the Security. In computing the daily portions of OID
with respect to a Security for such a subsequent purchaser, however, the daily
portion for any day shall be reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by which
the price paid by such holder for the Security exceeds its adjusted issue price
(the "acquisition premium"), and the denominator of which is the amount by which
the remaining stated redemption price at maturity exceeds the adjusted issue
price.
PREMIUM
A holder who purchases a Security at a cost greater than its stated
redemption price at maturity generally will be considered to have purchased the
Security at a premium, which it may elect to amortize as an offset to interest
income on such Security (and not as a separate deduction item) on a constant
yield method. Under the applicable Treasury regulations, bond premium is to be
accrued on a constant yield basis similar to OID. Accordingly, it appears that
the accrual of premium on a Class of Securities of a Series will be calculated
using the prepayment assumption used in pricing such Class. If a holder makes an
election to amortize premium on a Security, such election will apply to all
taxable debt instruments (including all FASIT regular interests) held by the
holder at the beginning of the taxable year in which the election is made, and
to all taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for the
Securities should consult their tax advisers regarding the election to amortize
premium and the method to be employed.
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ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
The OID Regulations permit a holder of a Security to elect to accrue all
interest, discount (including de minimis market or OID) and premium in income as
interest, based on a constant yield method for the Securities. If such an
election were to be made with respect to a Security with market discount, the
holder of the Security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder of the Securities acquires during the
year of the election or thereafter. Similarly, a holder of a Security that makes
this election for a Security that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield method
with respect to a Security is irrevocable.
REALIZED LOSSES
Securityholders generally are required to accrue interest and OID with
respect to the Securities without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the Mortgage
Collateral until it can be established that any such reductions ultimately will
not be recoverable. Although a holder of a Security will eventually be entitled
to recognize a loss or reduce income attributable to the Securities if
distribution reductions are ultimately not recovered, the law is unclear with
respect to the timing and the character thereof and mismatches may result that
further compound the economic losses associated with reduced distributions on
the Securities.
SALE OR REDEMPTION
If a Security is sold, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale and the seller's adjusted
basis in the Security. Such adjusted basis generally will equal the cost of the
Security to the seller, increased by any OID and market discount included in the
seller's gross income with respect to the Security and reduced by payments,
other than payments of qualified stated interest, previously received by the
seller and by any amortized premium. If a Securityholder is a bank, thrift or
similar institution described in Section 582(c) of the Code, gain or loss
realized on the sale or exchange of a Security will be taxable as ordinary
income or loss. Any such gain or loss recognized by any other seller will be
capital gain or loss, provided that the Security is held by the seller as a
"capital asset" (generally, property held for investment) within the meaning of
Code Section 1221.
MARKET DISCOUNT
The Securities are subject to the market discount provisions of Code
Sections 1276 through 1278. These rules provide that if a subsequent holder of a
Security purchases it at a market discount, some or all of any principal payment
or of any gain recognized upon the disposition of the Security will be taxable
as ordinary interest income. Market discount on a Security means the excess, if
any, of (1) the sum of its issue price and the aggregate amount of OID
includible in the gross income of all holders of the Security prior to the
acquisition by the subsequent holder (presumably adjusted to reflect prior
principal payments), over (2) the price paid by the holder for the Security.
Market discount on a Security will be considered to be zero if such discount is
less than .25% of the stated redemption price at maturity of such Security
multiplied by its weighted average life,
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which presumably would be calculated in a manner similar to weighted average
life (described above), taking into account distributions (including
prepayments) prior to the date of acquisition of such Security by the subsequent
purchaser. If market discount on a Security is treated as zero under this rule,
the actual amount of such discount must be allocated to the remaining principal
distributions on such Security and when each such distribution is made, gain
equal to the discount allocated to such distribution will be recognized.
Any principal payment (whether a scheduled payment or a prepayment) or any
gain on the disposition of a market discount bond is to be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment or disposition. The amount of accrued market discount for
purposes of determining the tax treatment of subsequent principal payments or
dispositions of the Securities is to be reduced by the amount so treated as
ordinary income.
The Code grants authority to the U.S. Treasury to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the U.S. Treasury, certain rules described in the
legislative history accompanying the Tax Reform Act of 1986 will apply. Under
those rules, the holder of a market discount bond may elect to accrue market
discount either on the basis of a constant interest rate or using one of the
following methods. For bonds issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
OID accruing during the period and the denominator of which is the total
remaining OID at the beginning of the period. For bonds issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the Securities) that provide for payments that may be accelerated by reason
of prepayments of other obligations securing such instruments, the same
prepayment assumption applicable to calculating the accrual of OID shall apply.
Regulations are to provide similar rules for computing the accrual of
amortizable bond premium on instruments payable in more than one principal
installment. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter. In addition, accrual method
holders may elect to accrue all interest on a Security, including de minimis OID
and market discount and as adjusted by any premium, under a constant yield
method.
A subsequent holder of a Security who acquired the Security at a market
discount also may be required to defer, until the maturity date of the Security
or the earlier disposition of the Security in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Security in excess of the aggregate amount of interest (including OID)
includible in his or her gross income for the taxable year with respect to such
Security. The amount of such net interest expense deferred in a taxable year may
not exceed the amount of market discount accrued on the Security for the days
during the taxable year on which the subsequent holder held the Security, and
the amount
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of such deferred deduction to be taken into account in the taxable year in which
the Security is disposed of in a transaction in which gain or loss is not
recognized in whole or in part is limited to the amount of gain recognized on
the disposition. This deferral rule does not apply to a holder that elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter.
Because the regulations described above with respect to market discounts
and premiums have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Security purchased at a
discount or premium in the secondary market.
WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Interest and OID income received with respect to the Securities by
Securityholders who are nonresident alien individuals, foreign corporations or
other non-United States persons unrelated to the Issuer ("foreign persons")
generally will not be subject to the 30% withholding tax imposed by Code
Sections 1441 and 1442 on certain income of foreign persons, provided the
procedural requirements of Code Section 871(h)(5) are met.
The 30% withholding tax will apply, however, in certain situations where
contingent interest is paid or the IRS determines that withholding is required
in order to prevent tax evasion by United States persons. If the 30% withholding
tax is applicable, interest payments made to Securityholders who are foreign
persons will be subject to withholding. In addition, a tax equal to 30% of the
OID accrued with respect to a Security since the last payment of interest
thereon will be withheld from each interest payment made to a foreign person.
The Code provides, for purposes of determining the amount of OID subject to the
withholding tax on foreign persons, that OID shall accrue at a constant interest
rate pursuant to the rules applicable to United States persons described above.
Securityholders to whom withholding with respect to foreign persons applies
also will be subject to a 30% tax on a portion of the gain, if any, recognized
upon the payment by the Issuer of principal on a Security or upon the sale or
exchange of a Security. Code Sections 871 and 881 provide, for purposes of
determining the amount of OID subject to the withholding tax, that the 30% tax
will apply to the amount of gain not in excess of the OID that accrued, on a
constant interest basis, while the foreign person held the Security (reduced by
the accrued OID on account of which the tax had already been withheld).
The 30% withholding tax imposed on a foreign person may be subject to
reduction or elimination under applicable tax treaties and does not apply if the
interest, OID or gain treated as ordinary income, as the case may be, is
effectively connected with the conduct by such foreign person of a trade or
business within the United States. Foreign persons who hold a Security should
consult their tax advisors regarding their qualification for reduced rate of, or
exemption from, withholding and the procedure for obtaining such a reduction or
exemption.
BACKUP WITHHOLDING
Federal income tax law provides for "backup withholding" of tax at a rate
of 31% in certain circumstances on "reportable payments," which include payments
of principal, interest and OID (determined in any case as if the Securityholder
were the original holder of the Security), but not market discount, on a
Security and of the proceeds of the
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disposition of a Security. Persons subject to the requirement to backup withhold
include, in certain circumstances, the Issuer, the paying agent of the Issuer, a
person who collects a payment of interest or OID as a custodian or nominee on
behalf of the Securityholder, and a "broker" (as defined in applicable Treasury
regulations) through which the Securityholder receives the proceeds of the
retirement or other disposition of a Security. Backup withholding applies only
if the Securityholder, among other things, (1) fails to furnish a social
security number or other taxpayer identification number ("TIN") to the person
subject to the requirement to backup withhold, (2) furnishes an incorrect TIN to
such person, (3) fails to report properly interest or dividends or (4) under
certain circumstances, fails to provide to such person a certified statement,
signed under penalty of perjury, that the TIN furnished is the correct number
and that such Securityholder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to Securityholders, including payments to certain exempt
recipients (such as corporations and tax-exempt organizations) and to certain
foreign persons. Securityholders should consult their tax advisors regarding
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
Each Issuer will report to the Securityholders and the IRS for each
calendar year the amount of any "reportable payments" by the Issuer during such
year and the amount of tax withheld, if any, with respect to payments on the
Securities issued by it.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above under
"FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Securities. State 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. Therefore, potential investors should consult
their own tax advisors with respect to the various state tax consequences of an
investment in the Securities.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Bonds will specify which, if
any, of the Classes of Securities offered thereby will constitute "mortgage
related securities" for purposes of SMMEA. Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law,
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obligations issued by or guaranteed as to principal and interest by the United
States or any such entities. Under SMMEA, if a state enacts legislation prior to
October 4, 1991 specifically limiting the legal investment authority of any of
such entities with respect to "mortgage related securities," the Securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Approximately twenty-one states adopted such
legislation prior to the October 4, 1991 deadline. SMMEA provides, however, that
in no event will the enactment of any such legislation affect the validity of
any contractual commitment to purchase, hold or invest in Securities, or require
the sale or other disposition of Securities, so long as such contractual
commitment was made or such Securities were acquired prior to the enactment of
such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703) (whether or not the Class of Securities under consideration for
purchase constitutes a "mortgage related security").
All depository institutions considering an investment in the
Securities(whether or not the Class of Securities under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities" that are "high-risk
mortgage securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Securities not entitled to distributions allocated to principal or interest, or
Subordinated Securities. Under the Policy Statement, it is the responsibility of
each depository institution to determine, prior to purchase (and at stated
intervals thereafter), whether a particular mortgage derivative product is a
"high-risk mortgage security," and whether the purchase (or retention) of such a
product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal
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advisors in determining whether and to what extent the Securities constitute
legal investments for such investors.
ERISA MATTERS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Securities without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the Securities should consult with its counsel with
respect to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Securities. Investments by Plans are also
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.
PROHIBITED TRANSACTIONS
GENERAL. Section 406 of ERISA prohibits parties in interest with respect
to a Plan from engaging in certain transactions (including loans) involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION. The United States Department of Labor ("Labor") has
issued final regulations concerning the definition of what constitutes the
assets of a Plan for purposes of ERISA and the prohibited transaction provisions
of the Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes
the circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any person who exercises
control over such assets would be subject to ERISA's fiduciary standards. Under
the Plan Asset Regulation, generally when a Plan invests in another entity's
debt securities, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity.
However, the Plan Asset Regulation provides that, if a Plan acquires an
"equity interest" in an entity that is neither a "publicly-offered security" (as
defined therein) nor a security issued by an investment company registered under
the Investment Company Act of 1940, the assets of the entity will be treated as
assets of the Plan investor unless certain exceptions apply. The Plan Asset
Regulations state that the underlying assets of an entity will not be considered
"plan assets" if, immediately after the most recent acquisition of
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any equity interest in the entity, whether from the issuer or an underwriter,
less than twenty-five percent (25%) of the value of each class of equity
interest is held by "benefit plan investors," individual retirement accounts,
and other employee benefit plans not subject to ERISA (for example, governmental
plans). If the Securities were deemed to be equity interests and no statutory,
regulatory or administrative exemption applies, the Issuer could be considered
to hold plan assets by reason of a Plan's investment in the Securities. Such
plan assets would include an undivided interest in any assets held by the
Issuer. In such an event, the applicable Trustee and other persons, in providing
services with respect to the Issuer's assets, may be parties in interest with
respect to such Plans, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of section 406
of ERISA, and section 4975 of the Code with respect to transactions involving
the Issuer's assets.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Assets Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, Labor
has stated that this determination should be made under the state law governing
interpretation of the instrument in question. In the preamble to the Plan Assets
Regulation, Labor declined to provide a precise definition of what features are
equity features or the circumstances under which such features would be
considered "substantial," noting that the question of whether a plan's interest
has substantial equity features is an inherently factual one, but that in making
a determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services. If the Securities are
deemed to be equity interests in the Issuer and no statutory, regulatory or
administrative exemption applies, the Issuer could be considered to hold plan
assets by reason of a Plan's investment in the Securities. Administrative
exemptions that would permit Plan investment potentially include Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts, PTCE 91-38, regarding investments by bank
collective investment funds, PTCE 84-14, regarding transactions effected by a
"qualified professional asset manager," PTCE 95-60, regarding investments by
insurance company general accounts, or PTCE 96-23, regarding transactions
effected by an "in house asset manager".
REVIEW BY PLAN FIDUCIARIES. Any Plan fiduciary considering whether to
purchase any Securities on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any Securities, a fiduciary of a Plan should make its
own determination as to whether the Issuer, as issuer of the Securities, is a
party in interest with respect to the Plan, the availability of the exemptive
relief provided in the Plan Asset Regulations and the availability of any other
prohibited transaction exemptions. The Prospectus Supplement for each Series of
Securities will discuss the potential applicability of ERISA and Section 4975 of
the Code, the availability of exemptions therefrom and any limitations on
investment in any Class of such Securities by Plans.
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RATINGS
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Mortgage Collateral supporting a Series of Securities and any
credit enhancement with respect to such Class and will reflect such Rating
Agency's assessment solely of the likelihood that holders of a Class of
Securities will receive payments to which such Securityholders are entitled
under the related Security. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the related Mortgage Collateral will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Each security rating should be
evaluated independently of any other security rating. Such rating will not
address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable Rating Agency in the future if in its judgment circumstances in
the future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the Mortgage Collateral securing a
Series of Securities or any credit enhancement with respect to a Series of
Securities, such rating might also be lowered or withdrawn among other reasons,
because of an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating Classes of such Series of Securities.
Such criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of mortgage loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Collateral. No
assurance can be given that values of any Mortgaged Properties or mortgaged
properties securing the mortgage loans underlying any Agency Securities, as the
case may be, have remained or will remain at their levels on the respective
dates of origination of the related mortgage loans. If the residential real
estate markets should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Collateral securing a
particular Series of Securities and any secondary financing on the related
Mortgaged Properties become equal to or greater than the value of the Mortgaged
Properties or mortgaged properties securing the mortgage loans underlying any
Agency Securities, as the case may be, the rates of
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delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Collateral and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Mortgage Collateral securing a
particular Series of Securities. To the extent that such losses are not covered
by credit enhancement, such losses will be borne, at least in part, by the
holders of one or more Classes of Securities.
PLAN OF DISTRIBUTION
The Issuer may sell the Securities offered hereby either directly or
through an underwriter or underwriters or through underwriting syndicates
managed by an underwriter or underwriters. The Prospectus Supplement for each
Series will set forth the terms of the offering of such Series and of each Class
within such Series, including the name or names of the underwriters, the
proceeds to and their use by the Issuer, and either the initial public offering
price, the discounts and commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers or the method by which the
price at which the underwriters will sell the Securities will be determined.
The Securities of a Series may be acquired by underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
underwriters will be subject to certain conditions precedent, and such
underwriters will be severally obligated to purchase all the Securities of a
Series described in the related Prospectus Supplement, if any are purchased. If
Securities of a Series are offered other than through underwriters, the related
Prospectus Supplement will contain information regarding the nature of such
offering and any agreements to be entered into between the Issuer and purchasers
of Securities of such Series.
AmREIT or other affiliate of the Issuer may purchase Securities and pledge
them to secure indebtedness or, together with its pledgees, donees, transferees
or other successors in interest, sell the Securities, from time to time, either
directly or through one or more underwriters, underwriting syndicates or
designated agents.
The place and time of delivery for the Securities of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by Jeffers, Wilson, Shaff & Falk, LLP, California.
Brown & Wood LLP, Washington, D.C., will act as counsel for the underwriters.
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INDEX OF CERTAIN DEFINITIONS
Set forth below is a list of certain terms used in this Prospectus,
together with the pages on which the terms are defined herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accretion Directed.......................................... 57
Accrual Period.............................................. 109
Advances.................................................... 17
Agency Securities........................................... 40
Agreements.................................................. 31
AmREIT...................................................... 31
applicable Trustee.......................................... 49
acquisition premium......................................... 110
Available Funds............................................. 52
balloon payments............................................ 12
Bankruptcy Bond............................................. 70
Belgian Cooperative......................................... 64
beneficial owner............................................ 62
Bond Account................................................ 14
Bond Issuer................................................. 31
Bond Trustee................................................ 8
Bondholders................................................. 8
Bonds....................................................... 8
Book-Entry Securities....................................... 62
Buydown Fund................................................ 36
Buydown Loans............................................... 36
Capitalized Interest Account................................ 49
CEDEL Participants.......................................... 63
CERCLA...................................................... 24
Certificate Issuer.......................................... 31
Certificate Trustee......................................... 31
Certificateholders.......................................... 8
Certificates................................................ 32
Class Security Balance...................................... 52
Closing Date................................................ 48
Code........................................................ 31
Collateral.................................................. 33
Companion Classes........................................... 59
Company..................................................... 31
Component Securities........................................ 57
Controlling Class........................................... 86
Conventional Loans.......................................... 55
Cooperative Loans........................................... 37
Cooperatives................................................ 37
Correspondents.............................................. 37
Cut-off Date................................................ 15
Cut-off Date Principal Balance.............................. 50
Deferred Interest Securities................................ 52
Definitive Security......................................... 62
</TABLE>
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<S> <C>
Depositor................................................... 31
Detailed Description........................................ 34
Distribution Account........................................ 14
Distribution Account Deposit Date........................... 47
Distribution Date........................................... 47
DTC......................................................... 62
Eligible Account............................................ 78
Eligible Corporations....................................... 106
EPA......................................................... 99
ERISA....................................................... 19
Euroclear Operator.......................................... 64
Euroclear Participants...................................... 64
European Depositaries....................................... 62
Event of Default............................................ 87
Excess Spread............................................... 72
FASIT....................................................... 104
FASIT Provisions............................................ 104
FASIT Qualification Test.................................... 105
FHA Loans................................................... 41
FHLMC Act................................................... 44
FHLMC Certificates.......................................... 41
FICO........................................................ 74
Financial Intermediary...................................... 62
Fixed Rate Mortgage Loans................................... 8
FNMA Certificates........................................... 41
foreign persons............................................. 113
Funding Period.............................................. 49
Garn-St Germain Act......................................... 101
GNMA Certificates........................................... 40
GNMA I Certificate.......................................... 41
GNMA II Certificate......................................... 41
GNMA Issuer................................................. 41
Guaranteed Mortgage Pass-Through Certificates............... 41
Guaranty Agreement.......................................... 41
Housing Act................................................. 41
Indenture................................................... 31
Insurance Proceeds.......................................... 33
IO.......................................................... 105
IRS......................................................... 108
Issuer...................................................... 31
L/C Bank.................................................... 71
L/C Percentage.............................................. 71
Labor....................................................... 116
Liquidated Mortgage......................................... 81
Liquidation Proceeds........................................ 33
lockout periods............................................. 13
Master Servicer............................................. 9
Master Servicing Agreement.................................. 77
Master Servicing Fee........................................ 81
</TABLE>
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<S> <C>
Mixed Use Mortgage Loans.................................... 38
Moody's..................................................... 47
Morgan...................................................... 64
mortgage collateral......................................... 8
Mortgage Loans.............................................. 11
Mortgage Note............................................... 35
Mortgage Pool Insurance Policy.............................. 67
Mortgage Rate............................................... 35
Mortgaged Property.......................................... 34
Mortgagor................................................... 76
NCUA........................................................ 115
Offered Securities.......................................... 8
OID......................................................... 18
OID Regulations............................................. 103
PACs........................................................ 58
parties in interest......................................... 19
Permitted Investments....................................... 47
Plan Asset Regulation....................................... 116
Plans....................................................... 116
Policy Statement............................................ 115
Pool Insurer................................................ 67
Pre-Funded Amount........................................... 48
Pre-Funding Account......................................... 48
Primary Mortgage Insurance Policy........................... 34
Principal Prepayments....................................... 53
PTCE........................................................ 117
Purchase Price.............................................. 76
qualified REIT subsidiary................................... 104
Rating Agency............................................... 118
RCRA........................................................ 100
Record Date................................................. 51
REIT........................................................ 18
Relevant Depositary......................................... 62
Relief Act.................................................. 102
REMIC....................................................... 103
Remittance Date............................................. 35
Replacement Mortgage Loan................................... 40
Reserve Account............................................. 52
Reserve Fund................................................ 67
Retained Interest........................................... 50
Rules....................................................... 62
secured creditor exclusion.................................. 99
Security Distribution Amount................................ 47
Security Insurance Policy................................... 70
Security Owners............................................. 62
Security Register........................................... 51
Securities.................................................. 8
Seller...................................................... 32
Senior Securities........................................... 15
</TABLE>
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<S> <C>
Senior Securityholders...................................... 66
Senior Liens................................................ 36
Servicer.................................................... 77
Servicers................................................... 40
Servicing Agreement......................................... 77
Servicing Default........................................... 85
Single-Family Mortgage Loans................................ 20
SMMEA....................................................... 19
Special Hazard Insurance Policy............................. 69
Special Hazard Insurer...................................... 69
Special Servicer............................................ 9
Special Servicing Agreement................................. 84
Stand-by Master Servicer.................................... 84
Subordinated Securities..................................... 15
Subordinated Securityholders................................ 66
Subsequent Mortgage Collateral.............................. 49
Substitute Collateral....................................... 46
Successor Master Servicer................................... 83
TACs........................................................ 59
Tax Prepayment Assumption................................... 109
Terms and Conditions........................................ 64
TIN......................................................... 114
Title V..................................................... 102
TMP......................................................... 103
Trust Agreement............................................. 31
Trust Fund.................................................. 103
Trust Fund Assets........................................... 11
UCC......................................................... 95
VA Loans.................................................... 41
Weighted Average Life....................................... 23
</TABLE>
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$332,350,000 CLASS A-1 BONDS (APPROXIMATE)
$61,750,000 CLASS A-2 BONDS (APPROXIMATE)
[AMERICANRESIDENTIALLOGO]
AMERICAN RESIDENTIAL EAGLE BOND TRUST 1999-2
COLLATERALIZED HOME EQUITY BONDS,
SERIES 1999-2
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
MORGAN STANLEY DEAN WITTER
JULY 21, 1999
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