PROSPECTUS SUPPLEMENT (to prospectus dated July 26, 1999)
$372,062,000 (Approximate)
ACE SECURITIES CORP.
Home Loan Trust 1999-A
Asset Backed Notes
GMAC Mortgage Corporation
Servicer
---------------
- ----------------------------------------------
Consider carefully the risk factors
beginning on page S-10 of this prospectus
supplement and on page 22 of the
prospectus.
For a list of capitalized terms used
in this prospectus supplement and the
prospectus, see the glossary of defined
terms beginning on page S-61 of this
prospectus supplement and on page 158 of
the prospectus.
The notes will represent obligations
of the trust only and will not represent
interests in or obligations of any other
entity.
This prospectus supplement may be
used to offer and sell the notes only if
accompanied by the prospectus.
- ----------------------------------------------
The trust will issue the following notes:
Original Class Interest Price Underwriting Proceeds
Class Principal Amount(1) Rate(2) to Public Discount to Depositor
- ----- ------------------- -------- --------- ------------ ------------
A $372,062,000 7.749% $372,061,810 0.250% $371,131,655
______________
(1) This amount is approximate, as described in this prospectus supplement.
(2) The interest rate is subject to increase as described in this prospectus
supplement.
Subject to the exceptions and limitations that are described in this
prospectus supplement, payment of monthly interest due on the notes, and payment
to holders of notes of the amount of principal losses on the mortgage loans
after overcollateralization has been reduced to zero, will be guaranteed under a
note guaranty insurance policy issued by MBIA Insurance Corporation.
[[MBIA Logo]]
This prospectus supplement and the accompanying prospectus relate only to
the offering of the notes and not to the residual certificate that will be
issued by the trust as described in this prospectus supplement.
The assets of the trust primarily consist of home loans that were
originated to finance property improvements, debt consolidation or a combination
of property improvements, debt consolidation, cash-out, credit insurance
premiums, origination costs and other consumer purposes. The home loans are
secured by, for the most part, junior liens on residential properties in which
the borrowers have little or no equity.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the notes or determined that this
prospectus supplement or the accompanying prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
The notes offered by this prospectus supplement will be purchased by
Deutsche Bank Securities Inc. from ACE Securities Corp., and are being offered
by Deutsche Bank Securities Inc. See "Underwriting" in this prospectus
supplement for additional information on the offering of the notes and
underwriting commissions.
On or about August 12, 1999, delivery of the notes offered by this
prospectus supplement will be made through the book-entry facilities of The
Depository Trust Company.
Underwriter:
Deutsche Banc Alex. Brown
The date of this prospectus supplement is August 6, 1999
<PAGE>
Important Notice About Information Presented in this
Prospectus Supplement and the Accompanying Prospectus:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
-----------------
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of 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. The following tables of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
Tables of Contents
Prospectus Supplement
Page
----
Summary of Terms..................................S-6
The Offered Notes..............................S-6
The Home Loans.................................S-8
Servicing of the Home Loans....................S-8
Optional Purchase of Home Loans................S-8
Tax Status.....................................S-8
ERISA Considerations...........................S-8
Legal Investment Considerations................S-9
Ratings of the Notes...........................S-9
Risk Factors.....................................S-10
Unpredictability and Effect of Prepayments....S-10
Effect of Creation and
Maintenance of Overcollateralization
on Payments of Principal on the
Notes.........................................S-10
Geographic Concentration of Home Loans........S-11
Potential Disruption of Computer Systems......S-11
Limited Ability to Resell Notes...............S-12
Description of the Trust.........................S-13
General.......................................S-13
The Owner Trustee.............................S-13
The Residual Certificate......................S-13
Description of the Notes.........................S-14
General.......................................S-14
Book-Entry Registration.......................S-15
Payments......................................S-17
Payment Priorities............................S-20
Related Definitions...........................S-20
Overcollateralization.........................S-23
Maturity Date.................................S-24
Reports to Noteholders........................S-24
Optional Redemption...........................S-24
Rights of Noteholders Upon
Occurrence of Event of Default................S-25
The Indenture Trustee.........................S-25
The MBIA Insurance Policy........................S-25
MBIA..........................................S-26
MBIA Financial Information....................S-26
Where You Can Obtain Additional
Information About MBIA........................S-27
Year 2000 Readiness Disclosure................S-27
Financial Strength Ratings of MBIA............S-27
The MBIA Insurance Policy.....................S-28
Description of the Home Loan Pool................S-31
General.......................................S-31
Payments on the Home Loans....................S-31
Characteristics of the Home Loans.............S-33
Additional Information...........................S-38
The Originator...................................S-39
General..........................................S-39
Underwriting Criteria............................S-39
The Servicer.....................................S-40
General..........................................S-41
Year 2000 Compliance.............................S-42
Description of the Transfer and
Servicing Agreements.............................S-42
Sale and Assignment of the Home Loans.........S-42
Trust Fees and Expenses.......................S-43
Voting Rights.................................S-44
General Servicing Provisions..................S-44
No Delinquency Advances.......................S-45
Servicing Advances............................S-45
Insurance Coverage............................S-45
Evidence as to Compliance.....................S-45
Servicing Compensation and Payment of ExpensesS-45
Subservicing..................................S-46
Resignation or Removal of the Servicer........S-46
Collection Account, Note
Distribution Account and Certificate
Distribution Account..........................S-47
The Owner Trustee and Indenture Trustee.......S-47
Duties of the Owner Trustee and
Indenture Trustee.............................S-48
Yield Considerations.............................S-49
General.......................................S-49
Overcollateralization.........................S-53
Maturity Date.................................S-53
Weighted Average Life.........................S-53
Material Federal Income Tax Considerations.......S-57
General.......................................S-57
Certain U.S. Federal Income Tax
Documentation Requirements....................S-57
State Income Tax Considerations..................S-58
ERISA Considerations.............................S-58
Legal Investment Considerations..................S-59
Use of Proceeds..................................S-59
Underwriting.....................................S-59
Experts..........................................S-60
Legal Matters....................................S-60
Ratings..........................................S-60
<PAGE>
Prospectus
Page
----
Prospectus Supplement...............................4
Available Information...............................4
Incorporation of Certain Information by
Reference.........................................5
Summary of Prospectus...............................9
Title of Securities..............................9
Depositor........................................9
Issuer...........................................9
Servicers........................................9
Master Servicer..................................9
Trustee; Indenture Trustee......................10
The Trust Assets................................10
Description of Securities.......................15
Distributions on Securities.....................16
Advances........................................18
Termination.....................................18
Registration of Securities......................19
Tax Status of the Securities....................19
Legal Investment Considerations.................21
ERISA Considerations............................21
Rating..........................................21
Material Risks..................................22
Risk Factors.......................................23
Limited Liquidity for Securities................23
Limited Assets for Payment of
Securities....................................23
Rate of Prepayments on Assets May
Adversely Affect Average Lives and
Yields of Securities..........................24
Priority of Payment of Securities May
Adversely Affect Average Lives and
Yields of Securities..........................24
Limited Nature of Ratings.......................25
Real Estate Market Conditions Affect
Mortgage Loan Performance.....................25
Variable Payment Provisions in
Mortgage Loans May Increase Rate
of Default....................................25
Geographic Concentration May
Increase Rates of Loss and
Delinquency...................................26
Multifamily Properties May Experience
Increased Defaults and Foreclosures...........26
Balloon Payment Assets are More
Likely to Experience Losses on
Foreclosure if Obligor is Unable to
Refinance or Sell Related Property............26
Junior Mortgage Loans are More Likely
to Experience Losses on Foreclosure...........27
Sub-prime Mortgage Loans May be
More Likely to Default or be
Foreclosed....................................27
Potential for Losses Increases if
Assets are Delinquent.........................27
Effects of Failure to Comply with
Consumer Protection Laws; Other
Legal Considerations..........................28
General Economic Conditions
Increases the Potential for Losses on
Contracts and Manufactured Homes..............28
Depreciation in Value Increases the
Potential for Losses on Contracts
and Manufactured Homes........................29
Grant of Security Interest in Contracts;
Risks of Defective Security Interest
and Effects of Certain Other Legal
Aspects of the Contracts......................29
Bankruptcy of Borrower May Prevent
Collections on Unsecured Home
Improvement Loans.............................30
Credit Support is Limited in Amount
and Coverage..................................30
Lowering of Rating on Securities May
Decrease Value and Liquidity..................31
Subordinated Securities Bear Risk of
Loss Before More Senior Securities............31
Residual Securities May Have
Adverse Tax Attributes........................31
Owners of Book-Entry Securities
Not Entitled to Exercise Rights of
Holders of Securities.........................32
Financial Instruments are Subject to
Counterparty Risk.............................32
Description of the Trust Funds.....................32
Assets..........................................32
Mortgage Loans..................................34
Contracts.......................................37
Agency Securities...............................38
Mortgage Securities.............................43
FHA Loans and VA Loans..........................44
Pre-Funding Account.............................44
Accounts........................................45
Credit Support..................................45
Cash Flow Agreements............................46
<PAGE>
Page
----
Use of Proceeds....................................46
Yield Considerations...............................46
General.........................................46
Pass-Through Rate and Interest Rate.............46
Timing of Payment of Interest...................47
Payments of Principal; Prepayments..............47
Prepayments--Maturity and
Weighted Average Life.........................48
Other Factors Affecting Weighted
Average Life..................................50
The Depositor......................................53
Description of the Securities......................53
General.........................................53
Distributions...................................54
Available Distribution Amount...................54
Distributions of Interest on the
Securities....................................55
Distributions of Principal of the
Securities....................................57
Components......................................57
Distributions on the Securities of
Prepayment Premiums...........................57
Allocation of Losses and Shortfalls.............57
Advances in Respect of
Delinquencies.................................58
Reports to Securityholders......................59
Termination.....................................61
Optional Purchases..............................61
Book-Entry Registration and
Definitive Securities.........................62
Description of the Agreements......................63
Agreements Applicable to a Series...............63
Material Terms of the Pooling and
Servicing Agreements and
Underlying Servicing Agreements...............64
Material Terms of the Indenture.................84
Description of Credit Support......................87
General.........................................87
Subordinate Securities..........................88
Cross-Support Provisions........................88
Limited Guarantee...............................88
Financial Guaranty Insurance Policy
or Surety Bond................................88
Letter of Credit................................88
Pool Insurance Policies.........................89
Special Hazard Insurance Policies...............89
Mortgagor Bankruptcy Bond.......................89
Reserve Funds...................................89
Overcollateralization...........................90
Certain Legal Aspects of Mortgage
Loans............................................90
General.........................................90
Types of Mortgage Instruments...................91
Interest in Real Property.......................91
Cooperative Loans...............................92
Land Sale Contracts.............................93
Foreclosure.....................................94
Junior Mortgages................................98
Anti-Deficiency Legislation and
Other Limitations on Lenders..................99
Environmental Considerations...................100
Due-on-Sale Clauses............................102
Prepayment Charges.............................103
Subordinate Financing..........................103
Applicability of Usury Laws....................104
Alternative Mortgage Instruments...............104
Soldiers' and Sailors' Civil Relief
Act of 1940..................................105
Forfeitures in Drug and RICO
Proceedings..................................105
Certain Legal Aspects of the Contracts............106
General........................................106
Security Interests in the
Manufactured Homes...........................106
Enforcement of Security Interests in
Manufactured Homes...........................108
Soldiers' and Sailors' Civil Relief Act
of 1940......................................109
Consumer Protection Laws.......................109
Transfers of Manufactured Homes;
Enforceability of "Due-on-Sale"
Clauses......................................109
Applicability of Usury Laws....................110
Material Federal Income Tax
Considerations.................................110
General........................................110
REMICS.........................................111
Grantor Trust Funds............................135
Standard Securities............................136
Stripped Securities............................139
Partnership Trust Funds........................144
State Income Tax Considerations...................150
ERISA Considerations..............................150
Legal Investment Considerations...................154
Methods of Distribution...........................156
Legal Matters.....................................157
Financial Information.............................157
Rating............................................158
<PAGE>
Summary of Terms
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the notes, it is necessary that you read carefully this
entire prospectus supplement and accompanying prospectus.
o While this summary contains an overview of certain calculations, cash flow
priorities, and other information to aid your understanding, you should
read carefully the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and the
accompanying prospectus before making any investment decision.
o Whenever we refer to a percentage of some or all of the home loans in the
trust, that percentage has been calculated on the basis of the total
principal balance of those home loans as of August 1, 1999, unless we
specify otherwise. We explain in this prospectus supplement under
"Description of the Notes -- Related Definitions" how the principal balance
of a home loan is determined. Whenever we refer in this Summary of Terms or
in the Risk Factors section of this prospectus supplement to the total
principal balance of any home loans, we mean the total of their principal
balances determined by that method, unless we specify otherwise.
The Offered Notes
ACE Securities Corp. Home Loan Trust 1999-A is offering the Class A Asset
Backed Notes as part of Series 1999-A. The notes will be issued in book-entry
form.
See "Description of the Notes -- General" in this prospectus supplement for
a discussion of the minimum denominations and the incremental denominations of
the notes.
The notes will represent obligations of the trust and will be secured by
the assets of the trust, which consist primarily of a pool of fixed rate home
loans and the MBIA insurance policy.
The notes will have an approximate total initial principal amount of
$372,062,000. Any difference between the total principal amount of the notes on
the date they are issued and the approximate total principal amount of the notes
on the date of this prospectus supplement will not exceed 5%.
Payments on the Notes
Principal and interest on the notes will be payable on the 20th day of each
month, beginning in September 1999. However, if the 20th day is not a business
day, payments will be made on the next business day after the 20th day of the
month.
Interest Payments
Interest will accrue on the notes at the annual rate described in this
prospectus supplement.
See "Description of the Notes -- Payments -- Payments of Interest" in this
prospectus supplement.
Principal Payments
The amount of principal payable on the notes will be determined by (1)
funds actually received on the home loans that are available to make payments on
the notes, (2) the amount of interest received on the home loans that is used to
pay principal on the notes, calculated as described in this prospectus
supplement, (3) the amount of principal received on the home loans that is
released to the residual certificate, calculated as described in this prospectus
supplement, and (4) any payment of principal required to be made under the MBIA
insurance policy. Funds actually received on the home loans may consist of
expected, scheduled payments, and unexpected payments resulting from prepayments
or defaults by borrowers, liquidation of defaulted home loans, or repurchases of
home loans under the circumstances described in this prospectus supplement.
We explain how principal is paid on the notes under "Description of the
Notes -- Payments -- Payments of Principal" in this prospectus supplement.
The last possible day on which the principal of the notes could become
payable in full is July 20, 2028 and is referred to as the maturity date. The
notes could be paid in full before the maturity date.
Limited Recourse
The only source of cash available to make interest and principal payments
on the notes will be the assets of the trust. The trust will have no other
source of cash and no entity other than the trust and MBIA will be required or
expected to make any payments on the notes.
Enhancement of Likelihood of Payment on the Notes
Subject to the exceptions and limitations that are described in this
prospectus supplement, payment of monthly interest due on the notes, and payment
to holders of notes of the amount of principal losses on the home loans after
overcollateralization has been reduced to zero, will be guaranteed under a
financial guaranty insurance policy issued by MBIA Insurance Corporation, as
described in this prospectus supplement.
The MBIA Insurance Policy
The MBIA insurance policy will guarantee payment to holders of notes of the
amount of interest due on the notes on each distribution date.
The MBIA insurance policy will also guarantee payment to holders of notes
of the amount of any principal losses on the home loans after
overcollateralization has been eliminated.
For information about MBIA and for a more detailed discussion of the MBIA
insurance policy, see "The MBIA Insurance Policy" in this prospectus supplement.
Subordination of Payments
No amounts will be paid to the holder of the residual certificate on any
distribution date until all amounts due to the notes on that date have been paid
and overcollateralization has reached the required level.
Overcollateralization
On the closing date, the total principal balance of the home loans is
expected to exceed the total principal amount of the notes by approximately
15.00%. This condition is referred to as "overcollateralization." Any interest
received on the home loans in excess of the amount needed to pay interest on the
notes and certain expenses and fees of the trust will be used to reduce the
total principal amount of the notes to a level set by MBIA, until the home loans
have a total principal balance that exceeds the total outstanding principal
amount of the notes by the amount required by MBIA. We cannot assure you that
sufficient interest will be generated by the home loans to increase
overcollateralization to the level required by MBIA, or to maintain it at that
level.
See "Description of the Notes -- Overcollateralization" in this prospectus
supplement.
The Home Loans
On the closing date, which is expected to be on or about August 12, 1999,
the assets of the trust will consist primarily of a pool of home loans with a
total principal balance of approximately $437,721,096. The home loans will be
secured by mortgages, deeds of trust or other security instruments, all of which
are referred to in this prospectus supplement as mortgages.
The home loans are fixed rate loans that have original terms to stated
maturity ranging from three to thirty years.
The home loans were originated or acquired by Firstplus Financial, Inc. in
accordance with the underwriting guidelines described in this prospectus
supplement. Almost all of the mortgages securing the home loans will be junior
in priority to one or more senior liens on the related properties, which will
mostly be owner occupied single family homes. The home loans will not be insured
or guaranteed by any government agency.
See "Description of the Home Loan Pool" in this prospectus supplement for a
general description of the home loans and "The Originator" in this prospectus
supplement for a description of the underwriting guidelines applied in
originating the home loans.
Servicing of the Home Loans
The home loans will be serviced by GMAC Mortgage Corporation.
See "The Servicer" and "Description of the Transfer and Servicing
Agreements" in this prospectus supplement.
Optional Purchase of Home Loans
The holder of the residual certificate will have the option to purchase all
of the home loans and the other assets of the trust, other than the MBIA
insurance policy, after the total principal balance of the home loans declines
to less than 10% of their initial total principal balance; if the holder of the
residual certificate does not exercise that option, MBIA may purchase the home
loans and other assets of the trust.
If the home loans and other assets are purchased, the noteholders will be
paid accrued interest, and principal equal to the outstanding principal amount
of the notes.
See "Description of the Notes -- Optional Redemption" in this prospectus
supplement for a description of the purchase price to be paid for the home
loans.
Tax Status
In the opinion of Brown & Wood LLP, for federal income tax purposes the
notes will be characterized as debt, and the trust will not be characterized as
an association (or a publicly traded partnership) taxable as a corporation or a
taxable mortgage pool. Each noteholder, by its acceptance of a note, will agree
to treat the notes as debt.
See "Material Federal Income Tax Considerations" in this prospectus
supplement and in the accompanying prospectus for additional information
concerning the application of federal income tax laws to the notes.
ERISA Considerations
Generally, the notes may be purchased by employee benefit plans or
individual retirement accounts subject to the Employee Retirement Income
Security Act of 1974 or Section 4975 of the Internal Revenue Code of 1986.
However, a fiduciary of an employee benefit plan or an individual retirement
account must determine that the purchase of a note is consistent with its
fiduciary duties under applicable law and does not result in a nonexempt
prohibited transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus
for a more complete discussion of these issues.
Legal Investment Considerations
The notes will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984.
There are other restrictions on the ability of certain types of investors
to purchase the notes that prospective investors should consider.
See "Legal Investment Considerations" in this prospectus supplement and in
the prospectus.
Ratings of the Notes
The notes will initially be rated "AAA" by Standard and Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc., and "Aaa" by Moody's
Investors Service.
These ratings are not recommendations to buy, sell or hold these notes. A
rating may be changed or withdrawn at any time by the assigning rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your notes may be lower than
anticipated.
See "Ratings" in this prospectus supplement for a more complete discussion
of the note ratings.
<PAGE>
Risk Factors
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
the notes. You should also carefully consider the information set forth under
"Risk Factors" in the prospectus.
Unpredictability and Effect of Borrowers may prepay their home loans in
Prepayments whole or in part at any time; however,
approximately half of the home loans
require the payment of a prepayment
penalty in connection with any voluntary
prepayment during the first three to five
years after origination. The prepayment
penalties may be waived by the servicer. A
prepayment of a home loan will usually
result in a prepayment on the notes.
o If you purchase your notes at a
discount and principal is repaid slower
than you anticipate, then your yield
may be lower than you anticipate.
o If you purchase your notes at a premium
and principal is repaid faster than you
anticipate, then your yield may be
lower than you anticipate.
The rate at which defaults and losses
occur on the home loans will affect the
rate of payment of principal on the notes.
We encourage you to review the information
in this prospectus supplement about the
underwriting guidelines applied in
originating the home loans, the credit
quality of the home loans and the
collateral for the home loans.
See "Yield Considerations" in this
prospectus supplement for a description of
factors that may influence the rate and
timing of prepayments on the home loans.
The prepayment experience of the home
loans may differ significantly from that
of first lien residential mortgage loans,
or junior lien mortgage loans with a
principal balance lower than the value of
the related property.
Effect of Creation and We describe in this prospectus supplement
Maintenance of the underwriting guidelines used in
Overcollateralization on originating the home loans, the collateral
Payments of for the home loans and the servicing of
Principal on the the home loans. These and other factors
Notes will affect the rate of defaults and
losses on the home loans, which in turn
will affect the rate at which
overcollateralization is created or
maintained. When overcollateralization is
less than the level required by MBIA, a
portion of interest collections on the
home loans will be used to make principal
payments on the notes. This will
accelerate the rate at which you receive
payments of principal. When
overcollateralization is greater than the
level required by MBIA, a portion of
principal collections on the home loans
will be released to the residual
certificate. This will slow the rate at
which you receive payments of principal.
Geographic Concentration of Approximately 11.77% of the home loans
Home Loans expected to be in the trust on the closing
date are secured by properties in
California. The rate of delinquencies and
defaults, and therefore the rate of
prepayments, on the home loans may be
higher than if fewer of the home loans
were concentrated in one state because the
following conditions in California will
have a disproportionate impact on the home
loans in general:
o Weak economic conditions in California
(which may or may not affect real
property values) may affect the ability
of borrowers to repay their home loans
on time;
o Declines in the California residential
real estate market may reduce the
values of properties located in
California, which would result in an
increase in the combined loan-to-value
ratios;
o Properties in California may be more
susceptible than homes located in other
parts of the country to certain types
of uninsurable hazards, such as
earthquakes, as well as floods,
mudslides and other natural disasters;
and
o Any increase in the market value
of properties located in California
would reduce the combined loan-to-value
ratios of the home loans and could,
therefore, make alternative sources of
financing available to the borrowers at
lower interest rates, which could
result in an increased rate of
prepayment of the home loans.
Natural disasters affect regions of the
United States from time to time, and may
result in increased losses on home loans
in those regions, or in insurance payments
that will constitute prepayments of those
home loans.
For additional information regarding the
geographic distribution of the home loans
in the trust, see the applicable table
under "Description of the Home Loan Pool"
in this prospectus supplement.
Potential Disruption of The transition from the year 1999 to the
Computer Systems year 2000 may interfere with the ability
of computer systems used by the servicer,
the indenture trustee, the note registrar,
The Depository Trust Company and other
parties to process information, unless
modifications to those systems are
completed in time. This could disrupt
collection of payments on the home loans
and calculation and distribution of
payments on the notes.
Limited Ability to Resell Notes The underwriter is not required to assist
in resales of the notes, although it may
do so. A secondary market for the notes
may not develop. If a secondary market
does develop, it might not continue or it
might not be sufficiently liquid to allow
you to resell any of your notes.
<PAGE>
Description of the Trust
General
ACE Securities Corp. Home Loan Trust 1999-A (the "Trust" or the
"Issuer") will be a business trust formed under the laws of the State of
Delaware pursuant to an amended and restated Trust Agreement (the "Trust
Agreement") dated as of August 1, 1999 (the "Cut-off Date") between ACE
Securities Corp. as depositor (the "Depositor") and Wilmington Trust Company as
owner trustee (the "Owner Trustee"), for the transactions described in this
prospectus supplement. The Trust will not engage in any activity other than
acquiring, holding and managing the Home Loans (as defined herein) and the other
assets of the Trust and proceeds therefrom, issuing the Securities (as defined
herein), making payments on the Securities, and engaging in related activities.
On or about August 12, 1999 (the "Closing Date"), the Trust will
purchase the Home Loans from the Depositor pursuant to a Sale and Servicing
Agreement (as amended and supplemented from time to time, the "Sale and
Servicing Agreement") dated as of the Cut-off Date, among the Trust, the
Depositor, the Servicer and First Union National Bank, as indenture trustee (the
"Indenture Trustee").
The Trust's principal offices are located in Wilmington, Delaware, in
care of Wilmington Trust Company, as Owner Trustee, at the address set forth
below under "-- The Owner Trustee."
The Owner Trustee
Wilmington Trust Company will act not in its individual capacity but
solely as the Owner Trustee under the Trust Agreement. Wilmington Trust Company
is a Delaware banking corporation and its principal offices are located at
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. The
compensation of the Owner Trustee will be paid by GMACM (as defined herein) for
as long as GMACM remains the Servicer.
Bankers Trust Company will perform certain administrative functions on
behalf of the Trust pursuant to the terms of an administration agreement (the
"Administration Agreement") between the Trust and Bankers Trust Company.
The Residual Certificate
The equity interest in the Trust will be represented by a residual
interest certificate (the "Residual Certificate").
The holder of the Residual Certificate (the "Residual
Certificateholder," and together with the Noteholders (as defined herein), the
"Securityholders") will be entitled to receive, from and to the extent that
funds are available therefor in the Certificate Distribution Account (as defined
herein), any amounts remaining on any Distribution Date (as defined herein)
after all required payments have been made on the Class A Notes (the "Notes") on
that date, as described herein. Distributions on the Residual Certificate will
be subordinate in priority to payments of interest and payments of principal on
the Notes.
Description of the Notes
General
The Trust will issue the Notes pursuant to an Indenture dated as of the
Cut-off Date (the "Indenture") between the Issuer and the Indenture Trustee. The
Trust will also issue the Residual Certificate pursuant to the Trust Agreement.
The Notes and the Residual Certificate are referred to herein as the
"Securities." Only the Notes are offered hereby. The Notes will be secured by
the Trust Estate (as defined below) pursuant to the Indenture.
The "Trust Estate" will consist primarily of (1) a pool (the "Home Loan
Pool") of fixed rate home loans (the "Home Loans"), (2) the assets that from
time to time are identified as deposited in connection with the Home Loans in
the Collection Account and the Note Distribution Account (each as defined
herein), (3) property acquired by foreclosure of Home Loans or deed in lieu of
foreclosure, (4) the MBIA Insurance Policy (as defined herein), (5) any other
applicable insurance policies and (6) all proceeds of the foregoing.
The Notes will be issued in the approximate initial total principal
amount specified on the cover page hereof (the "Original Class Principal
Amount"). The total principal amount of the Notes outstanding at any time is
referred to herein as the "Class Principal Amount." The Residual Certificate
will be issued without a principal amount or interest rate, and will be entitled
only to the amounts that are described herein. The Original Class Principal
Amount of the Notes may be increased or decreased by up to 5% to the extent that
the Cut-off Date Balance (as defined herein) of the Home Loans is increased or
decreased as described under "Description of the Home Loan Pool" herein.
Payments on the Notes will be made on the 20th day of each month or, if
the 20th day is not a Business Day, on the next succeeding Business Day,
commencing in September 1999 (each, a "Distribution Date"), to holders of Notes
("Noteholders") of record on the applicable Record Date. The "Record Date" for
each Distribution Date will be the close of business on the last Business Day of
the calendar month immediately before the month in which that Distribution Date
occurs.
o A "Business Day" is generally any day other than a Saturday or
Sunday or a day on which MBIA Insurance Corporation ("MBIA")
or banks in New York or Pennsylvania are closed.
Payments on the Notes will be made to each registered holder entitled
thereto, either (1) by check mailed to the Noteholder's address as it appears on
the books of the Indenture Trustee, or (2) at the request, submitted to the
Indenture Trustee in writing not later than the related Record Date, of any
Noteholder (at the Noteholder's expense) in immediately available funds;
provided, that the final payment for any Note will be made only upon
presentation and surrender of the Note at the Corporate Trust Office (as defined
herein) of the Indenture Trustee or the office of the Note Registrar (as defined
herein). See "-- The Indenture Trustee" herein.
The Notes (the "Book-Entry Notes") will be issued, maintained and
transferred on the book-entry records of The Depository Trust Company ("DTC")
and its Participants (as defined herein). The Book-Entry Notes will be issued in
minimum denominations in principal amount of $100,000 and integral multiples of
$1 in excess thereof.
The Book-Entry Notes will be represented by one or more notes
registered in the name of the nominee of DTC. The Depositor has been informed by
DTC that DTC's nominee will be Cede & Co. No person acquiring an interest in a
Book-Entry Note (each, a "Beneficial Owner") will be entitled to receive a note
representing an interest (a "Definitive Note"), except as set forth below under
"-- Book-Entry Registration -- Definitive Notes." Unless and until Definitive
Notes are issued for the Book-Entry Notes under the limited circumstances
described herein, all references to actions by Noteholders with respect to the
Book-Entry Notes will refer to actions taken by DTC upon instructions from its
Participants, and all references herein to distributions, notices, reports and
statements to Noteholders with respect to the Book-Entry Notes will refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Notes, for distribution to Beneficial Owners
by DTC in accordance with DTC procedures.
Book-Entry Registration
General. Beneficial Owners will hold their Notes through DTC if they
are participants of DTC, or indirectly through organizations that are
participants in DTC. The Book-Entry Notes will be issued in one or more notes
that equal the Original Class Principal Amount of the Notes and will initially
be registered in the name of Cede & Co., the nominee of DTC. Except as described
below, no Beneficial Owner will be entitled to receive a physical note
representing a Note. Unless and until Definitive Notes are issued, it is
anticipated that the only "Noteholder" will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be Noteholders as that term is used in the Sale and
Servicing Agreement (as defined herein) or the Indenture. Beneficial Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Note will be recorded on the records of
DTC (or of a participating firm (a "Participant") 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).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Notes from the Indenture Trustee through DTC and DTC
participants. While the Notes 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 Notes and is required to receive and transmit distributions of principal of,
and interest on, the Notes. Participants and indirect participants with whom
Beneficial Owners have accounts with respect to Notes are similarly required to
make book-entry transfers and receive and transmit payments on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess notes, the Rules provide a mechanism by which Beneficial Owners will
receive payments and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive notes
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Beneficial Owners who are not Participants may transfer ownership of Notes only
through Participants and indirect participants by instructing the Participants
and indirect participants to transfer Notes, by book-entry transfer, through DTC
for the account of the purchasers of the Notes, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfer of ownership of Book-Entry Notes 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.
Transfers between Participants will occur in accordance with DTC Rules.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Payments on the Book-Entry Notes will be made on each Distribution Date
by the Indenture Trustee to DTC. DTC will be responsible for crediting the
amount of each payment to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing the payment to the Beneficial Owners of the
Book-Entry Notes that it represents and to each Financial Intermediary for which
it acts as agent. Each Financial Intermediary will be responsible for disbursing
funds to the Beneficial Owners of the Book-Entry Notes that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, because the payments
will be forwarded by the Indenture Trustee to Cede & Co. Because DTC can only
act on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of Book-Entry Notes, may
be limited due to the lack of physical notes for the Book-Entry Notes. In
addition, issuance of the Book-Entry Notes in book-entry form may reduce the
liquidity of the Notes in the secondary market since certain potential investors
may be unwilling to purchase Notes for which they cannot obtain physical notes.
Monthly and annual reports will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes of Beneficial Owners are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Sale and Servicing Agreement or the Indenture
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Notes are credited, to the extent that actions are taken
on behalf of Financial Intermediaries whose holdings include the Book-Entry
Notes. DTC may take actions, at the direction of the related Participants, with
respect to some Notes that conflict with actions taken with respect to other
Notes.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Book-Entry Notes among its participants, they are under
no obligation to perform or continue to perform these procedures and the
procedures may be discontinued at any time.
None of the Depositor, GACC, the Servicer, MBIA, the Owner Trustee or
the Indenture Trustee (as those terms are defined herein) will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes held by Cede &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
Certain computer applications and systems that DTC uses for processing
dates ("Systems") based upon calendar dates, including dates before, on, and
after January 1, 2000, may encounter certain problems related to the Systems'
use of only two digits to calculate calendar dates ("Year 2000 Problems"). Year
2000 Problems could cause DTC's Systems, as they relate to the timely payment of
distributions (including principal and interest payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, to cease functioning
appropriately. DTC has advised the Depositor that it has developed and is
implementing a technical assessment and remediation plan (which includes a
testing phase) to deal with Year 2000 Problems. However, DTC's ability to
perform its services also depends upon other parties including, among others,
issuers and their agents, third party software and hardware vendors, and third
party service and information providers (including telecommunication and
electrical utility service providers). DTC has advised the Depositor that it is
attempting to determine the extent of the efforts of its vendors to deal with
Year 2000 Problems as they relate to the provision of these services. In
addition, DTC is in the process of developing such contingency plans as it deems
appropriate.
Definitive Notes. Definitive Notes will be issued to Beneficial Owners
or their nominees, respectively, rather than to DTC or its nominee, only under
the limited conditions described in the prospectus under "Description of the
Securities -- Book-Entry Registration and Definitive Securities." Upon the
occurrence of an event described in the seventh paragraph thereunder, the
Indenture Trustee is required to direct DTC to notify Participants who have
ownership of Book-Entry Notes as indicated on the records of DTC of the
availability of Definitive Notes for their Book-Entry Notes. Upon surrender by
DTC of the Definitive Notes representing the Book-Entry Notes and upon receipt
of instructions from DTC for re-registration, the Indenture Trustee will
re-issue the Book-Entry Notes as Definitive Notes in the respective principal
amounts owned by individual Beneficial Owners, and thereafter the Indenture
Trustee will recognize the holders of the Definitive Notes as Noteholders under
the Sale and Servicing Agreement and the Indenture.
Payments
For the definitions of certain of the defined terms used in this
subsection, see "-- Related Definitions" below.
Available Collection Amount. Payments on the Notes on each Distribution
Date will be made from the Available Collection Amount. The Available Collection
Amount will be determined as of the close of business on the last day of each
Due Period (the "Determination Date").
o The "Available Collection Amount" for each Distribution Date will
be the sum of the following:
(1) all amounts received relating to the Home Loans
or paid by GACC or the Depositor (not including amounts not
required to be deposited in the Collection Account) during the
related Due Period (and, in the case of amounts required to be
paid by GACC in connection with the purchase or substitution
of a defective Home Loan, deposited in the Collection Account
on or before the related Determination Date), as reduced by
any amount that may not be withdrawn by order of a United
States bankruptcy court;
(2) on the final Distribution Date, or upon early
redemption of the Notes, the Termination Price (as defined
herein), and
(3) any income from investment of funds in the
Collection Account.
o With respect to each Distribution Date, the "Due Period" is
the calendar month immediately before that Distribution Date.
Payments of Interest. Interest on the Class Principal Amount of the
Notes will accrue during each Accrual Period (as defined herein) at the interest
rate specified on the front cover hereof (the "Interest Rate") and will be
payable to Noteholders on each Distribution Date, starting in September 1999. If
the Residual Certificateholder does not exercise its option to purchase the Home
Loans and the other assets of the Trust when it is first entitled to do so, as
described under "--Optional Redemption" herein, then with respect to each
succeeding Distribution Date the Interest Rate will be increased to 8.249%. See
"-- Optional Redemption" herein. Interest on the Notes will be calculated on the
basis of a 360-day year of twelve 30-day months.
o The "Accrual Period" for the Notes will be the calendar month
immediately preceding the month in which the related
Distribution Date occurs.
Payments of interest on the Notes will be made from the Available
Collection Amount remaining after payment of the Servicing Fee (as defined
herein) and payment of investment earnings on amounts in the Collection Account
to the Servicer (the "Available Funds"). Under certain circumstances the amount
available to make interest payments on any Distribution Date could be less than
the amount of interest payable on all of the Notes on that date. An interest
shortfall could occur, for example, if delinquencies or losses on the Home Loans
were exceptionally high or were concentrated in a particular month. Any interest
deficiency with respect to the Notes will be paid by MBIA under the MBIA
Insurance Policy (as defined herein), as described under "The MBIA Insurance
Policy" herein.
Payments of Principal. Principal payments will be made to Noteholders
on each Distribution Date in an amount generally equal to the sum of (1) the
Regular Principal Distribution Amount, as reduced by any Overcollateralization
Release Amount (each as defined herein), and (2) any Excess Spread (as defined
herein) paid to Noteholders as principal, as described below. Principal payments
on the Notes will be made from the Available Funds remaining after the payment
of the Noteholders' Interest Distribution Amount (as defined herein).
o The "Regular Principal Distribution Amount" for any
Distribution Date will be an amount equal to the lesser of:
(a) the sum of:
(1) each scheduled payment of principal
collected by the Servicer in the related Due Period;
(2) all partial and full principal
prepayments applied by the Servicer during that Due
Period;
(3) the principal portion of all Net
Liquidation Proceeds, Insurance Proceeds and Released
Mortgaged Property Proceeds received by the Servicer
during that Due Period relating to any Home Loan;
(4) that portion of the Purchase Price of
any repurchased Home Loan allocable to principal;
(5) the principal portion of any
Substitution Adjustments required to be deposited in
the Collection Account as of the related
Determination Date; and
(6) the principal portion of the
Termination Price, if any; and
(b) the Class Principal Amount of the Notes
immediately before that Distribution Date.
o The "Excess Spread" for any Distribution Date will be the
amount, if any, by which (1) the Available Funds exceeds (2)
the sum of the Regular Distribution Amount, the monthly
premium for the MBIA Insurance Policy, any amounts
reimbursable to MBIA and, if GMACM is no longer the Servicer,
the compensation of the Owner Trustee and the Custodian.
o The "Regular Distribution Amount" for any Distribution Date
will be the lesser of (a) the Available Funds remaining after
payment of (1) the monthly premium for the MBIA Insurance
Policy and (2) if GMACM is no longer the Servicer, the
compensation of the Owner Trustee and the Custodian and (b)
the sum of (1) the Noteholders' Interest Distribution Amount
and (2) the Regular Principal Distribution Amount.
o The "Noteholders' Interest Distribution Amount" for any
Distribution Date will be the sum of the Noteholders' Monthly
Interest Distribution Amount and the Noteholders' Interest
Carryforward Amount.
o The "Noteholders' Monthly Interest Distribution Amount" for
any Distribution Date will be the total of interest accrued
for the related Accrual Period at the Interest Rate on the
Class Principal Amount of the Notes immediately before that
Distribution Date.
o The "Noteholders' Interest Carryforward Amount" for any
Distribution Date will be the sum of
(a) the amount, if any, by which:
(x) the sum of:
(1) the Noteholders' Monthly Interest
Distribution Amount for the immediately preceding
Distribution Date and
(2) any unpaid Noteholders' Interest
Carryforward Amount for the immediately preceding
Distribution Date exceeds
(y) the amount of interest that was paid on the
Notes on that preceding Distribution Date, and
(b) interest on that amount for the related Accrual
Period at the Interest Rate.
Payment Priorities
On each Distribution Date, the Available Funds will be applied in the
following order of priority:
(1) if GMACM is no longer the Servicer, to pay the
compensation of the Owner Trustee and the Custodian (as defined
herein);
(2) to MBIA, the premium for the MBIA Insurance Policy;
(3) to the holders of the Notes, the Noteholders' Interest
Distribution Amount;
(4) to the holders of the Notes, until their Class Principal
Amount has been reduced to zero, the amount necessary to reduce their
Class Principal Amount to the Optimal Principal Amount (as defined
below);
(5) to reimburse MBIA for payments under the MBIA Insurance
Policy not yet reimbursed, and to pay any amounts owed to MBIA under
the Insurance Agreement (as defined herein), together with interest
thereon at the rate specified in the Insurance Agreement;
(6) to the Servicer, any unreimbursed Servicing Advances and
certain additional amounts, as provided in the Sale and Servicing
Agreement; and
(7) to the holder of the Residual Certificate, any remaining
amount.
Related Definitions
o "Insurance Proceeds" means, with respect to any Distribution
Date and any Home Loan, the proceeds paid to the Indenture
Trustee or the Servicer by any insurer pursuant to any
insurance policy covering a Home Loan, Mortgaged Property or
REO Property (each as defined herein) or any other insurance
policy that relates to a Home Loan, net of any expenses
incurred by the Indenture Trustee or the Servicer in
connection with the collection of those proceeds and not
otherwise reimbursed, but excluding any proceeds that are to
be applied to the restoration or repair of the Mortgaged
Property or released to the borrower in accordance with
customary loan servicing procedures.
o A "Liquidated Home Loan" is a defaulted Home Loan as to which
the Servicer has determined that all recoverable liquidation
and insurance proceeds have been received, which will be
deemed to occur upon the earlier of:
(1) the liquidation of the related Mortgaged
Property acquired through foreclosure or similar proceedings,
(2) the Servicer's determination in accordance
with customary servicing practices that no further amounts
are collectible from the Home Loan and any related security,
or
(3) any portion of a scheduled monthly payment
of principal and interest being in excess of 180 days past
due.
o "Net Liquidation Proceeds" means, with respect to any
Distribution Date, any cash amounts received relating to
Liquidated Home Loans, whether through trustee's sale,
foreclosure sale, disposition of REO Properties, whole loan
sale or otherwise (other than Insurance Proceeds and Released
Mortgaged Property Proceeds), and any other cash amounts
received in connection with the management of the Mortgaged
Properties related to defaulted Home Loans, in each case, net
of any reimbursements to the Servicer made from those amounts
for any unreimbursed Servicing Advances made with respect to
the related Liquidated Home Loans or Mortgaged Properties and
any other fees and expenses paid in connection with the
foreclosure, conservation and liquidation of the related
Liquidated Home Loans or Mortgaged Properties.
o The "Optimal Principal Amount" will be an amount equal to the
Total Loan Balance as of the related Determination Date minus
the Targeted Overcollateralization Amount for that
Distribution Date.
o The "Overcollateralization Amount" will be, with respect to
any Distribution Date, an amount (not less than zero) equal to
the amount, if any, by which (1) the Total Loan Balance as of
the related Determination Date exceeds (2) the Class Principal
Amount of the Notes after giving effect, unless otherwise
specified, to all payments on the Notes on that Distribution
Date.
o The "Overcollateralization Release Amount" will be, with
respect to any Distribution Date, the lesser of (a) the
Regular Principal Distribution Amount and (b) the amount, if
any, by which (1) the Overcollateralization Amount for that
date exceeds (2) the Targeted Overcollateralization Amount for
that date.
o The "Total Loan Balance" as of any date of determination will
be the total Principal Balance of the Home Loans as of that
date.
o The "Principal Balance" of any Home Loan as of any date of
determination will be an amount equal to its unpaid principal
balance as of the Cut-off Date minus all principal reductions
credited against the Principal Balance of such Home Loan since
the Cut-off Date; provided, however, that the Principal
Balance of a Liquidated Home Loan will be zero.
o "Released Mortgaged Property Proceeds" means, with respect to
any Distribution Date and any Home Loan, the proceeds received
by the Servicer in connection with (1) a taking of an entire
Mortgaged Property by exercise of the power of eminent domain
or condemnation or (2) any release of part of the Mortgaged
Property from the lien of the related Mortgage, whether by
partial condemnation, sale or otherwise, which in either case
are not released to the borrower in accordance with applicable
law, customary mortgage servicing procedures and the Sale and
Servicing Agreement.
o The "Stepdown Date" will be the latest to occur of:
(1) the Distribution Date in September 2002;
(2) the first Distribution Date on which the
Overcollateralization Amount equals or exceeds an amount equal
to (a) double the Target Percentage multiplied by (b) the
Total Loan Balance; and
(3) the first Distribution Date on which the Class
Principal Amount of the Notes is less than or equal to
$153,201,452;
provided, in each case, that a Trigger Event has not occurred
with respect to that Distribution Date.
o The "Target Percentage" will be a percentage determined by
MBIA and specified in the Sale and Servicing Agreement.
o The "Targeted Overcollateralization Amount" will be,
initially, (a) with respect to any Distribution Date occurring
before the Stepdown Date, an amount equal to the Target
Percentage multiplied by the Cut-off Date Balance, and (b)
with respect to any other Distribution Date, the greater of
(1) an amount equal to (a) double the Target Percentage
multiplied by (b) the Total Loan Balance as of the end of the
related Due Period and (2) 1.00% of the Cut-off Date Balance.
The Targeted Overcollateralization Amount will be subject to
increase or decrease from time to time on the basis of the
loss and delinquency performance of the Home Loans, as
provided in the Sale and Servicing Agreement.
o The "Termination Price" will be an amount equal to the sum of:
(1) 100% of the total outstanding principal balance
of the Home Loans plus accrued interest thereon at the
applicable Home Loan Rate, and
(2) the fair market value of all other property
being purchased;
provided, that the Termination Price will not be less than
the sum of the following:
(1) the Class Principal Amount of the Notes plus
all accrued and unpaid interest thereon at the Interest Rate,
(2) any Servicing Fees due and unpaid,
(3) any unreimbursed Servicing Advances,
including Servicing Advances deemed to be nonrecoverable,
(4) any amounts owed to the Indenture Trustee, the
Owner Trustee and the Custodian, and
(5) any amounts owed to MBIA, including
reimbursement for payments under the MBIA Insurance Policy.
o A "Trigger Event" will be, in general, the occurrence of
certain levels of delinquencies or losses with respect to the
Home Loans, as determined by MBIA and specified in the Sale
and Servicing Agreement.
Overcollateralization
On the Closing Date the Cut-off Date Balance is expected to exceed the
Original Class Principal Amount of the Notes by approximately $65,659,096. The
weighted average Net Home Loan Rate (as defined below) of the Home Loans is
generally expected to be higher than the Interest Rate of the Notes, thus
generating certain excess interest collections. To the extent described herein,
Excess Spread will be applied on any Distribution Date as principal in reduction
of the Class Principal Amount of the Notes. This application of interest
collections as payments of principal will cause the Class Principal Amount of
the Notes to amortize more rapidly than the Total Loan Balance, increasing and
maintaining overcollateralization. However, losses on the Home Loans will reduce
overcollateralization.
o The "Net Home Loan Rate" for any Home Loan equals the Home
Loan Rate thereof minus the sum of the Servicing Fee Rate (as
defined herein), the MBIA Premium Rate and, if GMACM is no
longer the Servicer, the compensation of the Owner Trustee and
the Custodian (expressed as an annual rate).
o The "MBIA Premium Rate" for each Distribution Date is the
fraction, expressed as a percentage, the numerator of which is
the product of (1) the annual premium rate specified in the
Insurance Agreement dated as of the Cut-off Date among MBIA,
the Servicer, GACC, the Depositor, the Issuer, and the
Indenture Trustee (the "Insurance Agreement") and (2) the
Class Principal Amount of the Notes immediately prior to that
date, and the denominator of which is the Total Loan Balance
as of the related Determination Date.
As described herein, on and after the Stepdown Date and if a Trigger
Event has not occurred, to the extent that the Overcollateralization Amount
exceeds the Targeted Overcollateralization Amount, a portion of the Regular
Principal Distribution Amount will not be applied in reduction of the Class
Principal Amount of the Notes, but will instead be distributed to the holder of
the Residual Certificate in an amount equal to the Overcollateralization Release
Amount. This amount could be substantial on any particular Distribution Date if
the Targeted Overcollateralization Amount has been reduced as provided in the
Sale and Servicing Agreement.
Maturity Date
The Class Principal Amount of the Notes and all interest accrued and
unpaid on the Notes will be payable in full on July 20, 2028 (the "Maturity
Date"). See "--Rights of Noteholders Upon Occurrence of an Event of Default"
below. The actual final Distribution Date for the Notes could be substantially
earlier than the Maturity Date.
Reports to Noteholders
On each Distribution Date the Indenture Trustee will make available to
each Noteholder and MBIA a statement containing the following information:
o the amount of principal distributed on that date to Noteholders;
o the amount of interest distributed on that date to Noteholders;
o the amount of any outstanding Noteholders' Interest Carryforward
Amount for the Notes after distributions on that date;
o the Class Principal Amount of the Notes after distributions on
that date;
o the amount of any payment under the MBIA Insurance Policy for
that date;
o the amount of any reimbursement paid to MBIA on that date;
o the amount of the Servicing Fees and MBIA Insurance Premium paid
with respect to that date;
o the Total Loan Balance as of the related Distribution Date;
o the number and total Principal Balance of Home Loans (1)
remaining outstanding, (2) delinquent by one, two, three or
four or more monthly payments, (3) in foreclosure, and (4)
with respect to REO Property;
o any amount distributed to the holder of the Residual Certificate;
and
o certain other information to the extent provided in the Sale and
Servicing Agreement.
Optional Redemption
On any Distribution Date after the date on which the Total Loan Balance
is less than 10% of the Cut-off Date Balance, the holder of the Residual
Certificate will (subject to the terms of the Sale and Servicing Agreement) have
the option to purchase the Home Loans, any REO Property and any other assets of
the Trust, other than the MBIA Insurance Policy, for the Termination Price. If
the holder of the Residual Certificate does not exercise that option, MBIA will
then have the same purchase option. If either purchase option is exercised, the
Notes will be redeemed and the Residual Certificate and the Trust will be
terminated (such event, an "Optional Redemption").
If the Residual Certificateholder does not exercise its option as
described above when it is first entitled to do so, the Interest Rate of the
Notes will be increased as described under "-- Payments of Interest" herein.
Rights of Noteholders Upon Occurrence of Event of Default
Under the Indenture, a failure to pay the full amount of the
Noteholders' Interest Distribution Amount within five days of the Distribution
Date on which that payment is due (without regard to the amount of Available
Funds) or failure to pay the entire outstanding principal amount of the Notes on
the Maturity Date, will constitute an event of default (an "Event of Default").
Upon the occurrence of an Event of Default, MBIA, or the holders of
Notes evidencing more than 50% of the Class Principal Amount of the Notes then
outstanding with the prior consent of MBIA, may exercise their remedies under
the Indenture. These remedies include the right to cause accrued interest to be
paid pro rata in accordance with the amount of unpaid accrued interest, and to
cause principal on the outstanding Notes to be paid (either in lump sum from
proceeds of the sale of the assets pledged to secure the Notes or from monthly
collections on the Home Loans) pro rata out of remaining Available Funds. These
remedies will also include the right to direct the Indenture Trustee's actions
under the Indenture unless this right is otherwise granted to MBIA, or the
holders of the Notes after an acceleration of the Notes and to consent to the
sale of the assets pledged to secure the Notes. See "Description of the
Agreements -- Material Terms of the Indenture" in the prospectus.
The Indenture Trustee
First Union National Bank, a national banking association, will be the
Indenture Trustee under the Indenture. The Indenture Trustee will be entitled to
retain the investment income on amounts in the Note Distribution Account and the
Certificate Distribution Account. The Indenture Trustee's "Corporate Trust
Office" is located at 230 South Tryon Street, 9th Floor, Charlotte, North
Carolina 28288-1179, Attention: Structured Finance Trust Group, or such address
as the Indenture Trustee may designate from time to time by notice to the
Noteholders, MBIA, the Depositor and the Servicer.
To the extent consistent with its fiduciary obligations under the
Indenture, the Indenture Trustee intends to appoint Bankers Trust Company as its
agent to perform many of the duties of the Indenture Trustee, including the
duties of note registrar ("Note Registrar") and paying agent ("Paying Agent")
under the Indenture.
The MBIA Insurance Policy
The following information has been provided by MBIA for inclusion in
this prospectus supplement. Neither the Depositor nor the Underwriter makes any
representation as to the accuracy or completeness of this information.
MBIA does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Note Guaranty Insurance Policy (the "MBIA
Insurance Policy") and MBIA set forth below under this heading "The MBIA
Insurance Policy." Additionally, MBIA makes no representation regarding the
Notes or the advisability of investing in the Notes.
MBIA
MBIA is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not obligated to pay
the debts of or claims against MBIA. MBIA is domiciled in the State of New York
and licensed to do business in and is subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. MBIA has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by MBIA, changes in control and transactions
among affiliates. Additionally, MBIA is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
MBIA Financial Information
The consolidated financial statements of MBIA, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1998, and
December 31, 1997, and for each of the three years in the period ended December
31, 1998, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1998, and the consolidated financial statements of MBIA and its
subsidiaries as of March 31, 1999 and for the three month periods ended March
31, 1999 and March 31, 1998 included in the Quarterly Report on Form 10-Q of
MBIA Inc. for the period ended March 31, 1999, are hereby incorporated by
reference into this prospectus supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this prospectus supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus
supplement.
All financial statements of MBIA and its subsidiaries included in
documents filed by MBIA, Inc. 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 Notes
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 tables below present selected financial information of MBIA
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
December 31, 1998 March 31, 1999
--------------------- ---------------------
(Audited) (Unaudited)
(in millions)
Admitted Assets $6,521 $6,742
Liabilities 4,231 4,412
Capital and Surplus 2,290 2,330
GAAP
December 31, 1998 March 31, 1999
--------------------- ---------------------
(Audited) (Unaudited)
(in millions)
Assets $7,488 $7,625
Liabilities 3,211 3,370
Shareholder's Equity 4,277 4,255
Where You Can Obtain Additional Information About MBIA
Copies of the financial statements of MBIA incorporated by reference
herein and copies of MBIA's 1998 year-end audited financial statements prepared
in accordance with statutory accounting practices are available, without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545.
Year 2000 Readiness Disclosure
MBIA Inc. is actively managing a high-priority Year 2000 ("Y2K")
program. MBIA Inc. has established an independent Y2K testing lab in its Armonk
headquarters, with a committee of business unit managers overseeing the project.
MBIA Inc. has a budget of $1.13 million for its 1998-2000 Y2K efforts.
Expenditures are proceeding as anticipated, and MBIA Inc. does not expect the
project budget to materially exceed this amount. MBIA Inc. has initiated a
comprehensive Y2K plan that includes assessment, remediation, testing and
contingency planning. This plan covers "mission-critical" internally developed
systems, vendor software, hardware and certain third-party entities through
which MBIA Inc. conducts its business. Testing to date indicates that functions
critical to the financial guarantee business, both domestic and international,
were Y2K-ready as of December 31, 1998. Additional testing will continue
throughout 1999.
Financial Strength Ratings of MBIA
Moody's Investors Service, Inc. ("Moody's") rates the financial
strength of MBIA "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") rates the financial strength of MBIA "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes, and these ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. MBIA does
not guaranty the market price of the Notes nor does it guaranty that the ratings
on the Notes will not be revised or withdrawn.
The MBIA Insurance Policy
MBIA, in consideration of the payment of the premium and subject to the
terms of the MBIA Insurance Policy, thereby unconditionally and irrevocably
guarantees to any Owner (as described below) that an amount equal to each full
and complete Insured Payment (as described below) will be received from MBIA by
First Union National Bank, or its successor, as trustee for the Owners (the
"Indenture Trustee") on behalf of the Owners, for distribution by the Indenture
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. MBIA's obligations under the MBIA Insurance Policy with respect to a
particular Insured Payment shall be discharged to the extent that funds equal to
the applicable Insured Payment are received by the Indenture Trustee, whether or
not those funds are properly applied by the Indenture Trustee. Insured Payments
shall be made only at the time set forth in the MBIA Insurance Policy and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Notes, unless such acceleration is at the sole option of MBIA.
Notwithstanding the foregoing paragraph, the MBIA Insurance Policy does
not cover shortfalls, if any, attributable to the liability of the Trust or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
MBIA will pay any Insured Payment that is a Preference Amount (as
described below) on the Business Day (as described below) following receipt on a
Business Day by the Fiscal Agent (as described below) of:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to MBIA that such order is
final and not subject to appeal;
o an assignment in the form as is reasonably required by MBIA,
irrevocably assigning to MBIA all rights and claims of the
Owner relating to or arising under the Notes against the
debtor which made such preference payment or otherwise with
respect to such preference payment; and
o appropriate instruments to effect the appointment of MBIA as
agent for such Owner in any legal proceeding related to such
preference payment such instruments being in a form
satisfactory to MBIA;
provided that if such documents are received after 12:00 noon New York City time
on such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Notes to the receiver or trustee in
bankruptcy, in which case the payment shall be disbursed to such Owner.
MBIA will pay any other amount payable under the MBIA Insurance Policy
no later than 12:00 noon New York City time on the later of the Distribution
Date on which the related Deficiency Amount is due or the third Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for MBIA or any successor fiscal agent
appointed by MBIA (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time on
such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under the MBIA
Insurance Policy it shall be deemed not to have been received by the Fiscal
Agent for purposes of this paragraph, and MBIA or the Fiscal Agent, as the case
may be, shall promptly so advise the Indenture Trustee and the Indenture Trustee
may submit an amended Notice.
Insured Payments due under the MBIA Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the Indenture Trustee on
behalf of the Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
the Insured Payment and legally available therefor.
The Fiscal Agent is the agent of MBIA only and the Fiscal Agent shall
in no event be liable to Owners for any acts of the Fiscal Agent or any failure
of MBIA to deposit or cause to be deposited, sufficient funds to make payments
due under the MBIA Insurance Policy.
Subject to the terms of the Agreement, MBIA shall be subrogated to the
rights of each Owner to receive payments under the Notes to the extent of any
payment by MBIA under the MBIA Insurance Policy.
As used in the MBIA Insurance Policy, the following terms shall have
the following meanings:
o "Agreement" means the Sale and Servicing Agreement dated as of
August 1, 1999 among ACE Securities Corp., as Depositor, ACE
Securities Corp. Home Loan Trust 1999-A, as Issuer, GMAC
Mortgage Corporation, as Servicer, and the Indenture Trustee,
as indenture trustee, without regard to any amendment or
supplement thereto, unless such amendment or supplement has
been approved in writing by MBIA.
o "Business Day" means any day other than (a) a Saturday or a
Sunday, (b) a day on which MBIA is closed or (c) a day on
which banking institutions in New York, Pennsylvania or the
city in which the corporate trust office of the Indenture
Trustee under the Agreement is located are authorized or
obligated by law or executive order to close.
o "Deficiency Amount" means the excess, if any, of (a) the sum
of (1) for any Distribution Date, the Noteholders' Interest
Distribution Amount and (2) for any Distribution Date on which
the Overcollateralization Amount is zero, the amount by which
the Class Principal Amount of the Notes as of that
Distribution Date (before giving effect to payments of
principal on that Distribution Date) exceeds the Total Loan
Balance as of the related Determination Date over (b) the
Available Funds (net of the premium amount payable to MBIA
and, if GMACM is no longer the Servicer, the compensation of
the Owner Trustee and the Custodian) for that Distribution
Date.
o "Insured Payment" means (a) for any Distribution Date, any
Deficiency Amount and (b) any Preference Amount.
o "Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by facsimile substantially in the form of
Exhibit A attached to the MBIA Insurance Policy, the original
of which is subsequently delivered by registered or certified
mail, from the Indenture Trustee specifying the Insured
Payment that shall be due and owing on the applicable
Distribution Date.
o "Owner" means each Noteholder (as defined in the Agreement)
who, on the applicable Distribution Date, is entitled under
the terms of the Notes to payment thereunder.
o "Preference Amount" means any amount previously distributed to
an Owner on the Notes that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as
amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the MBIA Insurance Policy and not otherwise
defined in the MBIA Insurance Policy shall have the respective meanings set
forth in the Agreement as of the date of execution of the MBIA Insurance Policy,
without giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved in writing by
MBIA.
Any notice under the MBIA Insurance Policy or service of process on the
Fiscal Agent may be made at the address listed below for the Fiscal Agent or
such other address as MBIA shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The MBIA Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the MBIA Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The MBIA Insurance Policy is not cancelable for any reason. The premium
on the MBIA Insurance Policy is not refundable for any reason including payment,
or provision being made for payment, prior to maturity of the Notes.
Description of the Home Loan Pool
General
The Home Loan Pool will consist of approximately 14,072 Home Loans with
original terms to maturity of not more than thirty years, having a total
Principal Balance as of the Cut-off Date of approximately $437,721,096 (the
"Cut-off Date Balance"). The Home Loans are secured by mortgages, deeds of trust
or other security instruments ("Mortgages"). All of the Home Loans will be
conventional loans (loans that are not insured by a governmental agency). The
Home Loans will consist of loans for which the related net proceeds were used to
finance (1) property improvements, (2) debt consolidation, or (3) a combination
of property improvements, debt consolidation, cash-out, credit insurance
premiums, origination costs or other consumer purposes. A very small number of
Home Loans may be evidenced by retail installment sales contracts that are
secured by Mortgages.
Generally, the Home Loans were originated or acquired by the Originator
(as defined herein) in one of four ways:
o the origination of loans directly to consumers, including but
not limited to solicitations through television, radio and
direct mail advertising, telemarketing, refinancing of
existing home loans and referrals from home improvement
contractors, mortgage brokers and credit unions;
o the wholesale purchase of loans, on a flow basis, originated
by unaffiliated lenders, as correspondents, including
delegated underwriting correspondents;
o the purchase, on a bulk basis, of loan portfolios originated
by unaffiliated lenders; or
o to a more limited extent, the indirect origination and
purchase of retail installment sales contracts from dealers
that professionally install the related property improvements.
For a description of the underwriting criteria applicable to the Home
Loans, see "The Originator -- Underwriting Criteria" herein.
The Trust will be entitled to all payments of interest and principal
and all proceeds received in connection with the Home Loans on and after the
Cut-off Date.
The Servicer will be required to service the Home Loans pursuant to the
Sale and Servicing Agreement and will be compensated for these services as
described under "Description of the Transfer and Servicing Agreements --
Servicing" herein.
Payments on the Home Loans
The Home Loans provide for a schedule of payments that will be, if
timely paid, sufficient to amortize fully the principal balance of the related
Home Loan on or before its maturity date. The scheduled monthly payment dates of
the Home Loans vary. Each Home Loan bears interest at a fixed rate (the "Home
Loan Rate"). Interest on the Home Loans will accrue on either an "actuarial
interest" method or a "simple interest" method. A substantial majority of the
Home Loans will accrue interest on the actuarial method. No Home Loan provides
for deferred interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following that scheduled
day are subject to late charges. A scheduled payment on a Home Loan received
either earlier or later than its scheduled due date will not affect the
amortization schedule or the relative application of that payment to principal
and interest in respect of the Home Loan.
The simple interest method provides for the amortization of the amount
of a Home Loan over a series of equal scheduled payments. However, unlike the
monthly actuarial interest method, each scheduled payment will be applied to
interest calculated on the basis of the outstanding principal balance of the
related Home Loan, the Home Loan Rate and the period elapsed since the preceding
payment of principal was made. As payments are received on the Home Loan, the
amount received is applied first to interest accrued to the date of payment and
the balance, if any, is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Home Loan less
than one month after the previous payment, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment on a Home Loan more than one month after the previous payment, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would be had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly less. In addition, in certain states a late
charge may be imposed with respect to the past due amount.
With respect to a Home Loan on which interest accrues pursuant to the
simple interest method, if a payment is received on the Home Loan less than one
month after the previous payment, more of that payment will be used on the
related Distribution Date to pay principal on the Notes than if that payment was
received as scheduled. If a payment is received on the Home Loan more than one
month after the previous payment, less of that payment will be used on the
related Distribution Date to pay principal on the Notes than if that payment was
received as scheduled. This allocation will not affect the total amount of
principal due over the life of a Home Loan, but it may affect the weighted
average lives of the Notes. See "Yield Considerations" herein.
Certain of the borrowers are covered by credit insurance policies and
involuntary unemployment insurance policies, which provide for payment in full
of the outstanding principal balances of their Home Loans in the event of the
accidental death or disability of the borrower, or for payment of the applicable
monthly payment (up to $500 per month), in the case of employment interruption.
The credit life insurance policies and involuntary unemployment insurance
policies generally have terms of five years. If a borrower covered by a credit
life insurance policy or an involuntary unemployment insurance policy elects to
cancel the policy, the amount of the premium refund payable in connection with
the cancellation will be applied as a principal payment on the related Home
Loan. Any proceeds received by the Trust from these insurance policies will
affect the rate of prepayments on the Home Loans. See "Yield Considerations"
herein.
Characteristics of the Home Loans
Substantially all of the Mortgages for the Home Loans will be junior in
priority to one or more senior liens on the related mortgaged properties
("Mortgaged Properties"), which will consist primarily of owner occupied single
family residences. Substantially all of the Home Loans will be secured by liens
on Mortgaged Properties in which the borrowers have little or no equity; that
is, the related Combined Loan-to-Value Ratios approach or exceed 100%.
o "Combined Loan-to-Value Ratio" means, with respect to any Home
Loan, the fraction, expressed as a percentage, the numerator
of which is the principal balance of the Home Loan at
origination plus, in the case of a junior lien Home Loan, the
total outstanding principal balance of the related senior lien
loans on the date of origination of the Home Loan, and the
denominator of which is the appraised or stated value of the
related Mortgaged Property at the time of origination of the
Home Loan (determined as described herein under "The
Originator -- Underwriting Criteria").
The Home Loans are expected to have the following approximate total
characteristics as of the Cut-off Date. Prior to the issuance of the Notes, Home
Loans may be removed from the Home Loan Pool as a result of incomplete
documentation or otherwise, if the Depositor deems removal necessary or
appropriate. In addition, a limited number of other home loans may be included
in the Home Loan Pool prior to the issuance of the Notes.
Wherever reference is made herein to a percentage of some or all of the
Home Loans, the percentage is determined (unless otherwise specified) on the
basis of the total principal balance of the related Home Loans as of the Cut-off
Date.
Approximately half of the Home Loans provide for payment by the
borrower of a prepayment premium in connection with full or partial prepayments
of principal within three to five years of the date of origination of the loan,
generally equal to six months' interest on the portion of the amount prepaid
that exceeds 20% of the original principal balance of the loan over any twelve
month period at the applicable Home Loan Rate.
The Home Loan Rates of the Home Loans range from approximately 6.00%
annually to 19.99% annually. The weighted average Home Loan Rate of the Home
Loans is approximately 13.17% annually.
The Principal Balances of the Home Loans range from approximately $31
to $99,058. The Home Loans have an average Principal Balance of approximately
$31,106.
The weighted average Combined Loan-to-Value Ratio at origination of the
Home Loans is approximately 114%.
No more than approximately 0.14% of the Home Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Home Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may not
equal the totals due to rounding.)
<PAGE>
<TABLE>
<CAPTION>
Cut-off Date Principal Balances
Percentage of Home Loans by
Range of Cut-off Date Number of Total Total
Principal Balances ($) Home Loans Principal Balance Principal Balance
---------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000........... 168 $ 885,566 0.20%
10,001 to 20,000........... 1,966 32,030,520 7.32
20,001 to 30,000........... 5,016 128,085,480 29.26
30,001 to 40,000........... 4,569 157,788,781 36.05
40,001 to 50,000........... 1,504 67,920,840 15.52
50,001 to 60,000........... 497 27,148,251 6.20
60,001 to 70,000........... 245 15,751,769 3.60
70,001 to 80,000........... 91 6,709,151 1.53
80,001 to 90,000........... 12 1,011,980 0.23
90,001 to 100,000........... 4 388,758 0.09
---------- ---------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
The average Principal Balance of the Home Loans as of the Cut-off Date
was approximately $31,106.
<TABLE>
<CAPTION>
Original Principal Balances
Percentage of Home Loans by
Range of Original Number of Total Total
Principal Balances ($) Home Loans Principal Balance Principal Balance
---------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Up to 10,000............. 51 $ 357,971 0.08%
10,001 to 20,000............. 1,826 28,682,781 6.55
20,001 to 30,000............. 5,035 125,994,557 28.78
30,001 to 40,000............. 4,697 159,811,008 36.51
40,001 to 50,000............. 1,569 69,772,091 15.94
50,001 to 60,000............. 514 27,621,108 6.31
60,001 to 70,000............. 259 16,426,016 3.75
70,001 to 80,000............. 103 7,497,333 1.71
80,001 to 90,000............. 13 1,091,388 0.25
90,001 to 100,000............. 5 466,842 0.11
------------ ---------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
The average principal balance of the Home Loans at origination was
approximately $32,071.
<TABLE>
<CAPTION>
Home Loan Rates
Percentage of Home Loans by
Range of Number of Total Total
Home Loan Rates (%) Home Loans Principal Balance Principal Balance
------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
5.001 to 6.000.............. 1 $ 28,073 0.01%
7.001 to 8.000.............. 1 2,103 0.00
8.001 to 9.000.............. 7 182,720 0.04
9.001 to 10.000.............. 225 5,958,635 1.36
10.001 to 11.000.............. 838 26,055,081 5.95
11.001 to 12.000.............. 3,343 109,075,140 24.92
12.001 to 13.000.............. 3,228 106,249,398 24.27
13.001 to 14.000.............. 2,656 84,556,251 19.32
14.001 to 15.000.............. 1,887 55,560,944 12.69
15.001 to 16.000.............. 1,271 34,656,743 7.92
16.001 to 17.000.............. 447 11,442,611 2.61
17.001 to 18.000.............. 133 3,179,378 0.73
18.001 to 19.000.............. 27 611,713 0.14
19.001 to 20.000 8 162,306 0.04
------------ ---------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
The weighted average Home Loan Rate of the Home Loans as of the Cut-off
Date was approximately 13.17% per annum.
<TABLE>
<CAPTION>
Remaining Terms to Maturity
Percentage of Home Loans by
Range of Remaining Number of Total Total
Terms to Maturity (Months) Home Loans Principal Balance Principal Balance
-------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
1 to 60...................... 117 $ 1,650,234 0.38%
61 to 90...................... 91 1,718,423 0.39
91 to 120...................... 796 18,725,528 4.28
121 to 150...................... 135 3,156,590 0.72
151 to 180...................... 2,717 82,244,750 18.79
181 to 210...................... 94 2,446,783 0.56
211 to 240...................... 1,391 44,835,566 10.24
241 to 270...................... 65 2,018,032 0.46
271 to 300...................... 8,665 280,903,447 64.17
greater than 300................. 1 21,744 0.00
---------- ----------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
The weighted average remaining term to maturity of the Home Loans as of
the Cut-off Date was approximately 246 months.
<TABLE>
<CAPTION>
Loan Age
Percentage of Home Loans by
Range of Loan Number of Total Total
Age (in Months) Home Loans Principal Balance Principal Balance
--------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
0 to 10.......................... 3 $ 101,104 0.02%
11................................ 391 11,933,209 2.73
12................................ 2,974 92,847,379 21.21
13................................ 3,271 100,903,820 23.05
14................................ 2,957 94,756,152 21.65
16................................ 1,403 44,600,131 10.19
17................................ 844 26,281,469 6.00
18................................ 405 12,272,029 2.80
19................................ 436 13,657,795 3.12
20 to 25.......................... 760 25,036,642 5.72
26 to 31.......................... 406 10,635,805 2.43
32 to 37.......................... 73 1,817,831 0.42
38 to 43.......................... 45 939,955 0.21
44 to 49.......................... 82 1,666,688 0.38
greater than 49................... 22 271,087 0.06
--------- ---------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
The weighted average number of months since origination of the Home
Loans as of the Cut-off Date was approximately fifteen months.
<TABLE>
<CAPTION>
Year of First Payment Date
Percentage of Home Loans by
Year of First Number of Total Total
Payment Date Home Loans Principal Balance Principal Balance
------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
Before 1994........................ 4 $ 8,660 0.00%
1994............................... 5 64,743 0.01
1995............................... 93 1,843,076 0.42
1996............................... 116 2,714,733 0.62
1997............................... 1,155 35,144,835 8.03
1998............................... 12,699 397,945,050 90.91
------ ------------- -------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Geographic Concentration
Percentage of Home Loans by
Number of Total Total
State Home Loans Principal Balance Principal Balance
----- ---------- ----------------- -----------------
<S> <C> <C> <C>
Arizona............................ 356 $ 10,528,711 2.41%
Arkansas........................... 275 8,532,908 1.95
California......................... 1,584 51,502,894 11.77
Colorado........................... 249 7,490,257 1.71
Connecticut........................ 117 3,811,055 0.87
Delaware........................... 47 1,578,529 0.36
Florida............................ 1,357 40,962,132 9.36
Georgia............................ 566 17,757,281 4.06
Idaho.............................. 103 2,931,730 0.67
Illinois........................... 245 8,170,776 1.87
Indiana............................ 289 9,066,377 2.07
Iowa............................... 129 3,994,086 0.91
Kansas............................. 335 9,790,882 2.24
Kentucky........................... 180 5,480,188 1.25
Louisiana.......................... 140 4,718,797 1.08
Maine.............................. 101 3,091,704 0.71
Maryland........................... 271 8,595,928 1.96
Massachusetts...................... 190 5,842,008 1.33
Michigan........................... 514 15,722,808 3.59
Minnesota.......................... 285 9,217,515 2.11
Mississippi........................ 83 2,332,485 0.53
Missouri........................... 725 20,988,501 4.79
Montana............................ 25 690,959 0.16
Nebraska........................... 91 2,799,335 0.64
Nevada............................. 252 8,172,011 1.87
New Hampshire...................... 72 2,200,048 0.50
New Jersey......................... 195 6,506,874 1.49
New Mexico......................... 114 3,471,278 0.79
New York........................... 265 8,338,665 1.91
North Carolina..................... 640 20,013,946 4.57
Ohio............................... 812 25,452,077 5.81
Oklahoma........................... 175 5,083,855 1.16
Oregon............................. 131 3,918,064 0.90
Pennsylvania....................... 1,147 35,888,414 8.20
Rhode Island....................... 40 1,359,500 0.31
South Carolina..................... 283 8,588,913 1.96
Tennessee.......................... 207 6,117,436 1.40
Utah............................... 93 2,847,267 0.65
Vermont............................ 20 624,941 0.14
Virginia........................... 484 15,055,734 3.44
Washington......................... 648 21,416,263 4.89
Wisconsin.......................... 123 3,964,088 0.91
Wyoming............................ 25 789,892 0.18
Other.............................. 89 2,313,985 0.53
------- -- --------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Credit Scores*
Percentage of Home Loans by
Range of Number of Total Total
Credit Scores Home Loans Principal Balance Principal Balance
------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Unknown............................ 313 $ 10,337,255 2.36%
Below 500.......................... 46 1,212,866 0.28
500 to 519......................... 72 2,037,478 0.47
520 to 539......................... 105 2,958,325 0.68
540 to 559......................... 139 3,774,531 0.86
560 to 579......................... 211 5,988,320 1.37
580 to 599......................... 336 9,636,344 2.20
600 to 619......................... 538 15,716,384 3.59
620 to 639......................... 824 24,109,929 5.51
640 to 659......................... 1,153 34,587,364 7.90
660 to 679......................... 1,526 46,739,697 10.68
680 to 699......................... 1,696 53,422,411 12.20
700 to 719......................... 1,837 58,994,610 13.48
720 to 739......................... 1,848 59,064,690 13.49
740 to 759......................... 1,711 54,611,566 12.48
760 to 779......................... 1,168 36,979,638 8.45
780 to 799......................... 480 15,226,006 3.48
800 or more........................ 69 2,323,681 0.53
------------ --------------- --------
Total..................... 14,072 $437,721,096 100.00%
</TABLE>
- --------------------
* The Credit Scores (as defined herein) shown in the above table are not the
Credit Scores that were obtained by the Originator in connection with the
underwriting of the Home Loans. The above Credit Scores were obtained by the
Seller in June of 1999 from Equifax Credit Marketing Service ("Equifax"). The
Credit Scores range from 440 to 820. Equifax was unable to produce a Credit
Score for 313 of the loans, representing approximately 2.36% of the Home Loans
by Principal Balance.
The weighted average Credit Score of the Home Loans for which Credit
Scores were available as of the Cut-off Date was approximately 697.
Additional Information
The description in this prospectus supplement of the Home Loan Pool and
the Mortgaged Properties is based upon the Home Loan Pool as constituted at the
close of business on the Cut-off Date. A Current Report on Form 8-K will be
available to purchasers of the Notes and will be filed, together with the Sale
and Servicing Agreement, the Indenture and the Trust Agreement, with the
Securities and Exchange Commission (the "SEC") within fifteen days after the
initial issuance of the Notes. In the event that Home Loans are removed from or
added to the Home Loan Pool as described herein under "Description of the Home
Loan Pool," the removal or addition, to the extent material, will be noted in
the Current Report on Form 8-K.
The Originator
General
Firstplus Special Funding Corp., a Nevada corporation ("FSFC"),
acquired the Home Loans from Firstplus Financial, Inc. (the "Originator")
pursuant to a Purchase and Sale Agreement (the "Purchase and Sale Agreement")
among the Originator, as seller, FSFC, as purchaser, and Firstplus Financial
Group, Inc., as guarantor. FSFC transferred the Home Loans to GACC pursuant to a
Sale, Assignment and Assumption Agreement dated as of October 8, 1998 (the
"Assumption Agreement") between FSFC, as assignor, and GACC, as assignee. The
Originator represented and warranted to FSFC pursuant to the Purchase and Sale
Agreement that each Home Loan had been underwritten or reunderwritten in
accordance with the Originator's then-current underwriting guidelines. Pursuant
to the Assumption Agreement, FSFC assigned to GACC all of its rights under the
Purchase and Sale Agreement, including its rights with respect to any breach of
a representation and warranty made thereunder.
Since GACC purchased the Home Loans, both the Originator and FSFC have
become debtors in Chapter 11 bankruptcy proceedings. On July 30, 1999, orders of
the bankruptcy court were entered dismissing FSFC's bankruptcy case and
approving a settlement agreement in which the Originator and FSFC recognize
GACC's ownership of the Home Loans. GACC and the Depositor will have received,
prior to the issuance of the Notes, an opinion of legal counsel to the effect
that the bankruptcy court's orders were validly entered and are in full force
and effect and are final and not subject to appeal. This opinion will be based
on certain assumptions, including the assumptions that (1) each entity having an
interest in the Home Loans, other than the Originator and FSFC, received due and
adequate notice of the motion to approve the settlement agreement and (2) the
bankruptcy court docket accurately reflects all motions, appeals, stays and
requests relating to the bankruptcy case.
Underwriting Criteria
The information contained herein regarding the Originator's
underwriting requirements and practices was obtained from publicly available
information regarding asset-backed notes secured by loans made by the Originator
that are similar to the Home Loans and not from the Originator directly. As a
result, there can be no assurance that the Home Loans were originated, in whole
or in part, in accordance with these underwriting requirements and practices, or
that these underwriting requirements and practices were in effect when the Home
Loans were originated.
Generally, the Originator's underwriting standards placed a greater
emphasis on the creditworthiness of the borrower than on the value of the
underlying collateral in evaluating the likelihood that a borrower would be able
to repay a loan.
In many cases, Home Loans will have been made to borrowers that
typically have limited access to mortgage financing for a variety of reasons,
such as high ratios of debt-to-income, unfavorable credit experience,
insufficient home equity value, relatively low income or a limited credit
history. Each Home Loan is subject to various risks, including, for example, the
risk that the related borrower will not be able to make payments of interest and
principal on the loan and that the realizable value of the related Mortgaged
Property will be insufficient to repay the outstanding interest and principal
owed on the loan. The Originator used its own credit evaluation criteria to
classify the loans by risk class. These criteria included, as a significant
component, the credit score ("Credit Score") derived on the basis of a
methodology developed by Fair, Isaac and Company, a consulting firm specializing
in creating default predictive models through scoring mechanisms. The Credit
Scores, which were based on information obtained from national credit reporting
organizations, are numerical representations of borrowers' estimated default
probability, and can range from a low of 250 to a high of 950. A borrower with a
Credit Score of 720 or higher would have been assigned the highest
classification for credit quality by the Originator. Additional criteria
included the borrower's debt-to-income ratio, mortgage credit history, consumer
credit history, prior bankruptcies, prior foreclosures, notices of default,
deeds-in-lieu of foreclosure, repossessions and the state in which the mortgaged
property is located.
The Originator generally did not require a full appraisal of a
Mortgaged Property for Home Loans. For loans between $35,000 and $75,000, a
drive-by appraisal, broker's price opinion, statistical appraisal or comparable
estimation of value is generally obtained, and for loans of $35,000 or less the
Originator relies on the property value stated by the borrower in the loan
application.
The Originator's underwriting guidelines provided for the evaluation of
a loan applicant's creditworthiness through the use of a consumer credit report,
verification of employment and a review of the debt-to-income ratio of the
applicant. The borrower's income was generally verified through various means,
including without limitation applicant interviews, written verifications with
employers and review of pay stubs or tax returns. A borrower was generally
expected to demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements. Notwithstanding the foregoing, the Originator offered a
"no income verification" program to certain borrowers that have Credit Scores in
excess of 680 and that satisfied a minimum disposable income and three-year
employment requirement. Under the no income verification program, the borrower's
employment history, but not income, was verified.
The Originator's underwriting requirements for certain types of home
loans may have changed from time to time, which in certain instances may have
resulted in more stringent and in other instances less stringent underwriting
requirements. Depending upon the date on which the Home Loans were originated or
purchased by the Originator, Home Loans included in the Home Loan Pool may have
been originated or purchased by the Originator under different underwriting
standards, and accordingly, some Home Loans included in the Home Loan Pool may
be of a different credit quality and have different characteristics than other
Home Loans. Furthermore, to the extent that certain Home Loans were originated
or purchased by the Originator under less stringent underwriting standards, the
Home Loans may be more likely to experience higher rates of delinquencies,
defaults and losses than home loans originated or purchased under more stringent
underwriting standards.
The Servicer
The following information has been provided by the Servicer. Neither
the Depositor nor the Underwriter makes any representation as to the accuracy or
completeness of this information.
General
GMAC Mortgage Corporation ("GMACM" or the "Servicer") will service the
Home Loans pursuant to the terms of the Sale and Servicing Agreement.
The Servicer is an indirect wholly-owned subsidiary of General Motors
Acceptance Corporation and is one of the nation's largest mortgage bankers. The
Servicer is engaged in the mortgage banking business, including the origination,
purchase, sale and servicing of residential loans. The principal office of the
Servicer is at 100 Witmer Road, Horsham, Pennsylvania 19044; its telephone
number is (215) 682-1000.
The Servicer will, consistent with the Sale and Servicing Agreement,
follow collection procedures that it typically follows in its general mortgage
servicing activities for mortgage loans that are similar to the Home Loans. The
Servicer may in its discretion waive any prepayment penalty in connection with
the prepayment of a Home Loan or extend the due dates for payments due on a Home
Loan.
If a Home Loan is in default or if default is reasonably foreseeable,
the Servicer may permit modification of the terms of the Home Loan if in its
judgment the modification would be in the best interests of the Noteholders and
MBIA. The Servicer's ability to modify Home Loans will be limited as described
under "Description of the Transfer and Servicing Agreements - General Servicing
Provisions" herein. The Servicer will take into account any loss that might
result if the Home Loan were liquidated in deciding whether to permit any
modifications.
From time to time, borrowers may request partial releases of Mortgaged
Properties from the lien of the related Mortgage, resubordination of a Home Loan
to a new senior loan, consent to grant easements, consent to alteration or
demolition of the Mortgaged Property and other similar matters. The Servicer may
approve these requests if in its judgment approval will not adversely affect the
security for the Home Loan, consistent with the terms of the Sale and Servicing
Agreement.
If a borrower becomes delinquent in payment on a Home Loan, the
Servicer will be required to follow the procedures described under "Description
of the Transfer and Servicing Agreements -- General Servicing Provisions"
herein. If a borrower defaults under a Home Loan, the Servicer will decide
whether to foreclose on the related Mortgaged Property, write off the principal
balance of the Home Loan as a bad debt or take an unsecured note. The Servicer
will, following its usual practices, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with foreclosure
or repossession and resale to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. Almost all of the Mortgages are junior
in priority to one or more senior liens on the related Mortgaged Property.
Unless foreclosure proceeds for a defaulted Home Loan are expected to at least
satisfy the related senior mortgage loan in full and to pay foreclosure costs,
it is likely that foreclosure will not be pursued by the Servicer.
If title to any Mortgaged Property is acquired in foreclosure or by
deed in lieu of foreclosure, the deed or certificate of sale will be issued to
the Indenture Trustee or to its nominee on behalf of the Noteholders and MBIA.
Any income(net of expenses and fees) received by the Servicer on the Mortgaged
Property prior to its disposition will be deposited in the Collection Account.
See "Description of the Transfer and Servicing Agreements -- General
Servicing Provisions" herein for additional information about the servicing of
the Home Loans.
Year 2000 Compliance
GMACM has undertaken a detailed review and assessment of all areas
within its business and operations that could be adversely affected by Year 2000
Problems, developed a detailed plan and timetable for addressing Year 2000
Problems on a timely basis, and to date, implemented that plan in accordance
with the timetable. All of GMACM's computer applications that are material to
its business and operations and the performance of its obligations under the
Sale and Servicing Agreement have been tested and are believed to be Year 2000
compliant.
Description of the Transfer and Servicing Agreements
The following summary describes certain terms of the Sale and Servicing
Agreement, the Indenture, the Trust Agreement, and the Administration Agreement
(collectively, the "Transfer and Servicing Agreements"). The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Transfer and Servicing Agreements. The
following summary supplements, and to the extent inconsistent, replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements under the headings "Description of the Agreements" in the prospectus.
Sale and Assignment of the Home Loans
On the Closing Date, GACC will sell the Home Loans (other than the
right to receive certain charges payable by borrowers) to the Depositor, and the
Depositor will sell the Home Loans (other than those amounts) to the Trust. The
Trust will, concurrently, deliver or cause to be delivered the Securities to the
Depositor. The Trust will pledge and assign the Home Loans to the Indenture
Trustee in exchange for the Notes. Each Home Loan will be identified in a
schedule appearing as an exhibit to the Sale and Servicing Agreement (the "Home
Loan Schedule").
In addition, the Depositor will, as to each Home Loan, deliver to a
custodian appointed by the Indenture Trustee (the "Custodian") the following
documents (together, with respect to each Home Loan, a "Home Loan File"):
o the related Note endorsed to the order of the Indenture
Trustee, or in blank, without recourse,
o any assumption and modification agreements and the Mortgage
with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office),
o an assignment of the Mortgage in the name of the Indenture
Trustee, or in blank, in recordable form, and
o any intervening assignments of the Mortgage.
Assignments of the Mortgages to the Indenture Trustee will be recorded
following the Closing Date in the real property records of the states in which
the related Mortgaged Properties are located to protect the Indenture Trustee's
interest in the Home Loans against the claims of creditors of GACC or subsequent
purchasers. In the event that, with respect to any Home Loan, the Depositor
cannot deliver the assignment with evidence of recording thereon concurrently
with the conveyance thereof under the Sale and Servicing Agreement because they
have not yet been returned by the public recording office, the Depositor will
deliver or cause to be delivered to the Custodian a certified true photocopy of
the assignment. The Depositor will deliver or cause to be delivered to the
Custodian any assignment with evidence of recording indicated thereon upon
receipt thereof from the public recording office. The Custodian will review (or
cause to be reviewed) each Home Loan File within ninety days after the
conveyance of the related Home Loan to the Trust to ascertain that all required
documents have been executed and received.
Under the terms of the agreement (the "Home Loan Sale Agreement")
pursuant to which the Depositor will purchase the Home Loans from GACC, and of
the Sale and Servicing Agreement, the Custodian will conduct an initial review
of the Home Loan documents and will notify the Depositor and GACC as to each
Home Loan document that either has not yet been delivered to the Depositor as
required or appears to be not properly executed, not in conformity with the
description of the Home Loan on the Home Loan schedule or otherwise defective.
If any Home Loan document is not delivered or any material defect in a document
is not cured within the time period specified in the Home Loan Sale Agreement,
GACC will be required to repurchase the affected Home Loan for a price equal to
the unpaid principal balance thereof plus accrued interest thereon (the
"Repurchase Price") or, in certain circumstances, to substitute another Home
Loan that satisfies the requirements specified in the Sale and Servicing
Agreement.
GACC will make to the Depositor under the Home Loan Sale Agreement
representations and warranties that include representations and warranties
similar to those summarized in the prospectus under the heading "Description of
the Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Representations and Warranties; Repurchases."
The Depositor's rights under these representations and warranties will be
assigned to the Indenture Trustee for the benefit of the Noteholders and MBIA.
In the event of a breach of any of these representations or warranties that
materially and adversely affects the value of any Home Loan or the interests of
the Noteholders or MBIA, GACC will be obligated, within 60 days following its
discovery of a breach or receipt of notice of a breach, to cure the breach or
purchase the affected Home Loan from the Trust for the Repurchase Price or, in
certain circumstances, to substitute another Home Loan.
No assurance can be given that, at any particular time, GACC will be
capable, financially or otherwise, of repurchasing defective Home Loans or
substituting additional Home Loans for defective Home Loans.
Trust Fees and Expenses
The Servicer is entitled to the Servicing Fee and reimbursement for
certain expenses as described under "-- Servicing Compensation and Payment of
Expenses" below. The fees and expenses of the Indenture Trustee, the Owner
Trustee and the Custodian will be paid by GMACM.
Voting Rights
Voting rights of Securityholders under the Transfer and Servicing
Agreements will be allocated among the Notes and the Residual Certificate as
provided in the Transfer and Servicing Agreements. MBIA will be entitled to
exercise all consent or voting rights of Noteholders.
General Servicing Provisions
The Home Loans will be serviced by the Servicer in accordance with the
provisions of the Sale and Servicing Agreement.
The Servicer will be required to employ generally accepted servicing
practices for loans similar to the Home Loans in collecting amounts due under
the Home Loans. The Servicer will be required to deposit all amounts recovered
with respect to the Home Loans within one Business Day of receipt thereof in the
Collection Account.
If a Home Loan becomes delinquent in payment, the Servicer will be
required to take certain actions, including:
o contacting the borrower by telephone five Business Days after
the related due date, again five Business Days later if
payment has not been received, and again periodically;
o mail delinquency notices at specified intervals;
o between 30 and 50 days after payment was due, determine the
lien position of the Home Loan, and have the property
inspected.
o between 60 and 90 days after payment was due, deliver a notice
of intent to foreclose to the borrower;
o after expiration of the period specified in the notice, obtain
a broker's price opinion with respect to the value of the
Mortgaged Property; and
o approximately 120 days after payment was due, determine
whether to foreclose.
If, as will frequently be the case, it is unlikely in the judgment of
the Servicer that foreclosure will be an economically practical course of
action, the Servicer may take other approaches to resolving a defaulted Home
Loan, such as modification of the loan terms, reduction or forgiveness of
amounts due, or a negotiated settlement with the borrower, consistent with the
terms of the Sale and Servicing Agreement.
The Servicer will be permitted under the Sale and Servicing Agreement
to modify the terms of a Home Loan, including changing the Home Loan Rate,
deferring or forgiving a scheduled payment or extending of the maturity date, if
the Home Loan is in default. In addition, the Servicer will be permitted to make
the same types of modifications to Home Loans that are not yet in default.
However, after 2.0% of the non-defaulted Home Loans (by Cut-off Date Balance)
have been modified, the Servicer will be prohibited from modifying any further
non-defaulted Home Loans without the prior written consent of MBIA.
When the Servicer does modify the terms of a Home Loan, the Home Loan
Rate may be reduced or the maturity date of the Home Loan may be extended.
Modified Home Loans will remain in the Trust, and the reduction in collections
resulting from a modification may result in reduced distributions of principal
on, or may extend the final payment of, the Notes.
The Servicer will be permitted to waive prepayment penalties in its
discretion.
No Delinquency Advances
In the event of a delinquency or default with respect to a Home Loan,
neither the Servicer nor any Subservicer (as defined below) will have any
obligation to advance scheduled monthly payments of principal or interest with
respect to the Home Loan.
Servicing Advances
The Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Home Loans (each, a "Servicing Advance")
and will be entitled to reimbursement for Servicing Advances as described
herein. Servicing Advances may include costs and expenses advanced for the
preservation, restoration and protection of any Mortgaged Property, including
advances to pay delinquent real estate taxes and assessments. Any Servicing
Advances by the Servicer or any Subservicer will be reimbursable from late
collections on the related Home Loan, or with respect to any Liquidated Home
Loan from the related Liquidation Proceeds. Servicing Advances remaining
outstanding will be reimbursed, to the extent of Available Funds, as described
under "Description of the Notes -- Payment Priorities."
Insurance Coverage
The Servicer is required to obtain and thereafter maintain in effect a
bond or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of its officers and
employees.
Evidence as to Compliance
The Sale and Servicing Agreement will provide that each year a firm of
independent accountants will furnish a statement to the Indenture Trustee and
MBIA to the effect that the firm has examined certain documents and records
relating to the servicing of home loans by the Servicer and that, on the basis
of that examination, the firm is of the opinion that the servicing has been
conducted in accordance with applicable accounting standards, except for those
exceptions that the firm believes to be immaterial and those exceptions set
forth in the statement.
Servicing Compensation and Payment of Expenses
The Servicer will be paid a monthly fee (the "Servicing Fee") with
respect to each Home Loan calculated at 0.75% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Home Loan. No Servicing Fee
will be payable on a Liquidated Home Loan unless the Servicer determines that
additional collection efforts are warranted with respect to that Home Loan. The
Servicer will be entitled to reimbursement from collections on the Home Loans
for certain expenses before any amounts are paid to Noteholders.
For as long as GMACM remains the Servicer, the Servicer will be
responsible for payment of the fees and certain expenses of the Owner Trustee
and the Custodian.
Subservicing
The Servicer will be prohibited from assigning the responsibility for
servicing the Home Loans, except as permitted by the Sale and Servicing
Agreement, but it may employ one or more subservicers ("Subservicers") as
provided under the Sale and Servicing Agreement. If the Servicer chooses to
employ Subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Sale and Servicing Agreement, and will be considered to
have itself received any payment received by a Subservicer whether or not the
Subservicer actually remits that payment.
Resignation or Removal of the Servicer
The Servicer will agree in the Sale and Servicing Agreement not to
resign except with the consent of MBIA, unless the Servicer delivers to MBIA an
opinion of legal counsel to the effect that the Servicer is no longer permitted
under applicable law to perform the duties of the Servicer under the Sale and
Servicing Agreement.
If the Servicer is in default under the Sale and Servicing Agreement,
MBIA may remove the Servicer, or the Indenture Trustee or Noteholders having a
majority of voting rights may, with the prior written consent of MBIA, remove
the Servicer. Events of default include:
o failure by the Servicer to remit any required payment to the
Indenture Trustee for one Business Day after receipt of
written notice that the payment has not been made;
o failure by the Servicer to deposit collections or other
recoveries on the Home Loans in the Collection Account on a
daily basis in accordance with the Sale and Servicing
Agreement;
o failure by the Servicer to fulfill any other material
requirement under the Sale and Servicing Agreement within the
applicable time period;
o failure by the Servicer to be qualified to service home loans
for either Fannie Mae or Freddie Mac;
o failure by the Servicer to maintain any applicable licenses
in each jurisdiction where Mortgaged Properties are located;
o failure by the Servicer to maintain a minimum net worth of
$25,000,000;
o insolvency of the Servicer; and
o other events specified in the Sale and Servicing Agreement.
If the Servicer is removed, the Indenture Trustee will immediately
assume the role of Servicer under the Sale and Servicing Agreement unless MBIA
appoints another Servicer pursuant to the Sale and Servicing Agreement. The
Indenture Trustee may continue to service the Home Loans if it is legally
qualified to do so or may appoint a successor Servicer acceptable to MBIA.
Collection Account, Note Distribution Account and Certificate Distribution
Account
The Servicer is required to deposit in a segregated account (the
"Collection Account") within two Business Days of receipt all payments received
on or after the Cut-off Date on account of principal and interest on the Home
Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged
Property Proceeds, any amounts payable in connection with the repurchase or
substitution of any Home Loan and any amount required to be deposited in the
Collection Account in connection with the redemption of the Notes. Withdrawals
will be made from the Collection Account only for the purposes specified in the
Sale and Servicing Agreement. The Collection Account may be maintained at any
depository institution that satisfies the requirements specified in the Sale and
Servicing Agreement.
Amounts on deposit in the Collection Account will be invested as
provided in the Sale and Servicing Agreement. All interest and any other
investment earnings on amounts on deposit in the Collection Account will be paid
to the Servicer. Any net losses on these investments will be paid by the
Servicer.
The Servicer will establish and maintain with the Paying Agent an
account on behalf of the Noteholders, into which amounts released from the
Collection Account for payment to the Noteholders will be deposited and from
which all payments to the Noteholders will be made (the "Note Distribution
Account"). The Servicer will also establish and maintain with the Paying Agent
an account in the name of the Owner Trustee on behalf of the Residual
Certificateholder, into which amounts released from the Collection Account for
distribution to the Residual Certificateholder will be deposited and from which
all distributions to the Residual Certificateholder will be made (the
"Certificate Distribution Account").
On the 18th day of each month, or if the 18th day is not a Business
Day, the preceding Business Day, the Servicer will remit the Available Funds to
the Paying Agent for deposit into the Note Distribution Account and Certificate
Distribution Account by making appropriate withdrawals from the Collection
Account. On each Distribution Date, the Indenture Trustee will make withdrawals
from the Note Distribution Account and Certificate Distribution Account for
application as described under "Description of the Notes -- Payment Priorities"
herein. Amounts on deposit in the Note Distribution Account and Certificate
Distribution Account will be invested as provided in the Sale and Servicing
Agreement. All interest and any other investment earnings on amounts on deposit
in the Note Distribution Account and Certificate Distribution Account will be
retained by the Indenture Trustee as its compensation. Any net losses on these
investments will be paid by the Indenture Trustee.
The Owner Trustee and Indenture Trustee
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of an appointment of another trustee all rights, powers,
duties and obligations conferred or imposed upon the Owner Trustee by the Sale
and Servicing Agreement and the Trust Agreement and upon the Indenture Trustee
by the Indenture will be conferred or imposed upon the Owner Trustee and the
Indenture Trustee, respectively, and in each case the separate trustee or
co-trustee, jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform certain acts,
singly upon the separate trustee or co-trustee, which will exercise and perform
these rights, powers, duties and obligations solely at the direction of the
Owner Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer may also remove the Owner Trustee or the Indenture Trustee if either
ceases to be eligible to continue as Owner Trustee or Indenture Trustee under
the Trust Agreement or the Indenture, as the case may be, becomes legally unable
to act or becomes insolvent. In these circumstances, the Servicer will be
obligated to appoint a successor Owner Trustee or a successor Indenture Trustee,
as applicable, that is acceptable to MBIA. Any resignation or removal of the
Owner Trustee or Indenture Trustee and appointment of a successor thereto will
not become effective until acceptance of the appointment by the successor and
approved by MBIA.
The Trust Agreement and Indenture will provide that the Owner Trustee
and Indenture Trustee will be entitled to indemnification by GACC and the
Depositor for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or Indenture Trustee not resulting from its own
willful misfeasance, bad faith or negligence (other than by reason of a breach
of any of its representations or warranties to be set forth in the Trust
Agreement or Indenture, as the case may be).
Duties of the Owner Trustee and Indenture Trustee
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Residual Certificate (other than the
execution and authentication thereof), the Notes or any Home Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Securities or the Home Loans, or the investment of any monies by
the Servicer before these monies are deposited into the Collection Account, the
Note Distribution Account or the Certificate Distribution Account. So long as no
Event of Default has occurred and is continuing, the Owner Trustee will be
required to perform only those 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 Owner Trustee will not be charged with knowledge of
a failure by the Servicer to perform its duties under the Sale and Servicing
Agreement, which failure constitutes an Event of Default, unless the Owner
Trustee has actual knowledge of any failure.
The Owner Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of the holder of the Residual Certificate, unless the Residual
Certificateholder has offered to the Owner Trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby. Subject to the rights or consent of MBIA, the Noteholders
and Indenture Trustee, the Residual Certificateholder will not have any right
under the Trust Agreement to institute any proceeding with respect to the Trust
Agreement, unless the Residual Certificateholder previously has given to the
Owner Trustee written notice of the occurrence of an Event of Default and (1)
the Event of Default arises from the Servicer's failure to remit payments when
due or (2) the holder of the Residual Certificate has made written request upon
the Owner Trustee to institute a proceeding in its own name as the Owner Trustee
thereunder and have offered to the Owner Trustee reasonable indemnity, and the
Owner Trustee for 30 days has neglected or refused to institute any proceedings.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Residual Certificate, the Notes (other than
the execution and authentication thereof) or any Home Loans or related
documents, and will not be accountable for the use or application by the
Depositor, the Servicer or the Owner Trustee of any funds paid to the Depositor,
the Servicer or the Owner Trustee in respect of the Securities or the Home
Loans, or the investment of any monies by the Servicer before those monies are
deposited into the Collection Account or the Note Distribution Account. So long
as no Event of Default under the Indenture or the Sale and Servicing Agreement
has occurred or is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Transfer and Servicing
Agreements. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Indenture Trustee under the Indenture, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Sale and Servicing
Agreement, which failure constitutes an Event of Default under the Indenture or
the Sale and Servicing Agreement, unless the Indenture Trustee obtains actual
knowledge of any failure.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless those Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Noteholder will have any right under
the Indenture to institute any proceeding with respect to the Indenture, unless
the holder previously has given to the Indenture Trustee written notice of the
occurrence of an Event of Default and (1) the Event of Default arises from the
Servicer's failure to remit payments when due or (2) Noteholders evidencing not
less than 25% of the Class Principal Amount of the Notes, acting together as a
single class, have made written request upon the Indenture Trustee to institute
a proceeding in its own name as the Indenture Trustee thereunder and have
offered to the Indenture Trustee reasonable indemnity, and the Indenture Trustee
for 30 days has neglected or refused to institute any proceedings. Any right of
Noteholders to institute proceedings as described above is subject to the rights
of MBIA, as provided in the Sale and Servicing Agreement. See "Description of
the Notes -- Rights of Noteholders Upon Occurrence of Event of Default" herein.
Yield Considerations
General
The yields to maturity (or to early termination) on the Notes will be
affected by the rate of principal payments on the Home Loans (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Home Loans. Yields will also be
affected by the extent to which Home Loans bearing higher Home Loan Rates prepay
at a more rapid rate than Home Loans with lower Home Loan Rates, the amount and
timing of borrower delinquencies and defaults resulting in Realized Losses, the
application of Monthly Excess Cashflow, the purchase price paid for the Notes
and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. These factors may
include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity, if any, in the mortgaged properties, servicing decisions,
homeowner mobility, the existence and enforceability of "due-on-sale" clauses,
seasoning of loans, market interest rates for similar types of loans and the
availability of funds for the loans. Nearly all of the Home Loans contain
due-on-sale provisions and the Servicer will generally enforce these provisions
unless (1) the Servicer, in a manner consistent with its servicing practices,
permits the purchaser of the related Mortgaged Property to assume the Home Loan,
or (2) enforcement is not permitted by applicable law. In certain cases, the
Servicer may, in a manner consistent with its servicing practices, permit a
borrower who is selling his principal residence and purchasing a new one to
substitute the new Mortgaged Property as collateral for the related Home Loan,
or may simply release its lien on the existing collateral, leaving the related
Home Loan unsecured. In that event, the Servicer will generally require the
borrower to make a partial prepayment in reduction of the principal balance of
the Home Loan to the extent that the borrower has received proceeds from the
sale of the prior residence that will not be applied to the purchase of the new
residence.
Approximately half of the Home Loans are subject to prepayment
penalties during the first three to five years after origination. Prepayment
penalties may have the effect of reducing the amount or the likelihood of
prepayments on the Home Loans. A prepayment premium may be waived by the
Servicer under certain circumstances. The remaining Home Loans may be prepaid in
full or in part at any time without penalty.
In general, if prevailing interest rates fall below the interest rates
on the Home Loans, the Home Loans are likely to be subject to higher prepayments
than if prevailing rates remain at or above the interest rates on the Home
Loans. Conversely, if prevailing interest rates rise above the interest rates on
the Home Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Home Loans include such factors as changes
in borrowers' housing needs, job transfers, unemployment, borrowers' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions.
The rate of principal payments on the Home Loans will also be affected
by the amortization schedules of the Home Loans, the rate and timing of
prepayments by the borrowers, liquidations of defaulted Home Loans and
repurchases of Home Loans due to certain breaches of representations and
warranties or defective documentation as described herein. The timing of changes
in the rate of prepayments, liquidations and purchases of the related Home Loans
may significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Because the rate and timing of principal payments on the Home Loans
will depend on future events and on a variety of factors (as described more
fully herein and in the prospectus under "Yield Considerations") no assurance
can be given as to the rate or the timing of principal payments on the Notes. In
general, the earlier a prepayment of principal of the related Home Loans, the
greater the effect on an investor's yield. The effect on an investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Notes may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. Any
resulting Realized Losses could affect the rate of payment of principal no the
Notes. To the extent that the insurance proceeds received with respect to any
damaged Mortgage Properties are not applied to the restoration thereof, the
proceeds will be used to prepay the related Home Loans in whole or in part. Any
repurchases or repayments of the Home Loans may reduce the weighted average
lives of the Notes and will reduce the yields on the Notes to the extent they
are purchased at a premium.
In addition, any future limitations on the rights of borrowers to
deduct interest payments on mortgage loans for federal income tax purposes may
result in a higher rate of prepayment on the Home Loans.
The Depositor and GACC make no representations as to the particular
factors that will affect the prepayment of the Home Loans, as to the relative
importance of these factors, or as to the percentage of the principal balance of
the Home Loans that will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease
the yield on Notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Notes purchased at a discount.
The effect on an investor's yield due to payments of principal occurring at a
rate that is faster (or slower) than the rate anticipated by the investor during
any period following the issuance of the Notes will not be entirely offset by a
subsequent like reduction (or increase) in the rate of payments of principal
during any subsequent period.
The rate of delinquencies and defaults on the Home Loans and of
recoveries, if any, on defaulted Home Loans and foreclosed properties will
affect the rate and timing of principal payments on the Home Loans, and,
accordingly, the weighted average life of the Notes. Certain factors may
influence delinquencies and defaults, including origination and underwriting
standards, loan-to-value ratios and delinquency history. In general, defaults on
Home Loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on similar
types of home loans. The rate of default on Home Loans with high loan-to-value
ratios, or on Home Loans secured by junior liens, may be higher than that of
home loans with lower loan-to-value ratios or secured by first liens on
comparable properties. In addition, the rate and timing of prepayments, defaults
and liquidations on the Home Loans will be affected by the general economic
condition of the area in which the related Mortgaged Properties are located or
the related borrower is residing. See "Description of the Home Loan Pool"
herein. The risk of delinquencies and losses is greater and voluntary principal
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.
A number of factors suggest that the prepayment experience of the Home
Loan Pool may be significantly different from that of a pool of conventional
first-lien, single family mortgage loans with equivalent interest rates and
maturities. One factor is that the principal balance of the average Home Loan is
smaller than that of the average conventional first-lien mortgage loan. A
smaller principal balance may be easier for a borrower to prepay than a larger
balance and, therefore, a higher prepayment rate may result for the Home Loan
Pool than for a pool of first-lien mortgage loans, irrespective of the relative
average interest rates and the general interest rate environment. In addition,
in order to refinance a first lien mortgage loan, the borrower must generally
repay any junior liens. However, a small principal balance may make refinancing
a Home Loan at a lower interest rate less attractive to the borrower as the
perceived impact to the borrower of lower interest rates on the size of the
monthly payment may not be significant. Other factors that might be expected to
affect the prepayment rate of the Home Loan Pool include the relative
creditworthiness of the borrowers, the amounts of and interest rates on the
underlying senior mortgage loans, and the tendency of borrowers to use real
property mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include the
direct or indirect financing of home improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at origination
the majority of the Home Loans had combined loan-to-value ratios that approached
or exceeded 100%, the related borrowers may have less opportunity to refinance
the indebtedness secured by the related Mortgaged Properties, including the Home
Loans, and a lower prepayment rate may result for the Home Loan Pool than for a
pool of mortgage (including first or junior lien) loans that have combined
loan-to-value ratios less than 100%. However, the availability of credit from an
increased number of lenders making loans similar to the Home Loans may result in
faster rates of prepayment of the Home Loans than would otherwise be the case.
In addition, any increase in the market values of Mortgaged Properties, and the
resulting decrease in the combined loan-to-value ratios of the related Home
Loans, may make alternative sources of financing available to the related
borrowers at lower interest rates.
Each Home Loan is either a "simple interest" or "actuarial method"
loan. With respect to a Home Loan that is a "simple interest" loan, if a payment
is received more than one month after the previous payment, a smaller portion of
that payment will be applied to principal and a greater portion will be applied
to interest than would have been the case had the payment been received
precisely one month after the previous payment, resulting in the Home Loan
having a longer weighted average life than would have been the case had each
payment been made as scheduled. Conversely, if a payment on a Home Loan is
received less than one month after the previous payment, more of the payment
will be applied to principal and less to interest than would have been the case
had the payment been received precisely one month after the previous payment,
resulting in the Home Loan having a shorter weighted average life than would
have been the case had each payment been made as scheduled.
See "Description of the Home Loan Pool -- Payments on the Home Loans" herein.
Investors in the Notes will bear the risk of reinvestment of amounts
received in respect of principal on the Notes at yields that may be lower than
the yield on the Notes.
The yields to investors in the Notes may be affected by the exercise by
either the holder of the Residual Certificate or MBIA of its right to purchase
the Home Loans, as described under "Description of the Notes -- Optional
Redemption" herein, or the failure of the holder of the Residual Certificate or
MBIA to exercise that right.
If the purchaser of a Note offered at a discount from its initial
principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Home Loans, the actual yield may
be lower than that so calculated. Conversely, if the purchaser of a Note offered
at a premium calculates its anticipated yield based on an assumed rate of
payment of principal that is slower than that actually experienced on the
related Home Loans, the actual yield may be lower than that so calculated.
The effective yield to holders of the Notes will be lower than the
yield otherwise produced by the Interest Rate and the purchase price because
monthly payments will not be payable until the 20th day (or later) of the month
following the Accrual Period.
Overcollateralization
The yields on the Notes will be affected by the application of Excess
Spread as described herein and by the amount of overcollateralization. The
amount of Excess Spread will be affected by the delinquency, default and
prepayment experience of the Home Loans. Prepayment premiums paid by borrowers
will not be included in the Available Funds and therefore will not be included
in Excess Spread. There can be no assurance as to the rate at which
overcollateralization will be increased (if at all), or whether
overcollateralization will be maintained at the levels described herein.
Maturity Date
The Maturity Date of the Notes is as set forth under "Description of
the Notes -- Maturity Date" herein. The Maturity Date of the Notes was
determined by adding 13 months to the final payment date of the Home Loan with
the latest maturity. The actual maturity of the Notes may be significantly
earlier than the Maturity Date.
Weighted Average Life
The following information illustrates the effect of prepayments of the
Home Loans on the weighted average life of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Home Loans. Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in net reduction
of principal of the security (assuming no losses). The weighted average life of
the Notes will be influenced by, among other things, the rate at which principal
of the Home Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes unscheduled
reductions of principal, including without limitation those resulting from full
or partial prepayments, refinancings, liquidations and write-offs due to
defaults, casualties or other dispositions, substitutions and repurchases by or
on behalf of GACC or the Depositor), the rate at which Excess Spread is paid to
Noteholders as described herein, and the extent to which any
Overcollateralization Release Amount is distributed to the Residual Certificate
as described herein.
Prepayments on loans such as the Home Loans are commonly measured
relative to a prepayment standard or model. The model used in this prospectus
supplement for the Home Loans ("CPR") represents an assumed constant rate of
prepayment each month relative to the then outstanding principal balance of the
pool of home loans for the life of the loans. As used in the table below, 0% CPR
assumes prepayment rates equal to 0% annually of the Total Loan Balance (that
is, no prepayments), 5% CPR assumes prepayment rates equal to 5% annually of the
Total Loan Balance, and so forth. CPR does not purport to be either a historical
description of the prepayment experience or any pool of loans or a prediction of
the anticipated rate of prepayment of any pool of loans, including the Home
Loans. Neither the Depositor nor the Underwriter makes any representation about
the appropriateness of the CPR model.
The following table was prepared based on the following assumptions,
among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amount and the Interest Rate are
as set forth on the cover of this prospectus supplement;
o each scheduled payment of principal and interest on a Home
Loan is timely received on the last day of each month starting
in August 1999;
o principal prepayments are received in full on the last day of
each month starting in August 1999, and each prepayment
includes 30 days of interest on the Home Loan;
o prepayments are received on the Home Loans at the applicable
constant rates indicated;
o there are no defaults or delinquencies on the Home Loans;
o Distribution Dates occur on the 20th day of each month,
starting in September 1999;
o there are no re-purchases or substitutions of the Home Loans;
o the Notes are issued on August 12, 1999; and
o the Home Loans were aggregated into assumed Home Loans
having the following characteristics:
<TABLE>
<CAPTION>
Home Net Home Remaining
Home Loan Loan Term to
Loan Principal Interest Interest Maturity
Number Balance Rate Rate (in months)
- ----------- -------------- ---------- -------- --------------
<S> <C> <C> <C> <C>
1 $ 23,842,813.67 13.330% 12.580% 101
2 22,884,221.22 12.983 12.233 168
3 60,768,489.82 13.502 12.752 164
4 10,431,332.56 12.848 12.098 228
5 36,851,016.75 13.442 12.692 222
6 65,549,395.40 13.026 12.276 288
7 135,188,081.66 12.673 11.923 286
8 82,205,745.34 13.792 13.042 282
</TABLE>
The actual characteristics of the Home Loans may, and the performance
of the Home Loans will, differ from the assumptions used in constructing the
table below, which is hypothetical in nature and is provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment scenarios. For example, it is not expected that the Home Loans will
prepay at a constant rate until maturity, that all of the Home Loans will prepay
at the same rate or that there will be no defaults or delinquencies on the Home
Loans. Moreover, the diverse remaining terms to maturity of the Home Loans could
produce slower or faster principal payments than indicated in the table in the
CPR percentages specified, even if the weighted average remaining term to
maturity of the Home Loans is as assumed. Any difference between those
assumptions and the actual characteristics and performance of the Home Loans or
actual prepayment or loss experience will cause the percentages of Original
Principal Amounts outstanding over time and the weighted average lives of the
Notes to differ (which difference could be material) from the corresponding
information in the table for each indicated CPR percentage.
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Notes and set forth the
percentages of the Original Principal Amount of the Notes that would be
outstanding after each of the Distribution Dates shown at the indicated CPR
percentage.
The weighted average life of the Notes is determined by (1) multiplying
the net reduction, if any, of the Class Principal Amount by the number of years
from the date of issuance of the Note to the related Distribution Date, (2)
adding the results and (3) dividing the sum by the total of the net reductions
of Class Principal Amount referred to in clause (1) and rounding to one decimal
place.
<PAGE>
<TABLE>
<CAPTION>
Percentage of Original Principal Amount of the Notes
Outstanding at the Following CPR Percentages
Class A
-----------------------------------------------------------------------------
Distribution Date 0% 5% 10% 15% 20% 25% 30%
- ----------------- --- ---- ---- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100 100 100
August 2000.................................. 92 86 80 75 69 63 58
August 2001.................................. 88 77 67 57 47 39 30
August 2002.................................. 86 70 56 43 32 22 13
August 2003.................................. 84 63 46 32 25 20 13
August 2004.................................. 81 57 37 27 20 14 10
August 2005.................................. 77 50 31 22 15 10 7
August 2006.................................. 74 44 27 18 12 7 5*
August 2007.................................. 69 37 23 15 9 5* 3*
August 2008.................................. 65 32 20 12 7 4* 2*
August 2009.................................. 61 29 17 10 5* 3* 1*
August 2010.................................. 56 26 15 8 4* 2* 0
August 2011.................................. 51 23 12 6* 3* 1* 0
August 2012.................................. 44 20 10 5* 2* 0 0
August 2013.................................. 38 18 8 4* 2* 0 0
August 2014.................................. 34 16 7 3* 1* 0 0
August 2015.................................. 31 14 6* 2* 0 0 0
August 2016.................................. 28 12 5* 2* 0 0 0
August 2017.................................. 24 10 4* 1* 0 0 0
August 2018.................................. 21 8 3* 1* 0 0 0
August 2019.................................. 18 6* 2* 0 0 0 0
August 2020.................................. 14 5* 1* 0 0 0 0
August 2021.................................. 9 3* 0 0 0 0 0
August 2022.................................. 4* 1* 0 0 0 0 0
August 2023.................................. 0 0 0 0 0 0 0
----- ---- ---- ---- ---- ---- ----
Weighted Average
Life in Years
With Optional Redemption................. 12.0 7.5 5.1 3.7 2.9 2.3 1.8
Without Optional Redemption.............. 12.1 7.6 5.3 3.9 3.1 2.5 2.0
</TABLE>
- ---------
* Based upon the assumption that neither the Residual Certificateholder nor
MBIA exercises its option to repurchase the Home Loans as described under
"Description of the Notes -- Optional Redemption" herein.
<PAGE>
Material Federal Income Tax Considerations
General
In the opinion of Brown & Wood LLP, for federal income tax purposes,
the Notes will be characterized as debt, and the Trust will not be a business
entity classified as an association (or a publicly traded partnership) treated
as a corporation or a taxable mortgage pool. Each Noteholder, by the acceptance
of a Note, will agree to treat the Notes as indebtedness for federal income tax
purposes. See "Material Federal Income Tax Considerations" in the prospectus for
additional information concerning the application of federal income tax laws to
the Trust and the Notes.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Notes holding Notes 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 (1) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(2) the 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 Notes
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 the 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 or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Noteholders residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Noteholder or an
agent thereof.
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 Noteholder or, in the
case of a Form 1001 or a Form 4224 filer, an agent thereof, 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 (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (3) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (4) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, certain trusts in existence on
August 20, 1996 and treated as U.S. persons before August 20, 1996 that elect to
continue to be so treated also will be considered U.S. Persons.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to Noteholders who are not U.S. Persons.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Notes.
State Income Tax Considerations
In addition to the federal income tax matters described under "Material
Federal Income Tax Considerations" above, prospective investors should consider
the state income tax consequences of the acquisition, ownership and disposition
of the Notes. State income tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, prospective investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA Considerations
Except as described below, the Notes may be purchased by an employee
benefit plan or an individual retirement account (a "Plan") subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section
4975 of the Internal Revenue Code of 1986, as amended (the "Code"). A fiduciary
of a Plan must determine that the purchase of a Note is consistent with its
fiduciary duties under ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code. For
additional information regarding treatment of the Notes under ERISA, See "ERISA
Considerations" in the prospectus.
The Notes may not be purchased with the assets of a Plan if the
Depositor, the Servicer, the Indenture Trustee, the Owner Trustee or any of
their affiliates (a) has investment or administrative discretion with respect to
the Plan assets; (b) has authority or responsibility to give, or regularly
gives, investment advice with respect to the Plan assets, for a fee and pursuant
to an agreement or understanding that such advice (1) will serve as a primary
basis for investment decisions with respect to such Plan assets and (2) will be
based on the particular investment needs for the Plan; or (c) is an employer
maintaining or contributing to the Plan.
Legal Investment Considerations
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Notes or to purchase
Notes representing more than a specified percentage of the investor's assets.
Investors should consult their own legal, tax and accounting advisors in
determining whether and to what extent the Notes constitute legal investments
for the investors and the applicable tax, regulatory and accounting treatment of
the Notes.
See "Legal Investment Considerations" in the prospectus.
Use of Proceeds
The net proceeds from the sale of the Notes will be applied by the
Depositor, or an affiliate thereof, toward the purchase of the Home Loans. The
Home Loans will be acquired by the Depositor from GACC in a privately negotiated
transaction.
Underwriting
Subject to the terms and conditions provided in the underwriting
agreement and in a terms agreement (collectively, the "Underwriting Agreement")
among the Depositor, GACC and the Underwriter, the Depositor has agreed to sell
to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, all of the Notes.
The Underwriter has advised the Depositor that the Underwriter intends
to initially offer the Notes to the public at the price specified on the front
cover of this prospectus supplement. After the initial public offering of the
Notes, the public offering price may be changed. 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.
Until the distribution of the Notes is completed, the rules of the SEC
may limit the ability of the Underwriter and certain selling group members to
bid for and purchase the Notes. As an exception to these rules, the Underwriter
is permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
If the Underwriter creates a short position in the Notes in connection
with the offering, that is, if they sell more Notes than the amount specified on
the cover page of this prospectus supplement, the Underwriter may reduce that
short position by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of those purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in these transactions or that these transactions, once begun, will not be
discontinued without notice.
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $1,000,000.
The Underwriter expects to make a secondary market in the Notes, but
has no obligation to do so. There can be no assurance that any such secondary
market will develop, or, if it does develop, that it will continue.
Deutsche Bank Securities Inc. has entered into an agreement with the
Depositor to purchase the Residual Certificate simultaneously with the purchase
of the Notes.
The Underwriter is an affiliate of GACC and performs management
services for the Depositor. The Underwriter has engaged in other transactions
with, arranged other transactions for or performed other services for the
Depositor and GACC in the ordinary course of business.
Experts
The consolidated balance sheets of MBIA Insurance Corporation 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.
The balance sheet of the Issuer, attached as Annex 1 to this prospectus
supplement, has been included herein in reliance on the report of Deloitte &
Touche 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 Notes will be passed upon for
the Depositor and for the Underwriter by Brown & Wood LLP, Washington, D.C.
Ratings
It is a condition to the issuance of the Notes that they be rated "AAA"
by S&P and "Aaa" by Moody's. S&P and Moody's are referred to herein as the
"Rating Agencies."
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. A securities rating addresses the likelihood of
the receipt by holders of Notes of distributions in the amount of scheduled
payments on the Home Loans. The rating takes into consideration the
characteristics of the Home Loans and the structural, legal and tax aspects
associated with the Notes. The ratings on the Notes do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that holders of Notes might suffer a lower than
anticipated yield due to prepayments.
The ratings assigned to the Notes will depend primarily upon the
financial strength of MBIA. Any reduction in a rating assigned to the financial
strength of MBIA below the ratings initially assigned to the Notes may result in
a reduction of the ratings assigned to the Notes by the Rating Agencies.
The security ratings assigned to the Notes should be evaluated
independently from similar ratings on other types of securities. 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 either Rating Agency.
The Depositor has not requested a rating of the Notes by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Notes or, if it does, what rating
would be assigned by the other rating agency. The rating assigned by the other
rating agency to the Notes could be lower than the ratings assigned by the
Rating Agencies.
<PAGE>
Glossary of Defined Terms
A
Accrual Period.....................................18
Administration Agreement...........................13
Agreement..........................................29
Assumption Agreement...............................39
Available Collection Amount........................17
Available Funds....................................18
B
Beneficial Owner...................................15
Book-Entry Notes...................................14
Business Day.......................................14
C
Certificate Distribution Account...................47
Class Principal Amount.............................14
Closing Date.......................................13
Code...............................................57
Collection Account.................................46
Combined Loan-to-Value Ratio.......................32
Corporate Trust Office.............................25
Credit Score.......................................40
Custodian..........................................42
Cut-off Date.......................................13
Cut-off Date Balance...............................30
D
Deficiency Amount..................................29
Definitive Note....................................15
Depositor..........................................13
Determination Date.................................17
Distribution Date..................................14
DTC................................................14
E
Equifax............................................38
ERISA..............................................57
Event of Default...................................25
Excess Spread......................................19
F
Financial Intermediary.............................15
Fiscal Agent.......................................28
FSFC...............................................39
G
GAAP...............................................26
GMACM..............................................40
H
Home Loan File.....................................42
Home Loan Pool.....................................14
Home Loan Rate.....................................31
Home Loan Sale Agreement...........................43
Home Loan Schedule.................................42
Home Loans.........................................14
I
Indenture..........................................14
Indenture Trustee..................................13
Insurance Agreement................................23
Insurance Proceeds.................................20
Insured Payment....................................29
Interest Rate......................................18
Issuer.............................................13
L
Liquidated Home Loan...............................20
M
Maturity Date......................................23
MBIA...............................................14
MBIA Inc...........................................25
MBIA Insurance Policy..............................25
MBIA Premium Rate..................................23
Modeling Assumptions...............................53
Moody's............................................27
Mortgaged Properties...............................32
Mortgages..........................................30
N
Net Home Loan Rate.................................23
Net Liquidation Proceeds...........................21
Note Distribution Account..........................47
Note Registrar.....................................25
Noteholder.........................................15
Noteholders........................................14
Noteholders' Interest Carryforward Amount..........19
Noteholders' Interest Distribution Amount..........19
Noteholders' Monthly Interest Distribution Amount..19
Notes..............................................13
Notice.............................................29
O
Optimal Principal Amount...........................21
Optional Redemption................................24
Original Class Principal Amount....................14
Originator.........................................39
Overcollateralization Amount.......................21
Overcollateralization Release Amount...............21
Owner..............................................29
Owner Trustee......................................13
P
Participant........................................15
Paying Agent.......................................25
Plan...............................................57
Preference Amount..................................30
Principal Balance..................................21
Purchase and Sale Agreement........................39
R
Rating Agencies....................................59
Record Date........................................14
Regular Distribution Amount........................19
Regular Principal Distribution Amount..............18
Released Mortgaged Property Proceeds...............21
Repurchase Price...................................43
Residual Certificate...............................13
Residual Certificateholder.........................13
Rules..............................................15
S
S&P................................................27
Sale and Servicing Agreement.......................13
SAP................................................26
SEC................................................38
Securities.........................................14
Securityholders....................................13
Servicer...........................................40
Servicing Advance..................................45
Servicing Fee......................................45
Servicing Fee Rate.................................45
Stepdown Date......................................22
Subservicers.......................................46
Systems............................................17
T
Target Percentage..................................22
Targeted Overcollateralization Amount..............22
Termination Price..................................22
Total Loan Balance.................................21
Transfer and Servicing Agreements..................42
Trigger Event......................................23
Trust..............................................13
Trust Agreement....................................13
Trust Estate.......................................14
U
U.S. Person.......................................57
Underwriting Agreement.............................58
Y
Y2K................................................27
Year 2000 Problems.................................17
Yield Considerations...............................50
<PAGE>
Annex 1
Index to Financial Statements
Page
Report of Independent Auditors........................................ A-2
Balance Sheet of the Trust as of August 6, 1999....................... A-3
Notes to Balance Sheet................................................ A-4
<PAGE>
Report of Independent Auditors
Wilmington Trust Company
As Owner Trustee of Ace Securities Corp.
Home Loan Trust 1999-A
We have audited the accompanying balance sheet of Ace Securities Corp.
Home Loan Trust 1999-A, a Delaware business trust (the "Trust") as of August 6,
1999. This balance sheet is the responsibility of the Trust. Our responsibility
is to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of the Trust, at August 6, 1999,
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
- ---------------------
Deloitte & Touche LLP
New York, New York
August 6, 1999
<PAGE>
Ace Securities Corp.
Home Loan Trust 1999-A
Notes to Balance Sheet
August 6, 1999
Assets
Total assets..........................................$0
Liabilities and Equity Interest
Liabilities....................................................$0
Equity interest $10
Capital contribution due
from Ace Securities Corp. (10)......... 0
---- -
Total liabilities and equity interest.................$0
See accompanying notes.
<PAGE>
Ace Securities Corp.
Home Loan Trust 1999-A
Notes to Balance Sheet
August 6, 1999
1. Organization
------------
Ace Securities Corp. Home Loan Trust 1999-A, a Delaware statutory
business trust (the "Trust"), was organized in the state of Delaware on
August 6, 1999 with Wilmington Trust Company, as its owner trustee.
The Trust was organized to engage exclusively in the following business
and financial activities: To purchase or acquire from certain direct
and indirect subsidiaries of ACE Securities Corp. certain home loans
secured by, for the most part, junior liens on residential properties
in which the related borrowers have little or no equity, and to pledge
such loans or interests therein to First Union National Bank, as
indenture trustee in connection with the planned issuance of up to $372
million of its Asset-Backed Notes, Series 1999-A. Ace Securities Corp.
is a subsidiary of German American Capital Corp.
2. Capital Contribution
--------------------
ACE Securities Corp. plans to make an initial capital contribution
of $10 to the Trust on August 10, 1999.
<PAGE>
$372,062,000
(Approximate)
ACE SECURITIES CORP.
Home Loan Trust 1999-A
Asset Backed Notes
GMAC Mortgage Corporation
Servicer
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
Deutsche Banc Alex. Brown
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
DEPOSITOR
The Asset Backed Certificates (the "Certificates") and Asset Backed Notes (the
"Notes" and, together with the Certificates, the "Securities") offered hereby
and by Supplements to this Prospectus (the "Offered Securities") will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the "Trust Fund") consisting of one or
more segregated pools of various types of single family and/or multifamily
mortgage loans (or certain balances thereof) (collectively, the "Mortgage
Loans"), unsecured home improvement installment sales contracts and
installment loans ("Unsecured Home Improvement Loans"), manufactured housing
installment sale contracts or installment loan agreements ("Contracts"), a
combination of Mortgage Loans, Unsecured Home Improvement Loans and/or
Contracts or beneficial interests in such assets (which may include Mortgage
Securities, as defined herein) or pass-through or participation certificates
issued or guaranteed by the Government National Mortgage Association ("Ginnie
Mae"), Fannie Mae ("Fannie Mae") or the Federal Home Loan Mortgage Corporation
("Freddie Mac") (any such certificates, "Agency Securities") (with respect to
any series, collectively, "Assets"). If so specified in the related Prospectus
Supplement, all or a portion of the Mortgage Loans will consist of Sub-prime
Mortgage Loans as described under "Risk Factors--Increased Risk of
Delinquencies and Foreclosures on Sub-prime Mortgage Loans." If a series of
Securities includes Notes, such Notes will be issued and secured pursuant to
an indenture and will represent indebtedness of the Trust Fund. If so
specified in the related Prospectus Supplement, the Trust Fund for a series of
Securities may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof
(with respect to any series, collectively, "Credit Support"), and currency or
interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). In addition, as so specified in the related Prospectus
Supplement, the Trust Fund will include monies on deposit in one or more trust
accounts to be established with a Trustee, which may include a Pre-Funding
Account, as described herein, which would be used to purchase additional
Assets for the related Trust Fund during the period specified in the related
Prospectus Supplement. See "Description of the Trust Funds," "Description of
the Securities" and "Description of Credit Support."
(cover continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OF EACH SERIES WILL NOT REPRESENT AN OBLIGATION OF OR INTEREST
IN THE DEPOSITOR, DEUTSCHE BANK SECURITIES INC., ANY MASTER SERVICER, ANY
SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE
LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES NOR, EXCEPT AS SET FORTH HEREIN OR IN THE RELATED
PROSPECTUS SUPPLEMENT, ANY ASSETS IN THE RELATED TRUST FUND (OTHER THAN ASSETS
IDENTIFIED AS FHA LOANS OR VA LOANS IN THE RELATED PROSPECTUS SUPPLEMENT) WILL
BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
ALTHOUGH PAYMENT OF PRINCIPAL AND INTEREST ON AGENCY SECURITIES WILL BE
GUARANTEED AS DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT BY
GINNIE MAE, FANNIE MAE OR FREDDIE MAC, THE SECURITIES OF ANY SERIES EVIDENCING
INTERESTS IN A TRUST FUND INCLUDING SUCH AGENCY SECURITIES WILL NOT BE SO
GUARANTEED.
PROSPECTIVE INVESTORS SHOULD REVIEW THE MATERIAL RISKS APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 22 HEREIN AND SUCH INFORMATION AS MAY
BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED SECURITY.
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. It is
not expected that any application will be made to list the Securities of a
series on any securities exchange. Accordingly the liquidity of the Securities
may be limited. This Prospectus may not be used to consummate sales of the
Offered Securities of any series unless accompanied by the Prospectus
Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, including Deutsche Bank
Securities Inc., as more fully described under "Methods of Distribution"
herein and in the related Prospectus Supplement.
The date of this Prospectus is July 26, 1999.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no
principal distributions; (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events, such as
the retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of
two or more components thereof with one or more of the characteristics
described in this paragraph, to the extent of available funds, in each case as
described in the related Prospectus Supplement. Any such classes may include
classes of Offered Securities. See "Description of the Securities."
Principal and interest with respect to Securities will be
distributable monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement. Distributions on
the Securities of any series will be made only from the assets of the related
Trust Fund.
The yield on each class of Securities of a series will be affected
by, among other things, the rate of payment of principal (including
prepayments, repurchase and defaults) on the Assets in the related Trust Fund
and the timing of receipt of such payments as described under the caption
"Yield Considerations" herein and in the related Prospectus Supplement. A
Trust Fund may be subject to early termination or one or more classes of
Securities of a series may be subject to purchase or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" for federal income tax
purposes. See also "Material Federal Income Tax Considerations" herein.
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the Offered Securities covered by such
Prospectus Supplement, whether or not participating in the distribution
thereof, may be required to deliver such Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus and Prospectus Supplement when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Securities of each series will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities, the payment provisions with respect to
each such class and the Pass-Through Rate or interest rate or method of
determining the Pass-Through Rate or interest rate with respect to each such
class; (ii) the aggregate principal amount and distribution dates relating to
such series and, if applicable, the initial and final scheduled distribution
dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the assets included therein,
including the Assets and any Credit Support and Cash Flow Agreements (with
respect to the Securities of any series, the "Trust Assets"); (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) additional information with respect to the method of
distribution of such Securities; (vi) whether one or more elections to treat
the Trust Fund or portion thereof as a real estate mortgage investment conduit
("REMIC") will be made and designation of the regular interests and residual
interests; (vii) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Securities; (viii) information as
to any Master Servicer, any Servicer and the Trustee, as applicable; (ix)
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; and (x) whether such Securities will be initially issued in definitive
or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the
Offered Securities. This Prospectus and the Prospectus Supplement relating to
each series of Securities contain summaries of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511; and
New York Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048. The Commission maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Depositor, that file electronically with
the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Offered Securities or an offer of the Offered Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus and any Prospectus Supplement hereto at any time
does not imply that information herein is correct as of any time subsequent to
its date.
Copies of Freddie Mac's most recent offering circular for Freddie Mac
Certificates, Freddie Mac's information statements and quarterly reports are
available from Freddie Mac's Investor Inquiry Department, 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did
not participate in the preparation of Freddie Mac's offering circular,
information statement or any supplement and, accordingly, makes no
representation as to the accuracy or completeness of the information set forth
therein.
Copies of Fannie Mae's most recent prospectus for Fannie Mae
Certificates are available from Fannie Mae's Mortgage Backed Securities
Office, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-6547).
Fannie Mae's annual report and quarterly financial statements, as well as
other financial information, are available from Fannie Mae's Office of the
Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000)
or the Office of the Vice President of Investor Relations, 3900 Wisconsin
Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The Depositor did not
participate in the preparation of Fannie Mae's prospectus and, accordingly,
makes no representations as to the accuracy or completeness of the information
set forth therein.
The Servicer, the Master Servicer or the Trustee will be required to
mail to registered holders of Securities (the "Securityholders") of each
series periodic unaudited reports concerning the related Trust Fund. If the
Prospectus Supplement for a series of Securities provides that one or more
Classes of Securities are to be issued in book-entry form, then unless and
until definitive Securities are issued, such reports with respect to
book-entry Securities will be sent on behalf of the related Trust Fund to Cede
& Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of such Securities, pursuant to the applicable Agreement or
to such other entity set forth in the related Prospectus Supplement. Such
reports may be available to beneficial owners of the Securities (the "Security
Owners") upon request to their respective DTC participants and indirect
participants. See "Description of the Securities--Reports to Securityholders"
and "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Evidence as to
Compliance." The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder, as interpreted by the
staff of the Commission thereunder. The Depositor does not intend to file
periodic reports under the Exchange Act following the expiration of the
reporting period prescribed by Rule 15d-1 of Regulation 15D under the Exchange
Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All documents subsequently filed by or on behalf of the Depositor
with respect to each Trust Fund referred to in the accompanying Prospectus
Supplement with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall
be deemed to be incorporated by reference in this Prospectus and to be a part
of this Prospectus from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
of this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference modifies
or replaces such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
Upon request, the Depositor will provide or cause to be provided
without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Securities, a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of
such classes of such Offered Securities, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to
ACE Securities Corp., 6707 Fairview Road, Suite D, Charlotte, North Carolina,
Attention: Secretary, or by telephone at (704) 365-0569. The Depositor has
determined that its financial statements are not material to the offering of
any Offered Securities.
<PAGE>
TABLE OF CONTENTS
<PAGE>
Page
----
Prospectus Supplement.........................................................3
Available Information.........................................................3
Incorporation of Certain Information by Reference.............................4
Summary of Prospectus.........................................................8
Title of Securities........................................................8
Depositor..................................................................8
Issuer.....................................................................8
Servicers..................................................................8
Master Servicer............................................................8
Trustee; Indenture Trustee.................................................9
The Trust Assets...........................................................9
Description of Securities.................................................15
Distributions on Securities...............................................15
Advances..................................................................17
Termination...............................................................18
Registration of Securities................................................18
Tax Status of the Securities..............................................18
Legal Investment Considerations...........................................20
ERISA Considerations......................................................20
Rating....................................................................21
Material Risks............................................................21
Risk Factors.................................................................22
Limited Liquidity for Securities..........................................22
Limited Assets for Payment of Securities..................................22
Rate of Prepayments on Assets May Adversely Affect Average Lives
and Yields of Securities................................................23
Priority of Payment of Securities May Adversely Affect Average
Lives and Yields of Securities..........................................23
Limited Nature of Ratings.................................................24
Real Estate Market Conditions Affect Mortgage Loan Performance............24
Variable Payment Provisions in Mortgage Loans May Increase Rate
of Default..............................................................24
Geographic Concentration May Increase Rates of Loss and Delinquency.......25
Multifamily Properties May Experience Increased Defaults and
Foreclosures............................................................25
Balloon Payment Assets are More Likely to Experience Losses on
Foreclosure if Obligor is Unable to Refinance or Sell Related
Property................................................................25
Junior Mortgage Loans are More Likely to Experience Losses on
Foreclosure.............................................................26
Sub-prime Mortgage Loans May be More Likely to Default or be
Foreclosed..............................................................26
Potential for Losses Increases if Assets are Delinquent...................26
Effects of Failure to Comply with Consumer Protection Laws; Other
Legal Considerations....................................................27
General Economic Conditions Increases the Potential for Losses
on Contracts and Manufactured Homes.....................................27
Depreciation in Value Increases the Potential for Losses on
Contracts and Manufactured Homes........................................28
Grant of Security Interest in Contracts; Risks of Defective
Security Interest and Effects of Certain Other Legal Aspects
of the Contracts........................................................28
Bankruptcy of Borrower May Prevent Collections on Unsecured Home
Improvement Loans.......................................................29
Credit Support is Limited in Amount and Coverage..........................29
Lowering of Rating on Securities May Decrease Value and Liquidity.........30
Subordinated Securities Bear Risk of Loss Before More Senior
Securities..............................................................30
Residual Securities May Have Adverse Tax Attributes.......................30
Owners of Book-Entry Securities Not Entitled to Exercise Rights
of Holders of Securities................................................31
Financial Instruments are Subject to Counterparty Risk....................31
Description of the Trust Funds...............................................31
Assets....................................................................31
Mortgage Loans............................................................33
Contracts.................................................................37
Agency Securities.........................................................38
Mortgage Securities.......................................................42
FHA Loans and VA Loans....................................................43
Pre-Funding Account.......................................................44
Accounts..................................................................44
Credit Support............................................................45
Cash Flow Agreements......................................................45
Use of Proceeds..............................................................45
Yield Considerations.........................................................45
General...................................................................45
Pass-Through Rate and Interest Rate.......................................46
Timing of Payment of Interest.............................................46
Payments of Principal; Prepayments........................................46
Prepayments--Maturity and Weighted Average Life...........................48
Other Factors Affecting Weighted Average Life.............................49
The Depositor................................................................52
Description of the Securities................................................53
General...................................................................53
Distributions.............................................................53
Available Distribution Amount.............................................54
Distributions of Interest on the Securities...............................55
Distributions of Principal of the Securities..............................56
Components................................................................56
Distributions on the Securities of Prepayment Premiums....................57
Allocation of Losses and Shortfalls.......................................57
Advances in Respect of Delinquencies......................................57
Reports to Securityholders................................................58
Termination...............................................................60
Optional Purchases........................................................61
Book-Entry Registration and Definitive Securities.........................61
Description of the Agreements................................................63
Agreements Applicable to a Series.........................................63
Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements.........................................63
Material Terms of the Indenture...........................................84
Description of Credit Support................................................87
General...................................................................87
Subordinate Securities....................................................87
Cross-Support Provisions..................................................88
Limited Guarantee.........................................................88
Financial Guaranty Insurance Policy or Surety Bond........................88
Letter of Credit..........................................................88
Pool Insurance Policies...................................................88
Special Hazard Insurance Policies.........................................88
Mortgagor Bankruptcy Bond.................................................89
Reserve Funds.............................................................89
Overcollateralization.....................................................90
Certain Legal Aspects of Mortgage Loans......................................90
General...................................................................90
Types of Mortgage Instruments.............................................91
Interest in Real Property.................................................91
Cooperative Loans.........................................................92
Land Sale Contracts.......................................................93
Foreclosure...............................................................94
Junior Mortgages..........................................................98
Anti-Deficiency Legislation and Other Limitations on Lenders..............99
Environmental Considerations.............................................100
Due-on-Sale Clauses......................................................103
Prepayment Charges.......................................................103
Subordinate Financing....................................................103
Applicability of Usury Laws..............................................104
Alternative Mortgage Instruments.........................................104
Soldiers' and Sailors' Civil Relief Act of 1940..........................105
Forfeitures in Drug and RICO Proceedings.................................105
Certain Legal Aspects of the Contracts......................................106
General..................................................................106
Security Interests in the Manufactured Homes.............................106
Enforcement of Security Interests in Manufactured Homes..................108
Soldiers' and Sailors' Civil Relief Act of 1940..........................109
Consumer Protection Laws.................................................109
Transfers of Manufactured Homes; Enforceability of
"Due-on-Sale" Clauses..................................................109
Applicability of Usury Laws..............................................110
Material Federal Income Tax Considerations..................................110
General..................................................................110
REMICS...................................................................111
Grantor Trust Funds......................................................136
Standard Securities......................................................136
Stripped Securities......................................................140
Partnership Trust Funds..................................................144
State Income Tax Considerations.............................................150
ERISA Considerations........................................................151
Legal Investment Considerations.............................................155
Methods of Distribution.....................................................157
Legal Matters...............................................................158
Financial Information.......................................................158
Rating......................................................................158
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to
the more detailed information appearing elsewhere in this Prospectus and by
reference to the information with respect to each series of Securities
contained in the Prospectus Supplement to be prepared and delivered in
connection with the offering of such series. An Index of Defined Terms is
included at the end of this Prospectus beginning on page 158.
TITLE OF SECURITIES Asset Backed Certificates and
Asset Backed Notes (the "Notes"
and, together with the
Certificates, the "Securities"),
issuable in series.
DEPOSITOR ACE Securities Corp. (the
"Depositor"), a wholly-owned
indirect subsidiary of Deutsche
Bank Securities Inc. Neither the
Depositor nor any of its
affiliates will insure or
guarantee the Securities or the
Assets or be otherwise obligated
in respect thereof.
ISSUER With respect to each series of
Securities, the Trust Fund to be
formed pursuant to either a
deposit trust agreement or a
pooling and servicing agreement.
SERVICERS To the extent specified in the
related Prospectus Supplement,
one or more entities identified
therein (each, a "Servicer") that
will service the Assets contained
in each Trust Fund. In the event
there is only one Servicer
performing the servicing
functions with respect to the
Assets in a Trust Fund, such
Assets will be serviced pursuant
to a related pooling and
servicing agreement (each, a
"Pooling and Servicing
Agreement"). In the event there
are multiple Servicers, or in the
event the Securities consist of
Notes, each Servicer will perform
such servicing functions pursuant
to a related servicing agreement
(each, an "Underlying Servicing
Agreement"). A Servicer may be an
affiliate of the Depositor. See
"Description of the Agreements."
MASTER SERVICER In the event that
there is more than one Servicer
for the Assets of the Trust Fund
relating to a series of
Certificates, a master servicer
(the "Master Servicer") may be
appointed to perform certain
administration, calculation and
reporting functions with respect
to the Trust Fund and may
supervise the Servicers pursuant
to a Pooling and Servicing
Agreement. In addition, to the
extent described in the related
Prospectus Supplement, if
advances are required to be made
with respect to delinquent
scheduled payments on the Assets
in the Trust Fund the Master
Servicer may be required to make
such advances to the extent the
related Servicer fails to do so.
The Master Servicer may be an
affiliate of the Depositor.
See "Description of the
Agreements" and "Description of
the Securities--Advances in
Respect of Delinquencies."
TRUSTEE; INDENTURE TRUSTEE The trustee
(the "Trustee") or indenture
trustee (the "Indenture Trustee")
for each series of Securities
will be named in the related
Prospectus Supplement. See
"Description of the
Agreements--Material Terms of the
Pooling and Servicing Agreements
and Underlying Servicing
Agreements--The Trustee."
THE TRUST ASSETS Each series of Certificates will
represent in the aggregate the
entire beneficial ownership
interest in a Trust Fund. If a
series of Securities includes
Notes, such Notes will represent
indebtedness of the Trust Fund
and will be secured by a security
interest in the Assets of the
Trust Fund. A Trust Fund will
consist primarily of any of the
following assets: the Mortgage
Loans, Unsecured Home Improvement
Loans, Contracts, Agency
Securities and Mortgage
Securities.
(a) Special Payment Provisions The Assets included in
a Trust Fund may be subject to
various types of payment
provisions as specified in the
related Prospectus Supplement,
and may include Level Payment
Assets, Adjustable Rate Assets,
Buydown Assets, GPM Assets,
Step-up Rate Assets, Interest
Reduction Assets, GEM Assets,
Balloon Payment Assets,
Convertible Assets, Bi-Weekly
Assets or Increasing Payment
Assets. See "Description of the
Trust Funds--Assets." The
characteristics of the Assets
included in a Trust Fund will not
vary by more than five percent
(by aggregate principal balance
as of the Cut-off Date) from the
characteristics thereof that are
described in the related
Prospectus Supplement.
(b) Mortgage Loans The Mortgage Loans with respect
to a series of Securities will
consist of a pool of single
family and/or multifamily loans
(or certain balances thereof).
The Mortgage Loans will not be
guaranteed or insured by the
Depositor or any of its
affiliates. The Mortgage Loans
will be guaranteed or insured by
a governmental agency or
instrumentality or other person
only if and to the extent
expressly provided in the related
Prospectus Supplement. If so
specified in the Prospectus
Supplement, the Mortgage Loans
may be insured by the Federal
Housing Administration (the
"FHA") or partially guaranteed by
the Veterans Administration (the
"VA"). The Mortgage Loans will be
secured by first and/or junior
liens on (i) one- to four-family
residential real properties
(including manufactured housing)
or security interests in shares
issued by cooperative housing
corporations ("Single Family
Properties") and/or (ii)
primarily residential properties
consisting of five or more
residential dwelling units and
which may include limited retail,
office or other commercial space
("Multifamily Properties")
(Single Family Properties and
Multifamily Properties are
sometimes referred to herein
collectively as "Mortgaged
Properties"). The Mortgaged
Properties will be located in any
one of the fifty states, the
District of Columbia, Guam,
Puerto Rico or any other
territory of the United States.
The Mortgage Loans may include
(i) closed-end and/or revolving
home equity loans or certain
balances thereof ("Home Equity
Loans") and/or (ii) secured home
improvement installment sales
contracts and secured installment
loan agreements ("Home
Improvement Contracts"). In
addition, the Mortgage Loans may
include certain Mortgage Loans
evidenced by contracts ("Land
Sale Contracts") for the sale of
properties pursuant to which the
mortgagor promises to pay the
amount due thereon to the holder
thereof with fee title to the
related property held by such
holder until the mortgagor has
made all of the payments required
pursuant to such Land Sale
Contract, at which time fee title
is conveyed to the mortgagor. All
Mortgage Loans will have been
originated by persons other than
the Depositor, and all Mortgage
Loans will have been purchased,
either directly or indirectly, by
the Depositor on or before the
date of initial issuance of the
related series of Securities or,
if the related Trust Fund
includes a Pre-Funding Account,
as described herein, within the
period specified in the related
Prospectus Supplement following
such date. The related Prospectus
Supplement will indicate if any
such persons are affiliates of
the Depositor. To the extent
specified in the related
Prospectus Supplement, all or a
portion of the Mortgage Loans
will be Sub-prime Mortgage Loans,
as described under "Risk
Factors--Sub-prime Mortgage Loans
May be More Likely to Default or
to be Foreclosed." Each Mortgage
Loan may provide for accrual of
interest thereon at an interest
rate (a "Mortgage Rate") that is
fixed over its term or that
adjusts from time to time, or
that may be converted from an
adjustable to a fixed Mortgage
Rate, or from a fixed to an
adjustable Mortgage Rate, from
time to time at the mortgagor's
election, in each case as
described in the related
Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage
Loans in a Trust Fund may be
based on one or more indices.
Each Mortgage Loan may provide
for scheduled payments to
maturity, payments that adjust
from time to time to accommodate
changes in the Mortgage Rate or
to reflect the occurrence of
certain events, and may provide
for negative amortization or
accelerated amortization, in each
case as described in the related
Prospectus Supplement. Each
Mortgage Loan may be fully
amortizing or require a balloon
payment due on its stated
maturity date, in each case as
described in the related
Prospectus Supplement. Each
Mortgage Loan may contain
prohibitions on prepayment or
require payment of a premium or a
yield maintenance penalty in
connection with a prepayment, in
each case as described in the
related Prospectus Supplement.
The Mortgage Loans may provide
for payments of principal,
interest or both, on due dates
that occur monthly, quarterly,
semi-annually or at such other
interval as is specified in the
related Prospectus Supplement.
See "Description of the Trust
Funds--Assets."
(c) Unsecured Home
Improvement Loans The Assets with respect to a
series of Securities may consist
of or include home improvement
installment sales contracts or
Unsecured Home Improvement Loans.
The Unsecured Home Improvement
Loans will not be insured or
guaranteed by the Depositor or
any of its affiliates. The
Unsecured Home Improvement Loans
will be insured or guaranteed by
a governmental agency or
instrumentality or other person
only if and to the extent
expressly provided in the related
Prospectus Supplement. If so
specified in the related
Prospectus Supplement, the
Unsecured Home Improvement Loans
may be insured by the FHA. The
Unsecured Home Improvement Loans
may have any of the features
described under "--(b) Mortgage
Loans" above, except that they
will not be secured by a lien on
or other security interest in any
property.
(d) Contracts The Contracts with respect to a
series of Securities will consist
of manufactured housing
installment sale contracts and
installment loan agreements
secured by a security interest in
a new or used manufactured home
(each, a "Manufactured Home"),
and, to the extent, if any,
indicated in the related
Prospectus Supplement, by real
property. The Contracts will not
be insured or guaranteed by the
Depositor or any of its
affiliates. The Contracts will be
insured or guaranteed by a
governmental agency or
instrumentality or other person
only if and to the extent
expressly provided in the related
Prospectus Supplement. If so
specified in the related
Prospectus Supplement, the
Contracts may be insured by the
FHA. All Contracts will have been
originated by persons other than
the Depositor, and all Contracts
will have been purchased, either
directly or indirectly, by the
Depositor on or before the date
of initial issuance of the
related series of Securities or,
if the related Trust Fund
includes a Pre-Funding Account,
as described herein, within the
period specified in the related
Prospectus Supplement following
such date. The related Prospectus
Supplement will indicate if any
such persons are affiliates of
the Depositor. Each Contract may
provide for an annual percentage
rate thereon (a "Contract Rate")
that is fixed over its term or
that adjusts as described in the
related Prospectus Supplement.
The manner of determining
scheduled payments due on the
Contract will be described in the
Prospectus Supplement. The
Prospectus Supplement will
describe the minimum principal
balance of the Contracts at
origination and the maximum
original term to maturity of the
Contracts.
(e) Agency Securities If so provided in the related
Prospectus Supplement, the Trust
Fund may include any combination
of "fully modified pass-through"
mortgage-backed certificates
("Ginnie Mae Certificates")
guaranteed by Ginnie Mae,
guaranteed mortgage pass-through
securities ("Fannie Mae
Certificates") issued by Fannie
Mae ("Fannie Mae") and mortgage
participation certificates
("Freddie Mac Certificates")
issued by Freddie Mac.
(f) Mortgage Securities If so provided in the related
Prospectus Supplement, the Trust
Fund may include asset-backed
certificates, collateralized
mortgage obligations or
participation certificates (each,
and collectively, "Mortgage
Securities") evidencing interests
in, or collateralized by,
mortgage loans or Agency
Securities. Mortgage Securities
included in a Trust Fund (i) will
have been issued by an entity
other than the Depositor or its
affiliates, (ii) will have been
acquired in bona fide secondary
market transactions from persons
other than the issuer thereof or
its affiliates and (iii) will
have previously been (a) offered
and distributed to the public
pursuant to an effective
registration statement or (b)
purchased in a transaction not
involving any public offering
from a person who is not an
affiliate of the issuer of such
securities at the time of sale
(nor an affiliate thereof at any
time during the three preceding
months); provided a period of two
years has elapsed since the later
of the date the securities were
acquired from the issuer or an
affiliate thereof. Although
individual assets underlying the
Mortgage Securities may be
insured or guaranteed by the
United States or an agency or
instrumentality thereof, they
need not be, and the Mortgage
Securities themselves will not
be, so insured or guaranteed. See
"Description of the Trust
Funds--Mortgage Securities."
Payments on the Mortgage
Securities will be distributed
directly to the Trustee or other
person specified in the related
Prospectus Supplement as
registered owner of such Mortgage
Securities.
(g) Collection Accounts Each Trust Fund will include one
or more accounts established and
maintained on behalf of the
Securityholders into which the
person or persons designated in
the related Prospectus Supplement
will, to the extent described
herein and in such Prospectus
Supplement, deposit all payments
and collections received or
advanced with respect to the
Assets and other assets in the
Trust Fund. Such an account may
be maintained as an interest
bearing or a non-interest bearing
account, and funds held therein
may be held as cash or invested
in certain short-term, investment
grade obligations, in each case
as described in the related
Prospectus Supplement. See
"Description of the
Agreements--Material Terms of the
Pooling and Servicing Agreements
and Underlying Servicing
Agreements--Collection Account
and Related Accounts."
(h) Credit Support If so provided in the related
Prospectus Supplement, partial or
full protection against certain
defaults and losses on the Assets
in the related Trust Fund may be
provided to one or more classes
of Securities of the related
series in the form of
subordination of one or more
other classes of Securities of
such series, which other classes
may include one or more classes
of Offered Securities, or by one
or more other types of credit
support, such as a letter of
credit, insurance policy,
guarantee, reserve fund or
another type of credit support,
or a combination thereof. The
amount and types of coverage, the
identification of the entity
providing the coverage (if
applicable) and related
information with respect to each
type of Credit Support, if any,
will be described in the
Prospectus Supplement for a
series of Securities. See "Risk
Factors--Credit Support is
Limited in Amount and Coverage"
and "Description of Credit
Support."
(i) Cash Flow Agreements If so provided in the related
Prospectus Supplement, the Trust
Fund may include guaranteed
investment contracts pursuant to
which moneys held in the funds
and accounts established for the
related series will be invested
at a specified rate. The Trust
Fund may also include certain
other agreements, such as
interest rate exchange
agreements, interest rate cap or
floor agreements, currency
exchange agreements or similar
agreements provided to reduce the
effects of interest rate or
currency exchange rate
fluctuations on the Assets or on
one or more classes of
Securities. Currency exchange
agreements might be included in
the Trust Fund if some or all of
the Assets (such as Mortgage
Loans secured by Mortgaged
Properties located outside the
United States) were denominated
in a non-United States currency.
The principal terms of any such
guaranteed investment contract or
other agreement, including,
without limitation, provisions
relating to the timing, manner
and amount of payments thereunder
and provisions relating to the
termination thereof, will be
described in the Prospectus
Supplement for the related
series. In addition, the related
Prospectus Supplement will
provide certain information with
respect to the obligor under any
such Cash Flow Agreement. See
"Description of the Trust
Funds--Cash Flow Agreements."
(j) Pre-Funding Account To the extent provided in the
related Prospectus Supplement, a
portion of the proceeds of the
issuance of Securities may be
deposited into an account
maintained with the Trustee (a
"Pre-Funding Account"). In such
event, the Depositor will be
obligated (subject only to the
availability thereof) to sell at
a predetermined price, and the
Trust Fund for the related series
of Securities will be obligated
to purchase (subject to the
satisfaction of certain
conditions described in the
applicable Agreement), additional
Assets (the "Subsequent Assets")
from time to time (as frequently
as daily) within the period (not
to exceed three months) specified
in the Prospectus Supplement (the
"Pre-Funding Period") after the
issuance of such series of
Securities having an aggregate
principal balance approximately
equal to the amount on deposit in
the Pre-Funding Account (the
"Pre-Funded Amount") for such
series on date of such issuance.
The Pre-Funded Amount with
respect to a series is not
expected to exceed 25% of the
aggregate initial Security
Balance of the related
Securities. Except as set forth
in the following sentence, the
Pre-Funded Amount will be used
only to purchase Subsequent
Mortgage Loans. Any portion of
the Pre-Funded Amount remaining
in the Pre-Funding Account at the
end of the Pre-Funding Period
will be used to prepay one or
more classes of Securities in the
amounts and in the manner
specified in the related
Prospectus Supplement. In
addition, if specified in the
related Prospectus Supplement,
the Depositor may be required to
deposit cash into an account
maintained by the Trustee (the
"Capitalized Interest Account")
for the purpose of assuring the
availability of funds to pay
interest with respect to the
Securities during the Pre-Funding
Period. Any amount remaining in
the Capitalized Interest Account
at the end of the Pre-Funding
Period will be remitted as
specified in the related
Prospectus Supplement. Amounts
deposited in the Pre-Funding and
Capitalized Interest Accounts
will be permitted to be invested,
pending application thereof, only
in eligible investments
authorized by each applicable
Rating Agency. See "Description
of the Trust Funds--Pre-Funding
Account."
DESCRIPTION OF SECURITIES Each series of Certificates will
evidence an interest in the
related Trust Fund and will be
issued pursuant to a Pooling and
Servicing Agreement. If a series
of Securities includes Notes,
such Notes will represent
indebtedness of the related Trust
Fund (which will be formed
pursuant to a deposit trust
agreement (each, a "Deposit Trust
Agreement") between the Depositor
and an owner trustee specified in
the related Prospectus
Supplement) and will be secured
by a security interest in the
Assets of the Trust Fund (or a
specified group thereof) pursuant
to an indenture (each, an
"Indenture"). Some or all of the
Assets in a Trust Fund may be
serviced pursuant to one or more
Underlying Servicing Agreements.
The Pooling and Servicing
Agreements and Underlying
Servicing Agreements are referred
to herein as the "Agreements."
Each series of Securities will
include one or more classes. Each
class of Securities (other than
certain Strip Securities, as
defined below) will have a stated
principal amount (a "Security
Balance") and except for certain
Strip Securities, as defined
below, will accrue interest
thereon based on a fixed,
variable or adjustable interest
rate (in the case of
Certificates, a "Pass-Through
Rate"). The related Prospectus
Supplement will specify the
Security Balance, if any, and the
Pass-Through Rate or interest
rate for each class of Securities
or, in the case of a variable or
adjustable Pass-Through Rate or
interest rate, the method for
determining the Pass-Through Rate
or interest rate.
DISTRIBUTIONS ON SECURITIES Each series of Securities will
consist of one or more classes of
Securities that may (i) provide
for the accrual of interest
thereon based on fixed, variable
or adjustable rates; (ii) be
senior (collectively, "Senior
Securities") or subordinate
(collectively, "Subordinate
Securities") to one or more other
classes of Securities in respect
of certain distributions on the
Securities; (iii) be entitled
either to (A) principal
distributions, with
disproportionately low, nominal
or no interest distributions or
(B) interest distributions, with
disproportionately low, nominal
or no principal distributions
(collectively, "Strip
Securities"); (iv) provide for
distributions of accrued interest
thereon commencing only following
the occurrence of certain events,
such as the retirement of one or
more other classes of Securities
of such series (collectively,
"Accrual Securities"); (v)
provide for distributions of
principal as described in the
related Prospectus Supplement;
and/or (vi) provide for
distributions based on a
combination of two or more
components thereof with one or
more of the characteristics
described in this paragraph,
including one or more Strip
Security or Accrual Security
components, to the extent of
available funds, in each case as
described in the related
Prospectus Supplement. If so
specified in the related
Prospectus Supplement,
distributions on one or more
classes of a series of Securities
may be limited to collections
from a designated portion of the
Assets in the related Trust Fund
(each such portion of Assets, an
"Asset Group"). See "Description
of the Securities--General." Any
such classes may include classes
of Offered Securities. With
respect to Securities with two or
more components, references
herein to Security Balance,
notional amount and Pass-Through
Rate or interest rate refer to
the principal balance, if any,
notional amount, if any, and the
Pass-Through Rate or interest
rate, if any, for any such
component.
The Securities will not represent
any interest in or obligation of
the Depositor or any affiliate
thereof except as set fort
herein, nor will the Securities,
any Assets (other than Assets
identified as FHA Loans or VA
Loans in the related Prospectus
Supplement) or Mortgage
Securities be insured or
guaranteed by any governmental
agency or instrumentality.
Although payment of principal and
interest on Agency Securities
will be guaranteed as described
herein and in the related
Prospectus Supplement by Ginnie
Mae, Fannie Mae or Freddie Mac,
the Securities of any series
including such Agency Securities
will not be so guaranteed. See
"Risk Factors--Limited Assets for
Payment of Securities" and
"Description of the Securities."
(a) Interest Interest on each class of Offered
Securities (other than certain
classes of Strip Securities) of
each series will accrue at the
applicable Pass-Through Rate or
interest rate on the outstanding
Security Balance thereof and will
be distributed to Securityholders
as provided in the related
Prospectus Supplement. The
specified date on which
distributions are to be made is a
"Distribution Date."
Distributions with respect to
interest on certain classes of
Strip Securities may be made on
each Distribution Date on the
basis of a notional amount as
described in the related
Prospectus Supplement.
Distributions of interest with
respect to one or more classes of
Securities may be reduced to the
extent of certain delinquencies,
losses, prepayment interest
shortfalls, and other
contingencies described herein
and in the related Prospectus
Supplement. See "Risk
Factors--Rate of Prepayments on
Assets and Priority of Payment of
Securities May Adversely Affect
Average Lives and Yields of
Securities," "Yield
Considerations" and "Description
of the Securities--Distributions
of Interest on the Securities."
(b) Principal The Securities of each series
initially will have an aggregate
Security Balance no greater than
the outstanding principal balance
of the Assets as of, unless the
related Prospectus Supplement
provides otherwise, the close of
business on the first day of the
month of formation of the related
Trust Fund (the "Cut-off Date"),
after application of scheduled
payments due on or before such
date, whether or not received.
The Security Balance of a
Security outstanding from time to
time represents the maximum
amount that the holder thereof is
then entitled to receive in
respect of principal from future
cash flow on the assets in the
related Trust Fund. Distributions
of principal will be made on each
Distribution Date to the class or
classes of Securities in the
amounts and in accordance with
the priorities specified in the
related Prospectus Supplement.
Distributions of principal of any
class of Securities will be made
on a pro rata basis among all of
the Securityholders of such
class, by random selection, or as
described in the related
Prospectus Supplement. Certain
classes of Strip Securities with
no Security Balance will not
receive distributions in respect
of principal. See "Description of
the Securities--Distributions of
Principal of the Securities."
ADVANCES To the extent specified in the
related Prospectus Supplement,
the Servicer will be obligated as
part of its servicing
responsibilities to make certain
advances that in its good faith
judgment it deems recoverable
with respect to delinquent
scheduled payments on the Assets
serviced by such Servicer in such
Trust Fund. If so specified in
the related Prospectus
Supplement, the Master Servicer,
the Trustee or other entity so
specified will be required to
make such advances in the event a
Servicer fails to do so. Neither
the Depositor nor, except to the
extent specified in the related
Prospectus Supplement, any of its
affiliates will have any
responsibility to make such
advances. Advances are
reimbursable generally from
subsequent recoveries in respect
of such Assets and otherwise to
the extent described herein and
in the related Prospectus
Supplement. If and to the extent
provided in the Prospectus
Supplement for any series, a
Servicer or another entity will
be entitled to receive interest
on its outstanding advances,
payable from amounts in the
related Trust Fund. See
"Description of the
Securities--Advances in Respect
of Delinquencies."
TERMINATION To the extent specified in the
related Prospectus Supplement, a
series of Securities may be
subject to optional early
termination through the
repurchase of the Assets in the
related Trust Fund by the party
specified therein, under the
circumstances and in the manner
set forth therein. If so provided
in the related Prospectus
Supplement, upon the reduction of
the Security Balance of a
specified class or classes of
Securities to a specified
percentage or on and after a date
specified in such Prospectus
Supplement, the party specified
therein will solicit bids for the
purchase of all of the Assets of
the Trust Fund, or of a
sufficient portion of such Assets
to retire such class or classes,
or purchase such Assets at a
price set forth in the related
Prospectus Supplement. Any such
purchase or solicitation of bids
may be made only when the
aggregate security balance of
such class or classes declines to
a percentage of the initial
Security Balance of such
Securities (generally not to
exceed 10%) specified in the
related Prospectus Supplement. In
addition, if so provided in the
related Prospectus Supplement,
certain classes of Securities may
be purchased or redeemed in the
manner set forth therein. In
either case, the purchase price
will at least equal the
outstanding Security Balance of
all Securities, or of the
Securities to be purchased or
redeemed, if less than all of the
Securities, and any accrued and
unpaid interest thereon. See
"Description of the
Securities--Termination."
REGISTRATION OF SECURITIES If so provided in the related
Prospectus Supplement, one or
more classes of the Offered
Securities will initially be
represented by one or more
certificates or notes, as
applicable, registered in the
name of Cede & Co., as the
nominee of DTC. No person
acquiring an interest in Offered
Securities so registered will be
entitled to receive a definitive
certificate or note, as
applicable, representing such
person's interest except in the
event that definitive
certificates or notes, as
applicable, are issued under the
limited circumstances described
herein. See "Risk Factors--Owners
of Book-Entry Securities Not
Entitled to Exercise Rights of
Holders of Securities" and
"Description of the
Securities--Book-Entry
Registration and Definitive
Securities."
TAX STATUS OF THE SECURITIES The following discussion
represents the opinion of Brown &
Wood LLP. The Securities of each
series offered hereby will
constitute either (i) "regular
interests" ("Regular Securities")
and "residual interests"
("Residual Securities") in a
Trust Fund treated as a real
estate mortgage investment
conduit under Sections 860A
through 860G of the Internal
Revenue Code of 1986, as amended
(the "Code"), (ii) interests
("Grantor Trust Securities") in a
Trust Fund treated as a grantor
trust under applicable provisions
of the Code, (iii) interests
("Partnership Securities") in a
Trust Fund treated as a
partnership under applicable
provisions of the Code, or (iv)
evidences of indebtedness ("Debt
Securities") of a Trust Fund
treated as debt instruments for
federal income tax purposes. In
general, to the extent the assets
and income of the Trust Fund are
treated as qualifying assets and
income under the following
sections of the Code, Regular
Securities (i) owned by a
"domestic building and loan
association" will be treated as
"loans . . . secured by an
interest in real property which
is . . . residential real
property" within the meaning of
Code Section 7701(a)(19)(C) and
(ii) owned by a real estate
investment trust will be treated
as "real estate assets" for
purposes of Section 856(c)(4)(A)
of the Code and interest income
therefrom will be treated as
"interest on obligations secured
by mortgages on real property"
for purposes of Section
856(c)(3)(B) of the Code. In
addition, Regular Securities will
be "qualified mortgages" within
the meaning of Section 860G(a)(3)
of the Code if transferred to
another REMIC on its startup in
exchange for regular or residual
interests therein. Moreover, if
95% or more of the assets and the
income of the Trust Fund qualify
for any of the foregoing
treatments, the Regular
Securities will qualify for the
foregoing treatments in their
entirety. Residual Securities
generally will be treated as
representing an interest in
qualifying assets and income to
the same extent described above
for institutions subject to
Sections 7701(a)(19)(C),
856(c)(4)(A) and 856(c)(3)(B) of
the Code. A portion (or, in
certain cases, all) of the income
from Residual Securities (i) may
not be offset by any losses from
other activities of the holder of
such Residual Securities, (ii)
may be treated as unrelated
business taxable income, for
holders of Residual Securities
that are subject to tax on
unrelated business taxable income
(as defined in Section 511 of the
Code), and (iii) may be subject
to U.S. federal income tax
withholding rules. In addition,
transfers of certain Residual
Securities may be disregarded
under some circumstances for all
federal income tax purposes. See
"Material Federal Income Tax
Considerations--REMICs--Taxation
of Owners of Residual Securities
herein. Grantor Trust Securities
may be either Standard Securities
having the same percentage
ownership of principal and
interest payments on the Mortgage
Loans or Strip Securities having
a different percentage ownership
interests in such principal and
interest payments. Holders of
Grantor Trust Securities
generally will be treated as
owning an interest in qualifying
assets and income under Sections
7701(a)(19)(C), 856(c)(4)(A),
856(c)(3)(B) and 860G(a)(3)(A) of
the Code. Partnership Securities
will be treated as partnership
interests for purposes of federal
income taxation, and accordingly,
will not represent an interest in
qualifying assets for purposes of
Section 7701(a)(19)(C) of the
Code, but will represent
qualifying assets and income
under Sections 856(c)(4)(A) and
856(c)(3)(B) of the Code to the
extent their proportionate share
of the assets of the related
Trust Fund so qualify. Debt
Securities will not represent
qualifying assets or income for
purposes of any of the preceding
sections. See "Material Federal
Income Tax Considerations" herein
and in the related Prospectus
Supplement.
LEGAL INVESTMENT CONSIDERATIONS The Prospectus Supplement for
each series of Securities will
specify which class or classes of
Offered Securities of such
series, if any, will constitute
"mortgage related securities" for
purposes of the Secondary
Mortgage Market Enhancement Act
of 1984, as amended ("SMMEA").
Investors whose investment
authority is subject to legal
restrictions should consult their
own legal advisors to determine
whether and to what extent the
Offered Securities constitute
legal investments for them. See
"Legal Investment Considerations"
herein and in the related
Prospectus Supplement.
ERISA CONSIDERATIONS An investment in Offered
Securities by an employee benefit
plan or other retirement plan or
arrangement that is subject to
Title I of the Employee
Retirement Income Security Act of
1974, as amended ("ERISA") or
Section 4975 of the Code (each, a
"Plan") may cause the Assets of
the related Trust Fund to be
deemed "plan assets" and could
give rise to a "prohibited
transaction" within the meaning
of ERISA and the Code. The U.S.
Department of Labor has issued an
individual exemption, Prohibited
Transaction Exemption (the
"Exemption"), to Deutsche Bank
Securities Inc. ("DBSI") that
generally exempts from the
application of certain of the
prohibited transaction provisions
of ERISA and the excise taxes
imposed on such prohibited
transactions by Section 4975 of
the Code, transactions relating
to the purchase, sale and holding
of pass-through securities
underwritten by DBSI and the
servicing and operation of pools
of assets such as certain of the
Assets, provided that certain
conditions are satisfied. To the
extent the Securities are not
treated as equity interests in
the related Trust Fund for
purposes of ERISA, a Plan's
investment in such Securities
would not cause the Assets to be
deemed "plan assets." However,
the purchase or holding of such
non-equity Securities by a Plan
with respect to which an
affiliate of the Depositor or an
equity investor is a "party in
interest" (within the meaning of
ERISA) or a "disqualified person"
(within the meaning of the Code)
could give rise to a prohibited
transaction unless one or more
statutory or administrative
exemptions apply to such
investment. The Prospectus
Supplement with respect to a
series of Securities may contain
additional information regarding
the application of the Exemption
or any other exemption with
respect to the Securities offered
thereby. See "ERISA
Considerations" herein.
RATING At the date of issuance, as to
each series, each class of
Offered Securities will be rated
in one of the four highest rating
categories by one or more
nationally recognized statistical
rating agencies (each, a "Rating
Agency"). A security rating is
not a recommendation to buy, sell
or hold such Securities and is
subject to revision or withdrawal
at any time by the assigning
Rating Agency. Further, such
ratings do not address the
possibility that, as a result of
principal prepayments, holders of
Securities may receive a lower
than anticipated yield. If a
series of Securities provides for
the establishment of a
Pre-Funding Account, it will be
an express condition to the
purchase of Subsequent Assets
that, after notice to each
assigning Rating Agency, no
Rating Agency notifies the
Depositor that such purchase
would result in the withdrawal or
downgrade of the ratings assigned
to such Securities. See "Rating"
herein.
MATERIAL RISKS Prospective investors are urged
to read "Risk Factors" herein and
in the applicable Prospectus
Supplement for a discussion of
the material risks associated
with an investment in the
Securities.
<PAGE>
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors.
LIMITED LIQUIDITY FOR SECURITIES
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Deutsche Bank Securities Inc. and
the other underwriters, if any, specified in the related Prospectus
Supplement, currently expect to make a secondary market in the Offered
Securities, but have no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding. It is not
expected that any application will be made to list the Securities of a series
on any securities exchange. Accordingly, the liquidity of the Securities may
be limited.
LIMITED ASSETS FOR PAYMENT OF SECURITIES
The Securities will not represent an interest in or obligation of the
Depositor, any Master Servicer, any Servicer, the Trustee or any of their
affiliates. The only obligations with respect to the Securities or the Assets
will be the obligations (if any) of the Warranting Party (as defined herein)
pursuant to certain limited representations and warranties made with respect
to the Assets, the Master Servicer's obligations and any Servicer's servicing
obligations under the related Agreement (including the limited obligation to
make certain advances in the event of delinquencies on the Assets, but only to
the extent deemed recoverable) and, if and to the extent expressly described
in the related Prospectus Supplement, certain limited obligations of a
Servicer or Master Servicer in connection with an agreement to purchase or act
as remarketing agent with respect to a convertible ARM Loan (as defined
herein) upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Assets may have been made
and/or assigned in connection with transfers of such Assets prior to the
issuance of the Securities, the rights of the Trustee and the Securityholders
with respect to such representations or warranties will be limited to their
rights as an assignee thereof. Except to the extent, if any, specified in the
related Prospectus Supplement, none of the Depositor, any Master Servicer, any
Servicer, the Trustee or any of their affiliates will have any obligation with
respect to representations or warranties made by any other entity. Except to
the extent, if any, specified in the related Prospectus Supplement, neither
the Securities nor the underlying Assets will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, any Master
Servicer, any Servicer, the Trustee or any of their affiliates. Proceeds of
the assets included in the related Trust Fund for each series of Securities
(including the Assets and any form of credit enhancement) will be the sole
source of payments on the Securities, and there will be no recourse to the
Depositor or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make all payments provided for under the
Securities.
Except to the extent, if any, specified in the related Prospectus
Supplement, a series of Securities will not have any claim against or security
interest in the Trust Funds for any other series and the Assets included in
the related Trust Fund will be the sole source of payments on the Securities
of a series. If the related Trust Fund is insufficient to make payments on
such Securities, no other assets will be available for payment of the
deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Accounts and any accounts maintained as
Credit Support, may be withdrawn under certain conditions, as described in the
related Prospectus Supplement. In the event of such withdrawal, such amounts
will not be available for future payment of principal of or interest on the
Securities. If so provided in the Prospectus Supplement for a series of
Securities containing one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by one or more classes of the Subordinate Securities, and,
thereafter, by the remaining classes of Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement.
RATE OF PREPAYMENTS ON ASSETS MAY ADVERSELY AFFECT AVERAGE LIVES AND YIELDS
OF SECURITIES
Prepayments (including those caused by defaults) on the Assets in any
Trust Fund (or, in the case of Agency Securities and Mortgage Securities, the
underlying assets related thereto) generally will result in a faster rate of
principal payments on one or more classes of the related Securities than if
payments on such Assets were made as scheduled. Thus, the prepayment
experience on the Assets may affect the average life of each class of related
Securities. The rate of principal payments on pools of mortgage loans or
manufactured housing contracts varies between pools and from time to time is
influenced by a variety of economic, demographic, geographic, social, tax,
legal and other factors. There can be no assurance as to the rate of
prepayment on the assets underlying or comprising the Assets in any Trust Fund
or that the rate of payments will conform to any model described herein or in
any Prospectus Supplement. If prevailing interest rates fall significantly
below the applicable mortgage interest rates, principal prepayments are likely
to be higher than if prevailing rates remain at or above the rates borne by
the assets underlying or comprising the Assets in any Trust Fund. As a result,
the actual maturity of any class of Securities evidencing an interest in or an
obligation of a Trust Fund containing Mortgage Loans, Contracts, Unsecured
Home Improvement Loans, Agency Securities or Mortgage Securities could occur
significantly earlier than expected. Conversely, if prevailing interest rates
rise significantly above the applicable mortgage interest rates, principal
prepayments are likely to be lower than if prevailing rates remain at or below
the rates borne by the assets underlying or comprising the Assets in any Trust
Fund and the maturity of any class of Securities evidencing an interest in or
an obligation of such Trust Fund could occur significantly later than
expected. The relationship of prevailing interest rates and prepayment rates
on Contracts will be discussed in the related Prospectus Supplement. In
addition, certain prepayments may result in the collection of less interest
than would otherwise be the case in the month of prepayment.
PRIORITY OF PAYMENT OF SECURITIES MAY ADVERSELY AFFECT AVERAGE LIVES AND
YIELDS OF SECURITIES
A series of Securities may include one or more classes of Securities
with priorities of payment and, as a result, yields on other classes of
Securities, including classes of Offered Securities, of such series may be
more sensitive to prepayments on Assets. A series of Securities may include
one or more classes offered at a significant premium or discount. Yields on
such classes of Securities will be sensitive, and in some cases extremely
sensitive, to prepayments on Assets and, where the amount of interest payable
with respect to a class is disproportionately high, as compared to the amount
of principal, as with certain classes of Strip Securities, a holder might, in
some prepayment scenarios, fail to recoup its original investment. A series of
Securities may include one or more classes of Securities, including classes of
Offered Securities, that provide for distribution of principal thereof from
amounts attributable to interest accrued but not currently distributable on
one or more classes of Accrual Securities and, as a result, yields on such
Securities will be sensitive to (a) the provisions of such Accrual Securities
relating to the timing of distributions of interest thereon and (b) if such
Accrual Securities accrue interest at a variable or adjustable Pass-Through
Rate or interest rate, changes in such rate. See "Yield Considerations" herein
and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Securities of such class will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Assets 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 or redemption of
the series of Securities. 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. Each Prospectus
Supplement will identify any payment to which holders of Offered Securities of
the related series are entitled that is not covered by the applicable rating.
REAL ESTATE MARKET CONDITIONS AFFECT MORTGAGE LOAN PERFORMANCE
An investment in securities such as the Securities which represent
interests in Mortgage Loans may be affected generally by, among other things,
a decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of
the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could
be higher than those now generally experienced in the mortgage lending
industry. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to the principal balance of
deferred interest, the principal balances of such Mortgage Loans could be
increased to an amount equal to or in excess of the value of the underlying
Mortgaged Properties, thereby increasing the likelihood of default. To the
extent that such losses are not covered by the applicable Credit Support, if
any, holders of Securities of the series evidencing interests in the related
Mortgage Loans will bear all risk of loss resulting from default by mortgagors
and will have to look primarily to the value of the Mortgaged Properties for
recovery of the outstanding principal and unpaid interest on the defaulted
Mortgage Loans.
VARIABLE PAYMENT PROVISIONS IN MORTGAGE LOANS MAY INCREASE RATE OF DEFAULT
Certain of the types of Mortgage Loans may involve additional
uncertainties not present in traditional types of loans. For example, certain
Mortgage Loans provide for escalating or variable payments by the mortgagor
under the Mortgage Loan, as to which the mortgagor is generally qualified on
the basis of the initial payment amount. In some instances the mortgagors'
income may not be sufficient to enable them to continue to make their loan
payments as such payments increase and thus the likelihood of default will
increase.
GEOGRAPHIC CONCENTRATION MAY INCREASE RATES OF LOSS AND DELINQUENCY
Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will
be experienced on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or
limited documentation mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
Additionally, a decline in the value of the Mortgaged Properties will increase
the risk of loss particularly with respect to any related junior Mortgage
Loans. See "--Junior Mortgage Loans are More Likely to Experience Losses on
Foreclosure."
MULTIFAMILY PROPERTIES MAY EXPERIENCE INCREASED DEFAULTS AND FORECLOSURES
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent
income or assets of the borrower; thus, the value of an income-producing
property typically is directly related to the net operating income derived
from such property. If the net operating income of the property is reduced
(for example, if rental or occupancy rates decline or real estate tax rates or
other operating expenses increase), the borrower's ability to repay the loan
may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of Mortgage Loans secured by Multifamily Properties may
be greater than for a pool of Mortgage Loans secured by Single Family
Properties of comparable aggregate unpaid principal balance because the pool
of Mortgage Loans secured by Multifamily Properties is likely to consist of a
smaller number of higher balance loans.
If applicable, certain legal aspects of the Mortgage Loans for a
series of Securities may be described in the related Prospectus Supplement.
See also "Certain Legal Aspects of Mortgage Loans" herein.
BALLOON PAYMENT ASSETS ARE MORE LIKELY TO EXPERIENCE LOSSES ON FORECLOSURE
IF OBLIGOR IS UNABLE TO REFINANCE OR SELL RELATED PROPERTY
Certain of the Mortgage Loans (the "Balloon Payment Assets") as of
the Cut-off Date may not be fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage Loans with balloon payments involve a greater
degree of risk because the ability of an obligor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the obligor's equity in the related property, the financial condition of the
obligor, the value of the property, tax laws, prevailing general economic
conditions and the availability of credit for single family or multifamily
real properties generally.
JUNIOR MORTGAGE LOANS ARE MORE LIKELY TO EXPERIENCE LOSSES ON FORECLOSURE
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior
lien"), may not be included in the Trust Fund. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior
lien to satisfy fully both the senior lien and the Mortgage Loan. In the event
that a holder of the 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 lien. The claims of the holder of the senior lien
will be satisfied in full out of proceeds of the liquidation of the Mortgaged
Property, if such proceeds are sufficient, before the Trust Fund as holder of
the junior lien receives any payments in respect of the Mortgage Loan. If a
Servicer were to foreclose on any Mortgaged Property, it would do so subject
to any related senior lien. In order for the debt related to the Mortgaged
Property 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 lien or purchase the Mortgaged
Property subject to the senior lien. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property were
insufficient to satisfy both loans in the aggregate, the Trust Fund, as the
holder of the junior lien, and, accordingly, holders of the related
Securities, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage. SUB-PRIME MORTGAGE LOANS MAY BE MORE LIKELY TO
DEFAULT OR BE FORECLOSED
All or a portion of the Assets may consist of mortgage loans
underwritten in accordance with the underwriting for "Sub-prime Mortgage
Loans". A Sub-prime Mortgage Loan is a mortgage loan that is ineligible for
purchase by Fannie Mae or Freddie Mac under their traditional mortgage loan
purchase programs due to borrower credit characteristics, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines, including
a loan made to a borrower whose creditworthiness and repayment ability do not
satisfy such Fannie Mae or Freddie Mac underwriting guidelines and a borrower
who may have a record of major derogatory credit items such as default on a
prior mortgage loan, credit write-offs, outstanding judgments or prior
bankruptcies. As a consequence, delinquencies and foreclosures can be expected
to be more prevalent with respect to Sub-prime Mortgage Loans than with
respect to mortgage loans originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines, and changes in the values of the Mortgaged
Properties may have a greater effect on the loss experience of Sub-prime
Mortgage Loans than on mortgage loans originated in accordance with Fannie Mae
or Freddie Mac underwriting guidelines.
POTENTIAL FOR LOSSES INCREASES IF ASSETS ARE DELINQUENT
A portion of the Assets may be delinquent upon the issuance of the
related Securities. Credit enhancement provided with respect to a particular
series of Securities may not cover all losses related thereto. Prospective
investors should consider the risk that the inclusion of such Assets in the
Trust Fund for a series may cause the rate of defaults and prepayments on the
Assets to increase and, in turn, may cause losses to exceed the available
credit enhancement for such series and affect the yield on the Securities of
such series.
EFFECTS OF FAILURE TO COMPLY WITH CONSUMER PROTECTION LAWS; OTHER LEGAL
CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and may require licensing of the persons
who originated the Mortgage Loans (the "Originators") and Servicers. In
addition, most states have other laws, public policy and general principles of
equity relating to the protection of consumers, unfair and deceptive practices
and practices which may apply to the origination, servicing and collection of
the Mortgage Loans. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of a Servicer to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject such
Servicer to damages and administrative sanctions.
See "Certain Legal Aspects of Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's
credit experience; and (iv) the National Housing Act of 1934 (the "Housing
Act") with respect to Mortgage Loans insured thereunder.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act"), which amended the Federal
Truth in Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of
certain provisions in mortgages subject to the Home Ownership Act. The Home
Ownership Act also provides that any purchaser or assignee of a mortgage
covered by the Home Ownership Act is subject to all of the claims and defenses
which the borrower could assert against the original lender. The maximum
damages that may be recovered in an action under the Home Ownership Act from
an assignee is the remaining amount of indebtedness plus the total amount paid
by the borrower in connection with the mortgage loan. Any Trust Fund for which
the Mortgage Loans include Mortgage Loans subject to the Home Ownership Act
would be subject to all of the claims and defenses that the borrower could
assert against the original lender. Any violation of the Home Ownership Act
that would result in such liability would be a breach of the applicable
Warranting Party's representations and warranties, and the Warranting Party
would be obligated to cure, repurchase or, if permitted by the related
Agreement, substitute for the Mortgage Loan in question.
GENERAL ECONOMIC CONDITIONS INCREASES THE POTENTIAL FOR LOSSES ON CONTRACTS
AND MANUFACTURED HOMES
An investment in Securities evidencing an interest in or obligation
of a Trust Fund containing Contracts may be affected by, among other things, a
downturn in national, regional or local economic conditions. The geographic
location of the Manufactured Homes securing the Contracts in any Trust Fund at
origination of the related Contract will be set forth in the related
Prospectus Supplement. Regional and local economic conditions are often
volatile and, historically, regional and local economic conditions, as well as
national economic conditions, have affected the delinquency, loan loss and
repossession experience of manufactured housing installment sales contracts
and/or installment loan contracts (hereinafter generally referred to as
"contracts" or "manufactured housing contracts").
DEPRECIATION IN VALUE INCREASES THE POTENTIAL FOR LOSSES ON CONTRACTS AND
MANUFACTURED HOMES
Regardless of its location, manufactured housing generally
depreciates in value. Thus, Securityholders should expect that, as a general
matter, the market value of any Manufactured Home will be lower than the
outstanding principal balance of the related Contract. Sufficiently high
delinquencies and liquidation losses on the Contracts in a Trust Fund will
have the effect of reducing, and could eliminate, the protection against loss
afforded by any credit enhancement supporting any class of the related
Securities. If such protection is eliminated with respect to a class of
Securities, the holders of such Securities will bear all risk of loss on the
related Contracts and will have to rely on the value of the related
Manufactured Homes for recovery of the outstanding principal of and unpaid
interest on any defaulted Contracts in the related Trust Fund. See
"Description of Credit Support."
GRANT OF SECURITY INTEREST IN CONTRACTS; RISKS OF DEFECTIVE SECURITY
INTEREST AND EFFECTS OF CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The Asset Seller in respect of a Contract will represent that such
Contract is secured by a security interest in a Manufactured Home. Perfection
of security interests in the Manufactured Homes and enforcement of rights to
realize upon the value of the Manufactured Homes as collateral for the
Contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's certificate
of title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. The Servicer will not amend
any certificates of title to change the lienholder specified therein from the
Asset Seller to the Trustee and will not deliver any certificate of title to
the Trustee or note thereon the Trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Asset Seller
or a trustee in bankruptcy of the Asset Seller. In addition, numerous federal
and state consumer protection laws impose requirements on lending under
installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with
such requirements could give rise to liabilities of assignees for amounts due
under such agreements and claims by such assignees may be subject to set-off
as result of such lender's or seller's noncompliance. These laws would apply
to the Trustee as assignee of the Contracts. The Asset Seller of the Contracts
to the Depositor will warrant that each Contract complies with all
requirements of law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
Manufactured Home securing a Contract. A breach of any such warranty that
materially adversely affects any Contract would create an obligation of the
Asset Seller to repurchase, or if permitted by the applicable Agreement,
substitute for, such Contract unless such breach is cured. If the Credit
Support is exhausted and recovery of amounts due on the Contracts is dependent
on repossession and resale of Manufactured Homes securing Contracts that are
in default, certain other factors may limit the ability to realize upon the
Manufactured Home or may limit the amount realized by Securityholders to less
than the amount due. See "Certain Legal Aspects of the Contracts."
BANKRUPTCY OF BORROWER MAY PREVENT COLLECTIONS ON UNSECURED HOME IMPROVEMENT
LOANS
The obligations of the borrower under any Unsecured Home Improvement
Loan included in a Trust Fund will not be secured by an interest in the
related real estate or any other property, and the Trust Fund will be a
general unsecured creditor as to such obligations. In the event of a default
under an Unsecured Home Improvement Loan, the related Trust Fund will have
recourse only against the borrower's assets generally, along with all other
general unsecured creditors of the borrower. In a bankruptcy or insolvency
proceeding relating to a borrower on an Unsecured Home Improvement Loan, the
obligations of the borrower under such Unsecured Home Improvement Loan may be
discharged in their entirety, notwithstanding the fact that the portion of
such borrower's assets made available to the related Trust Fund as a general
unsecured creditor to pay amounts due and owing thereunder are insufficient to
pay all such amounts. A borrower on an Unsecured Home Improvement Loan may not
demonstrate the same degree of concern over performance of the borrower's
obligations under such Home Improvement Loan as if such obligations were
secured by the real estate or other assets owned by such borrower.
CREDIT SUPPORT IS LIMITED IN AMOUNT AND COVERAGE
The Prospectus Supplement for a series of Securities will describe
any Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of credit
support, or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses
or risks; for example, Credit Support may or may not cover fraud or negligence
by a mortgage loan or contract originator or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce
the risk to holders of Senior Securities of delinquent distributions or
ultimate losses, the amount of subordination will be limited and may decline
under certain circumstances. 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 amount of claims under any related
Credit Support 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 and shortfalls on the Assets may fall primarily upon
those classes of Securities having a lower priority of payment. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing an interest in a Covered
Trust will be subject to the risk that such Credit Support will be exhausted
by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Securities, including the subordination of one or more
classes of Securities, will be determined on the basis of criteria established
by each Rating Agency rating such classes of Securities based on an assumed
level of defaults, delinquencies, other losses or other factors. There can,
however, be no assurance that the loss experience on the related Assets will
not exceed such assumed levels. See "--Limited Nature of Ratings,"
"Description of the Securities" and "Description of Credit Support."
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Servicer or
the Master Servicer will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series of
Securities, if the applicable Rating Agency indicates that the then-current
rating thereof will not be adversely affected.
LOWERING OF RATING ON SECURITIES MAY DECREASE VALUE AND LIQUIDITY
The rating of any series of Securities by any applicable Rating
Agency may be lowered following the initial issuance thereof as a result of
the downgrading of the obligations of any applicable Credit Support provider,
or as a result of losses on the related Assets substantially in excess of the
levels contemplated by such Rating Agency at the time of its initial rating
analysis. The lowering of a rating on a series or class of Securities may
adversely affect the market value of such Securities and the liquidity of such
Securities. None of the Depositor, any Master Servicer, any Servicer or any of
their affiliates will have any obligation to replace or supplement any Credit
Support or to take any other action to maintain any rating of any series of
Securities.
SUBORDINATED SECURITIES BEAR RISK OF LOSS BEFORE MORE SENIOR SECURITIES
The rights of Subordinate Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Servicer (to the extent of its servicing fee,
including any unpaid servicing fees with respect to one or more prior Due
Periods, and is reimbursed for certain unreimbursed advances and unreimbursed
liquidation expenses), any Master Servicer (to the extent of its master
servicing fee, including any unpaid master servicing fee with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed
advances) and the Senior Securityholders to the extent described in the
related Prospectus Supplement. As a result of the foregoing, investors must be
prepared to bear the risk that they may be subject to delays in payment and
may not recover their initial investments in the Subordinate Securities. See
"Description of the Securities--General" and "--Allocation of Losses and
Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive
to the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate and
amount of such losses assumed by an investor, the yields to maturity on the
Subordinate Securities may be lower than anticipated.
RESIDUAL SECURITIES MAY HAVE ADVERSE TAX ATTRIBUTES
Holders of Residual Securities will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the related REMIC, regardless of the amount or timing of
their receipt of cash payments, as described in "Material Federal Income Tax
Considerations--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute Residual Securities may have taxable income
and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual holders of Residual
Securities may be limited in their ability to deduct servicing fees and other
expenses of the REMIC. In addition, Residual Securities are subject to certain
restrictions on transfer. Because of the special tax treatment of Residual
Securities, the taxable income arising in a given year on a Residual Security
will not be equal to the taxable income associated with investment in a
corporate bond or stripped instrument having similar cash flow characteristics
and pre-tax yield. Therefore, the after-tax yield on the Residual Securities
may be significantly less than that of a corporate bond or stripped instrument
having similar cash flow characteristics. Additionally, prospective purchasers
of Residual Securities should be aware that applicable regulations prevent the
ability to mark-to-market REMIC residual interests. See "Material Federal
Income Tax Considerations--REMICs."
OWNERS OF BOOK-ENTRY SECURITIES NOT ENTITLED TO EXERCISE RIGHTS OF HOLDERS OF
SECURITIES
If so provided in the Prospectus Supplement, one or more classes of
the Offered Securities will be initially represented by one or more
certificates or notes registered in the name of Cede, the nominee for DTC, and
will not be registered in the names of the Security Owners or their nominees.
Because of this, unless and until Securities are issued in fully registered,
certificated form ("Definitive Securities"), Security Owners will not be
recognized by the Trustee as "Securityholders" (as that term is to be used in
the related Agreement). Hence, until such time, Security Owners will be able
to exercise the rights of Securityholders only indirectly through DTC and its
participating organizations. See "Description of the Securities--Book-Entry
Registration and Definitive Securities."
FINANCIAL INSTRUMENTS ARE SUBJECT TO COUNTERPARTY RISK
The assets of a Trust Fund may, if specified in the related
Prospectus Supplement, include financial instruments such as interest rate
swap, cap, floor or similar agreements (each, a "Financial Instrument"), which
will require the provider of such instrument (the "Counterparty") to make
payments to the Trust Fund under the circumstances described in the Prospectus
Supplement. To the extent that payments on the Securities of the related
series depend in part on payments to be received under a Financial Instrument,
the ability of the Trust Fund to make payments on the Securities will be
subject to the credit risk of the Counterparty. The Prospectus Supplement for
a series of Securities will describe any mechanism, such as the payment of
"breakage fees," which may exist to facilitate replacement of a Financial
Instrument upon the default or credit impairment of the related Counterparty.
However, there can be no assurance that any such mechanism will result in the
ability of the Servicer to obtain a replacement Financial Instrument.
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund will include (i) single family
and/or multifamily mortgage loans (or certain balances thereof) (collectively,
the "Mortgage Loans"), including without limitation, Home Equity Loans, Home
Improvement Contracts and Land Sale Contracts, (ii) home improvement
installment sales contracts or Unsecured Home Improvement Loans, (iii)
manufactured housing installment sale contracts or installment loan
agreements, (iv) any combination of "fully modified pass-through"
mortgage-backed certificates ("Ginnie Mae Certificates") guaranteed by Ginnie
Mae, guaranteed mortgage pass-through securities ("Fannie Mae Certificates")
issued by Fannie Mae and mortgage participation certificates ("Freddie Mac
Certificates") issued by Freddie Mac, (v) previously issued asset-backed
certificates, collateralized mortgage obligations or participation
certificates (each, and collectively, "Mortgage Securities") evidencing
interests in, or collateralized by, Mortgage Loans, Unsecured Home Improvement
Loans, Contracts or Agency Securities or (vi) a combination of Mortgage Loans,
Unsecured Home Improvement Loans, Contracts, Agency Securities and/or Mortgage
Securities. The Mortgage Loans will not be guaranteed or insured by the
Depositor or any of its affiliates. The Mortgage Loans will be guaranteed or
insured by a governmental agency or instrumentality or other person only if
and to the extent expressly provided in the related Prospectus Supplement.
Each Asset will be selected by the Depositor for inclusion in a Trust Fund
from among those purchased, either directly or indirectly, from a prior holder
thereof (an "Asset Seller"), which may be an affiliate of the Depositor and
which prior holder may or may not be the originator of such Mortgage Loan,
Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a series may be subject to
various types of payment provisions. Such Assets may consist of (1) "Level
Payment Assets," which may provide for the payment of interest and full
repayment of principal in level monthly payments with a fixed rate of interest
computed on their declining principal balances; (2) "Adjustable Rate Assets,"
which may provide for periodic adjustments to their rates of interest to equal
the sum (which may be rounded) of a fixed margin and an index; (3) "Buy Down
Assets," which are Assets for which funds have been provided by someone other
than the related Obligors to reduce the Obligors' monthly payments during the
early period after origination of such Assets; (4) "Increasing Payment
Assets," as described below; (5) "Interest Reduction Assets," which provide
for the one-time reduction of the interest rate payable thereon; (6) "GEM
Assets," which provide for (a) monthly payments during the first year after
origination that are at least sufficient to pay interest due thereon, and (b)
an increase in such monthly payments in subsequent years at a predetermined
rate resulting in full repayment over a shorter term than the initial
amortization terms of such Assets; (7) "GPM Assets," which allow for payments
during a portion of their terms which are or may be less than the amount of
interest due on the unpaid principal balances thereof, and which unpaid
interest will be added to the principal balances of such Assets and will be
paid, together with interest thereon, in later years; (8) "Step-up Rate
Assets" which provide for interest rates that increase over time; (9) "Balloon
Payment Assets;" (10) "Convertible Assets" which are Adjustable Rate Assets
subject to provisions pursuant to which, subject to certain limitations, the
related Obligors may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and (11) "Bi-weekly Assets," which provide for
Obligor payments to be made on a bi-weekly basis.
An Increasing Payment Asset is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the related
Prospectus Supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the related Prospectus Supplement
from the date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment with respect to an Increasing
Payment Asset is the total amount required to be paid each month in accordance
with its terms and equals the sum of (1) the Obligor's monthly payments
referred to in the preceding sentence and (2) payments made by the respective
Servicers pursuant to buy-down or subsidy agreements. The Obligor's initial
monthly payments for each Increasing Payment Asset are set at the
level-payment amount that would apply to an otherwise identical Level Payment
Asset having an interest rate a certain number of percentage points below the
Asset Rate of such Increasing Payment Asset. The Obligor's Monthly Payments on
each Increasing Payment Asset, together with any payments made thereon by the
related Servicers pursuant to buy-down or subsidy agreements, will in all
cases be sufficient to allow payment of accrued interest on such Increasing
Payment Asset at the related interest rate, without negative amortization. An
Obligor's monthly payments on such an Asset may, however, not be sufficient to
result in any reduction of the principal balance of such Asset until after the
period when such payments may be increased.
The Securities will be entitled to payment only from the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets of any other trust fund established by the Depositor. If specified in
the related Prospectus Supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
MORTGAGE LOANS
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-
to four-family residential property (including a manufactured home) or a
security interest in shares issued by a cooperative housing corporation (a
"Single Family Property" and the related Mortgage Loan a "Single Family
Mortgage Loan") or (ii) a primarily residential property which consists of
five or more residential dwelling units, and which may include limited retail,
office or other commercial space (a "Multifamily Property" and the related
Mortgage Loan, a "Multifamily Mortgage Loan"). Single Family Properties and
Multifamily Properties are sometimes referred to herein collectively as
"Mortgaged Properties." To the extent specified in the related Prospectus
Supplement, the Mortgage Loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property. The Mortgaged Properties may
include apartments owned by cooperative housing corporations ("Cooperatives").
The Mortgaged Properties may include leasehold interests in properties, the
title to which is held by third party lessors. The term of any such leasehold
shall exceed the term of the related mortgage note by at least five years or
such other time period specified in the related Prospectus Supplement. The
Mortgage Loans may include (i) closed-end and/or revolving home equity loans
or certain balances thereof ("Home Equity Loans") and/or (ii) secured home
improvement installment sales contracts and Home Improvement Contracts. In
addition, the Mortgage Loans may include certain Mortgage Loans evidenced by
Land Sale Contracts for the sale of properties pursuant to which the mortgagor
promises to pay the amount due thereon to the holder thereof with fee title to
the related property held by such holder until the mortgagor has made all of
the payments required pursuant to such Land Sale Contract, at which time fee
title is conveyed to the mortgagor. The Originator of each Mortgage Loan will
have been a person other than the Depositor. The related Prospectus Supplement
will indicate if any Originator is an affiliate of the Depositor. The Mortgage
Loans will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties. The Mortgaged Properties will be
located in any one of the fifty states, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. If so provided in the
related Prospectus Supplement, Mortgage Loans may include loans insured by the
FHA ("FHA Loans") or partially guaranteed by the VA ("VA Loans"). See "--FHA
Loans and VA Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise set forth in the related Prospectus Supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the appraised
value thereof determined in an appraisal obtained at the time of origination
of the Refinance Loan. The value of a Mortgaged Property as of the date of
initial issuance of the related series of Securities may be less than the
Value at origination and will fluctuate from time to time based upon changes
in economic conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and
latest origination date and maturity date of the Mortgage Loans, (v) the range
of the Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the
Mortgage Rates or range of Mortgage Rates and the weighted average Mortgage
Rate borne by the Mortgage Loans, (vii) the state or states in which most of
the Mortgaged Properties are located, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) with respect to
Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the index, the
frequency of the adjustment dates, the range of margins added to the index,
and the maximum Mortgage Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan, (x) information
regarding the payment characteristics of the Mortgage Loans, including without
limitation balloon payment and other amortization provisions, (xi) the number
of Mortgage Loans that are delinquent and the number of days or ranges of the
number of days such Mortgage Loans are delinquent and (xii) the material
underwriting standards used for the Mortgage Loans. If specific information
respecting the Mortgage Loans is not known to the Depositor at the time
Securities are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement, and specific
information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Mortgage Loans
included in a Trust Fund will not vary by more than five percent (by aggregate
principal balance as of the Cut-off Date) from the characteristics thereof
that are described in the related Prospectus Supplement.
The related Prospectus Supplement will specify whether the Mortgage
Loans include (i) Home Equity Loans, which may be secured by Mortgages that
are junior to other liens on the related Mortgaged Property and/or (ii) Home
Improvement Contracts originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens
on the Mortgaged Property. The home improvements purchased with the Home
Improvement Contracts typically include replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods, solar heating panels, patios, decks, room additions and garages. The
related Prospectus Supplement will specify whether the Home Improvement
Contracts are FHA Loans and, if so, the limitations on any FHA insurance. In
addition, the related Prospectus Supplement will specify whether the Mortgage
Loans contain certain Mortgage Loans evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually
or at such other interval as is specified in the related Prospectus Supplement
or for payments in another manner described in the related Prospectus
Supplement. Each Mortgage Loan may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to
a fixed Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, from time to time pursuant to an election or
as otherwise specified on the related Mortgage Note, in each case as described
in the related Prospectus Supplement. Each Mortgage Loan may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events or that adjust on the basis of other methodologies, and may
provide for negative amortization or accelerated amortization, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may be
fully amortizing or require a balloon payment due on its stated maturity date,
in each case as described in the related Prospectus Supplement. Each Mortgage
Loan may contain prohibitions on prepayment (a "Lock-out Period" and, the date
of expiration thereof, a "Lock-out Date") or require payment of a premium or a
yield maintenance penalty (a "Prepayment Premium") in connection with a
prepayment, in each case as described in the related Prospectus Supplement. In
the event that holders of any class or classes of Offered Securities will be
entitled to all or a portion of any Prepayment Premiums collected in respect
of Mortgage Loans, the related Prospectus Supplement will specify the method
or methods by which any such amounts will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the related Prospectus Supplement, the
Mortgage Loans may consist, in whole or in part, of revolving Home Equity
Loans or certain balances thereof ("Revolving Credit Line Loans"). Interest on
each Revolving Credit Line Loan, excluding introductory rates offered from
time to time during promotional periods, may be computed and payable monthly
on the average daily outstanding principal balance of such loan. From time to
time prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit Line
Loan may be drawn down (up to a maximum amount as set forth in the related
Prospectus Supplement) or repaid. If specified in the related Prospectus
Supplement, new draws by borrowers under the Revolving Credit Line Loans will
automatically become part of the Trust Fund described in such Prospectus
Supplement. As a result, the aggregate balance of the Revolving Credit Line
Loans will fluctuate from day to day as new draws by borrowers are added to
the Trust Fund and principal payments are applied to such balances and such
amounts will usually differ each day, as more specifically described in the
related Prospectus Supplement. Under certain circumstances, under a Revolving
Credit Line Loan, a borrower may, during the related draw period, choose an
interest only payment option, during which the borrower is obligated to pay
only the amount of interest which accrues on the loan during the billing
cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
Unsecured Home Improvement Loans
The Unsecured Home Improvement Loans may consist of conventional
unsecured home improvement loans, unsecured installment loans and unsecured
home improvement loans which are FHA Loans. See "--FHA Loans and VA Loans"
below and "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees." Except as otherwise set forth in the related Prospectus
Supplement, the Unsecured Home Improvement Loans will be fully amortizing and
will bear interest at a fixed or variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including (i) the aggregate outstanding principal balance
and the largest, smallest and average outstanding principal balance of the
Unsecured Home Improvement Loans as of the applicable Cut-Off Date, (ii) the
weighted average (by principal balance) of the original and remaining terms to
maturity of the Unsecured Home Improvement Loans, (iii) the earliest and
latest origination date and maturity date of the Unsecured Home Improvements
Loans, (iv) the interest rates or range of interest rates and the weighted
average interest rates borne by the Unsecured Home Improvement Loans, (v) the
state or states in which most of the Unsecured Home Improvement Loans were
originated, (vi) information with respect to the prepayment provisions, if
any, of the Unsecured Home Improvement Loans, (vii) with respect to the
Unsecured Home Improvement Loans with adjustable interest rates ("ARM
Unsecured Home Improvement Loans"), the index, the frequency of the adjustment
dates, the range of margins added to the index, and the maximum interest rate
or monthly payment variation at the time of any adjustment thereof and over
the life of the ARM Unsecured Home Improvement Loan, (viii) information
regarding the payment characteristics of the Unsecured Home Improvement Loan,
(ix) the number of Unsecured Home Improvement Loans that are delinquent and
the number of days or ranges of the number of days such Unsecured Home
Improvement Loans are delinquent and (x) the material underwriting standards
used for the Unsecured Home Improvement Loans. If specific information
respecting the Unsecured Home Improvement Loans is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Unsecured Home
Improvement Loans included in a Trust Fund will not vary by more than five
percent (by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related Prospectus
Supplement.
CONTRACTS
General
To the extent provided in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. To the extent specified in the related Prospectus Supplement, the
Contracts may include Contracts which are FHA Loans. See "--FHA Loans and VA
Loans" below and "Description of the Agreements--Material Terms of the Pooling
and Servicing Agreements and Underlying Servicing Agreements--FHA Insurance
and VA Guarantees." Such Prospectus Supplement will specify the states or
other jurisdictions in which the Manufactured Homes are located as of the
related Cut-off Date. The method of computing the "Loan-to-Value Ratio" of a
Contract will be described in the related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of
the dates specified in such Prospectus Supplement and to the extent then
applicable and specifically known to the Depositor, with respect to the
Contracts, including (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Contracts
as of the applicable Cut-off Date, (ii) whether the Manufactured Homes were
new or used as of the origination of the related Contracts, (iii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Contracts, (iv) the earliest and latest origination date and maturity
date of the Contracts, (v) the range of the Loan-to-Value Ratios at
origination of the Contracts, (vi) the Contract Rates or range of Contract
Rates and the weighted average Contract Rate borne by the Contracts, (vii) the
state or states in which most of the Manufactured Homes are located at
origination, (viii) information with respect to the prepayment provisions, if
any, of the Contracts, (ix) with respect to Contracts with adjustable Contract
Rates ("ARM Contracts"), the index, the frequency of the adjustment dates, and
the maximum Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract, (x) the number of
Contracts that are delinquent and the number of days or ranges of the number
of days such Contracts are delinquent, (xi) information regarding the payment
characteristics of the Contracts and (xii) the material underwriting standards
used for the Contracts. If specific information respecting the Contracts is
not known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before
the initial issuance thereof and will be filed as part of a Current Report on
Form 8-K with the Securities and Exchange Commission within fifteen days after
such initial issuance. Notwithstanding the foregoing, the characteristics of
the Contracts included in a Trust Fund will not vary by more than five percent
(by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related Prospectus
Supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest
or both, on due dates that occur monthly or at such other interval as is
specified in the related Prospectus Supplement or for payments in another
manner described in the Prospectus Supplement. Each Contract may provide for
no accrual of interest or for accrual of interest thereon at an annual
percentage rate that is fixed over its term or that adjusts from time to time,
or as otherwise specified in the related Prospectus Supplement. Each Contract
may provide for scheduled payments to maturity or payments that adjust from
time to time to accommodate changes in the Contract Rate as otherwise
described in the related Prospectus Supplement. See "--Assets" above.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
Certificates, Fannie Mae Certificates and Freddie Mac Certificates, which may
include Stripped Agency Securities, as described below.
Ginnie Mae
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g)
of Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA Loans, VA Loans or by pools of other eligible
residential 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, Ginnie Mae is authorized, under
Section 306(d) of the Housing Act, to borrow from the United States Treasury
with no limitations as to amount, to perform its obligations under its
guarantee.
Ginnie Mae Certificates
Each Ginnie Mae Certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by
Ginnie Mae or Fannie Mae as a seller-servicer of FHA Loans or VA Loans, except
as described below with respect to Stripped Agency Securities (as defined
below). The loans underlying Ginnie Mae Certificates may consist of FHA Loans,
VA Loans and other loans eligible for inclusion in loan pools underlying
Ginnie Mae Certificates. Ginnie Mae Certificates may be issued under either or
both of the Ginnie Mae I program and the Ginnie Mae II program, as described
in the related Prospectus Supplement. The Prospectus Supplement for
Certificates of each Series evidencing interests in a Trust Fund including
Ginnie Mae Certificates will set forth additional information regarding the
Ginnie Mae guaranty program, the characteristics of the pool underlying such
Ginnie Mae Certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae Certificates to the extent not described
herein and other relevant matters with respect to the Ginnie Mae Certificates.
Except as otherwise specified in the related Prospectus Supplement or
as described below with respect to Stripped Agency Securities, each Ginnie Mae
Certificate will provide for the payment, by or on behalf of the issuer, to
the registered holder of such Ginnie Mae Certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
aggregate amount of the monthly principal and interest payments on each
related FHA Loan or VA Loan, less servicing and guaranty fees aggregating the
excess of the interest on such FHA Loan or VA Loan over the Ginnie Mae
Certificates pass-through rate. In addition, each payment to a holder of a
Ginnie Mae Certificate will include proportionate pass-through payments to
such holder of any prepayments of principal of the FHA Loans or VA Loans
underlying the Ginnie Mae Certificate and the holder's proportionate interest
in the remaining principal balance in the event of a foreclosure or other
disposition of any such FHA Loan or VA Loan.
The Ginnie Mae Certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae Certificates, the
Depositor or any affiliates thereof, and the only recourse of a registered
holder, such as the Trustee, is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
Certificates included in a Trust Fund in accordance with a guaranty agreement
or contract between Ginnie Mae and the issuer of such Ginnie Mae Certificates.
Pursuant to such agreement, such issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA Loans and VA
Loans, including collecting payments from borrowers and remitting such
collections to the registered holder, maintaining escrow and impoundment
accounts of borrowers for payments of taxes, insurance and other items
required to be paid by the borrower, maintaining primary hazard insurance, and
advancing from its own funds in order to make timely payments of all amounts
due on the Ginnie Mae Certificate, even if the payments received by such
issuer on the loans backing the Ginnie Mae Certificate are less than the
amounts due thereon. If the issuer is unable to make payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make such payment. Upon such notification and request, Ginnie
Mae will make such payments directly to the registered holder of the Ginnie
Mae Certificate. In the event no payment is made by the issuer and the issuer
fails to notify and request Ginnie Mae to make such payment, the registered
holder of the Ginnie Mae Certificate has recourse against only Ginnie Mae to
obtain such payment. The Trustee or its nominee, as registered holder of the
Ginnie Mae Certificates included in a Trust Fund, is entitled to proceed
directly against Ginnie Mae under the terms of the guaranty agreement or
contract relating to such Ginnie Mae Certificates for any amounts that are not
paid when due under each Ginnie Mae Certificate.
The Ginnie Mae Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above so long as
such Ginnie Mae Certificates and underlying residential loans meet the
criteria of the Rating Agency or Agencies. Such Ginnie Mae Certificates and
underlying residential loans will be described in the related Prospectus
Supplement.
Fannie Mae
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally 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.
Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase loans from
many capital market investors, thereby expanding the total amount of funds
available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas. In addition,
Fannie Mae issues mortgage-backed securities primarily in exchange for pools
of mortgage loans from lenders. Fannie Mae receives fees for its guaranty of
timely payment of principal and interest on its mortgage-backed securities.
Fannie Mae Certificates
Fannie Mae Certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus which is periodically
revised by Fannie Mae. Fannie Mae Certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program.
Mortgage loans comprising a pool are either provided by Fannie Mae from its
own portfolio or purchased pursuant to the criteria of the Fannie Mae purchase
program. Mortgage loans underlying Fannie Mae Certificates included in a Trust
Fund will consist of conventional mortgage loans, FHA Loans or VA Loans. The
Prospectus Supplement for Securities of each series evidencing interests in a
Trust Fund including Fannie Mae Certificates will set forth additional
information regarding the Fannie Mae program, the characteristics of the pool
underlying such Fannie Mae Certificates, the servicing of the related pool,
payment of principal and interest on the Fannie Mae Certificates to the extent
not described herein and other relevant matters with respect to the Fannie Mae
Certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae Certificate
that it will distribute amounts representing such holder's proportionate share
of scheduled principal and interest at the applicable pass-through rate
provided for by such Fannie Mae Certificate on the underlying mortgage loans,
whether or not received, and such holder's proportionate share of the full
principal amount of any prepayment or foreclosed or other finally liquidated
mortgage loan, whether or not such principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith
and credit of the United States. If Fannie Mae were unable to satisfy such
obligations, distributions to the holders of Fannie Mae Certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae Certificates
would be affected by delinquent payments and defaults on such loans.
Fannie Mae Certificates evidencing interests in pools of mortgage
loans formed on or after May 1, 1985 (other than Fannie Mae Certificates
backed by pools containing graduated payment mortgage loans or multifamily
loans) are available in book-entry form only. With respect to a Fannie Mae
Certificate issued in book-entry form, distributions thereon will be made by
wire, and with respect to a fully registered Fannie Mae Certificate,
distributions thereon will be made by check.
The Fannie Mae Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as
such Fannie Mae Certificates and underlying mortgage loans meet the criteria
of the Rating Agency or Rating Agencies rating the Certificates of such
Series. Such Fannie Mae Certificates and underlying mortgage loans will be
described in the related Prospectus Supplement.
Freddie Mac
Freddie Mac is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended (the "Freddie Mac Act"). Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
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
Freddie Mac currently consists of the purchase of first lien, conventional
residential mortgage loans or participation interests in such mortgage loans
and the resale of the mortgage loans so purchased in the form of mortgage
securities, primarily Freddie Mac Certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans and participation interests
therein which it deems to be of such quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
Freddie Mac Certificates
Each Freddie Mac Certificate represents an undivided interest in a
pool of residential loans that may consist of first lien conventional
residential loans, FHA Loans or VA Loans (the "Freddie Mac Certificate
Group"). Each such mortgage loan must meet the applicable standards set forth
in the Freddie Mac Act. A Freddie Mac Certificate Group may include whole
loans, participation interests in whole loans and undivided interests in whole
loans and/or participations comprising another Freddie Mac Certificate Group.
The Prospectus Supplement for Securities of each series evidencing interests
in a Trust Fund including Freddie Mac Certificates will set forth additional
information regarding the Freddie Mac guaranty program, the characteristics of
the pool underlying such Freddie Mac Certificate, the servicing of the related
pool, payment of principal and interest on the Freddie Mac Certificate to the
extent not described herein and other relevant matters with respect to the
Freddie Mac Certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac Certificate
the timely payment of interest on the underlying mortgage loans to the extent
of the applicable pass-through rate on the registered holder's pro rata share
of the unpaid principal balance outstanding on the underlying mortgage loans
in the Freddie Mac Certificate Group represented by such Freddie Mac
Certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac 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, guarantee the timely payment of scheduled principal. Pursuant to
its guarantees, Freddie Mac also guarantees ultimate collection of scheduled
principal payments, prepayments of principal and the remaining principal
balance in the event of a foreclosure or other disposition of a mortgage loan.
Freddie Mac may remit the amount due on account of its guarantee of collection
of principal at any time after default on an underlying mortgage loan, but not
later than 30 days following the latest of (i) foreclosure sale, (ii) payment
of the claim by any mortgage insurer and (iii) the expiration of any right of
redemption, 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 Freddie Mac Certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its servicing
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies
with the particular circumstances of each mortgagor, and Freddie Mac has not
adopted servicing standards that require that the demand be made within any
specified period.
Freddie Mac 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 Freddie
Mac under its guarantee are obligations solely of Freddie Mac and are not
backed by, nor entitled to, the full faith and credit of the United States. If
Freddie Mac were unable to satisfy such obligations, distributions to holders
of Freddie Mac Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of Freddie Mac Certificates would be affected by
delinquent payments and defaults on such Mortgage Loans.
The Freddie Mac Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as
such Freddie Mac Certificates and underlying mortgage loans meet the criteria
of the Rating Agency or Rating Agencies rating the Securities of such Series.
Such Freddie Mac Certificates and underlying mortgage loans will be described
in the related Prospectus Supplement.
Stripped Agency Securities
The Ginnie Mae Certificates, Fannie Mae Certificates or Freddie Mac
Certificates may be issued in the form of certificates ("Stripped Agency
Securities") which represent an undivided interest in all or 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 or interest distributions (but not all of
such distributions), on an underlying pool of mortgage loans or certain other
Ginnie Mae Certificates, Fannie Mae Certificates or Freddie Mac Certificates.
Ginnie Mae, Fannie Mae or Freddie Mac, as applicable, will guarantee each
Stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such Stripped Agency Securities or to the extent
described above with respect to a Stripped Agency Security backed by a pool of
mortgage loans, unless otherwise specified in the related Prospectus
Supplement. The Prospectus Supplement for Securities of each series evidencing
interests in a Trust Fund including Stripped Agency Securities will set forth
additional information regarding the characteristics of the assets underlying
such Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters with respect to the
Stripped Agency Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans
of the type that would otherwise be eligible to be Mortgage Loans, Unsecured
Home Improvement Loans, Contract, or Agency Securities, or collateralized
obligations secured by Mortgage Loans, Unsecured Home Improvement Loans,
Contracts or Agency Securities. The Mortgage Securities (i) will have been
issued by an entity other than the Depositor or its affiliates, (ii) will have
been acquired in bona fide secondary market transactions from persons other
than the issuer thereof or its affiliates and (iii) will have been (a) offered
and distributed to the public pursuant to an effective registration statement
or (b) purchased in a transaction not involving any public offering from a
person who is not an affiliate of the issuer of such securities at the time of
sale (nor an affiliate thereof at any time during the preceding three months);
provided a period of two years elapsed since the later of the date the
securities were acquired from the issuer. Although individual Underlying Loans
may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Mortgage Securities themselves
will not be so insured or guaranteed. Except as otherwise set forth in the
related Prospectus Supplement, Mortgage Securities will generally be similar
to Securities offered hereunder.
The Prospectus Supplement for Securities of each series evidencing
interests in a Trust Fund including Mortgage Securities will include a
description of such Mortgage Securities and any related credit enhancement,
and the related Mortgage Loans, Unsecured Home Improvement Loans, Contracts or
Agency Securities will be described together with any other Mortgage Loans,
Unsecured Home Improvement Loans, Contracts or Agency Securities included in
the Trust Fund relating to such series. As to any such series of Securities,
as used herein the terms "Mortgage Loans," "Unsecured Home Improvement Loans"
and "Contracts" include the Mortgage Loans, Unsecured Home Improvement Loans
or Contracts, as applicable, underlying such Mortgage Securities. References
herein to advances to be made and other actions to be taken by the Master
Servicer in connection with the Assets may include such advances made and
other actions taken pursuant to the terms of such Mortgage Securities.
FHA LOANS AND VA LOANS
FHA Loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to
four-family FHA Loans will be insured under various FHA programs including the
standard FHA 203-b programs to finance the acquisition of one- to four-family
housing units and the FHA 245 graduated payment mortgage program. Such FHA
Loans generally require a minimum down payment of approximately 5% of the
original principal amount of the FHA Loan. No FHA Loan may have an interest
rate or original principal balance exceeding the applicable FHA limits at the
time of origination of such FHA Loan.
Mortgage Loans, Unsecured Home Improvement Loans and Contracts that
are FHA Loans are insured by the FHA (as described in the related Prospectus
Supplement, up to an amount equal to 90% of the sum of the unpaid principal of
the FHA Loan, a portion of the unpaid interest and certain other liquidation
costs) pursuant to Title I of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure multifamily loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a multifamily loan may be up to 40 years and the ratio of the
loan amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily
loans made for the purchase or refinancing of existing apartment projects that
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may
be made for up to, in general, the greater of 15% of the value of the project
and a dollar amount per apartment unit established from time to time by HUD.
In general the loan term may not exceed 35 years and a loan-to-value ratio of
no more than 85% is required for the purchase of a project and 70% for the
refinancing of a project.
VA Loans will be partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended (the "Servicemen's
Readjustment Act"). The Servicemen's Readjustment Act permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchasers and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no VA
Loan will have an original principal amount greater than five times the
partial VA guarantee for such VA Loan. The maximum guarantee that may be
issued by the VA under this program will be set forth in the related
Prospectus Supplement.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "Pre-Funding Account. In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the availability
thereof), additional Assets from time to time (as frequently as daily) within
the period (not to exceed three months) specified in the related Prospectus
Supplement after the issuance of such series of Securities having an aggregate
principal balance approximately equal to the amount on deposit in the
Pre-Funding Account for such series on the date of such issuance. The
Pre-Funded Amount with respect to a series is not expected to exceed 25% of
the aggregate initial Security Balance of the related Securities. Any
Subsequent Assets will be required to satisfy certain eligibility criteria
more fully set forth in the related Prospectus Supplement, which eligibility
criteria will be consistent with the eligibility criteria of the Assets
initially included in the Trust Fund, subject to such exceptions as are
expressly stated in the Prospectus Supplement. For example, the Subsequent
Assets will be subject to the same underwriting standards, representations and
warranties as the Assets initially included in the Trust Fund. In addition,
certain conditions must be satisfied before the Subsequent Assets are
transferred into the Trust Fund such as the delivery to the Rating Agencies
and the Trustee of certain opinions of counsel (including bankruptcy,
corporate and tax opinions).
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Mortgage Loans. Any portion of the
Pre-Funded Amount remaining in the Pre-Funding Account at the end of the
Pre-Funding Period will be used to prepay one or more classes of Securities in
the amounts and in the manner specified in the related Prospectus Supplement.
In addition, if specified in the related Prospectus Supplement, the Depositor
may be required to deposit cash into an account maintained by the Trustee for
the purpose of assuring the availability of funds to pay interest with respect
to the Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related Prospectus Supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest
Accounts will be permitted to be invested, pending application thereof, only
in eligible investments authorized by each applicable Rating Agency.
ACCOUNTS
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof. The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will
be described in the Prospectus Supplement for a series of Securities. See
"Risk Factors--Credit Support is Limited in Amount and Coverage" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in
the funds and accounts established for the related series will be invested at
a specified rate. The Trust Fund may also include certain other agreements,
such as interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or similar agreements provided to
reduce the effects of interest rate or currency exchange rate fluctuations on
the Assets or on one or more classes of Securities. (Currency exchange
agreements might be included in the Trust Fund if some or all of the Mortgage
Loans were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement, including,
without limitation, provisions relating to the timing, manner and amount of
payments thereunder and provisions relating to the termination thereof, will
be described in the Prospectus Supplement for the related series. In addition,
the related Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will
be applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors,
including the volume of Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by
the Securityholder, the Pass-Through Rate of the Security, the receipt and
timing of receipt of distributions on the Security and the weighted average
life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify
the Pass-Through Rate or interest rate for each class of such Securities or,
in the case of a variable or adjustable Pass-Through Rate or interest rate,
the method of determining the Pass-Through Rate or interest rate; the effect,
if any, of the prepayment of any Asset on the Pass-Through Rate or interest
rate of one or more classes of Securities; and whether the distributions of
interest on the Securities of any class will be dependent, in whole or in
part, on the performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of
interest will be below that otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price of such Security because, while
interest may accrue on each Asset during a certain period (each, an "Interest
Accrual Period"), the distribution of such interest will be made on a day
which may be several days, weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the
Security Balance of a class of Accrual Securities) on a Distribution Date will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate and Interest
Rate," if the Interest Accrual Period ends on a date other than the day before
a Distribution Date for the related series, the yield realized by the holders
of such Securities may be lower than the yield that would result if the
Interest Accrual Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate
of principal payments on the Assets (or, in the case of Mortgage Securities
and Agency Securities, the underlying assets related thereto), including
principal prepayments resulting from both voluntary prepayments by the
borrowers and involuntary liquidations. The rate at which such principal
prepayments occur will be affected by a variety of factors, including, without
limitation, the terms of the Assets (or, in the case of Mortgage Securities
and Agency Securities, the underlying assets related thereto), the level of
prevailing interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however, if
prevailing interest rates fall significantly below the interest rates on the
Assets in a particular Trust Fund (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related thereto), such assets are
likely to be the subject of higher principal prepayments than if prevailing
rates remain at or above the rates borne by such assets. In this regard, it
should be noted that certain Assets (or, in the case of Mortgage Securities
and Agency Securities, the underlying assets related thereto) may consist of
loans with different interest rates. The rate of principal payment on Mortgage
Securities will also be affected by the allocation of principal payments on
the underlying assets among the Mortgage Securities or Agency Securities and
other Mortgage Securities or Agency Securities of the same series. The rate of
principal payments on the Assets in the related Trust Fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related
thereto) is likely to be affected by the existence of any Lock-out Periods and
Prepayment Premium provisions of the mortgage loans underlying or comprising
such Assets, and by the extent to which the servicer of any such mortgage loan
is able to enforce such provisions. Mortgage Loans with a Lock-out Period or a
Prepayment Premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical mortgage loans without such provisions, with shorter Lock-out
Periods or with lower Prepayment Premiums. Because of the depreciating nature
of manufactured housing, which limits the possibilities for refinancing, and
because the terms and principal amounts of manufactured housing contracts are
generally shorter and smaller than the terms and principal amounts of mortgage
loans secured by site-built homes, changes in interest rates have a
correspondingly smaller effect on the amount of the monthly payments on
manufactured housing contracts than on the amount of the monthly payments on
mortgage loans secured by site-built homes. Consequently, changes in interest
rates may play a smaller role in prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgage
on site-built homes. Conversely, local economic conditions and certain of the
other factors mentioned above may play a larger role in the prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Security offered at a premium
calculates its anticipated yield to maturity based on an assumed rate of
distributions of principal that is slower than that actually experienced on
the Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related thereto), the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the Prospectus
Supplement for a series of Securities, the effect on yield on one or more
classes of the Securities of such series of prepayments of the Assets in the
related Trust Fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
Prospectus Supplement. Generally, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan or Contract as of the Due Date in the month in which
such partial prepayment is receive or such other date as is specified in the
related Prospectus Supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related thereto) may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the Mortgage Loans and distributed on a Security, the greater the
effect on such investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans or Contracts
comprising or underlying the Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes
of the Securities of the related series.
If so provided in the Prospectus Supplement for a series of
Securities, one or more classes of Securities may have a final scheduled
Distribution Date, which is the date on or prior to which the Security Balance
thereof is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to such series set forth therein. Weighted average life
refers to the average amount of time that will elapse from the date of issue
of a security until each dollar of principal of such security will be repaid
to the investor. The weighted average life of a class of Securities of a
series will be influenced by the rate at which principal on the Assets is paid
to such class, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Assets in a Trust Fund. If any
Assets in a particular Trust Fund have actual terms to maturity less than
those assumed in calculating final scheduled Distribution Dates for the
classes of Securities of the related series, one or more classes of such
Securities may be fully paid prior to their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Assets will, to some extent, be a function of the
mix of Mortgage Rates or Contract Rates and maturities of the Mortgage Loans
or Contracts comprising or underlying such Assets. See "Description of the
Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment
model, each as described below. CPR represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans. A prepayment assumption of 100% of SPA assumes prepayment rates
of 0.2% per annum of the then outstanding principal balance of such loans in
the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Mortgage Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities
may contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Securities of such series and the
percentage of the initial Security Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or such other standard
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Securities to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Securities. It is unlikely that prepayment of any
Mortgage Loans or Contracts comprising or underlying the Assets for any series
will conform to any particular level of CPR, SPA or any other rate specified
in the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount),
and because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the
related Mortgaged Property, there is a risk that a number of Balloon Payment
Assets may default at maturity. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the mortgagor's financial
situation, prevailing mortgage loan interest rates, the mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Neither the Depositor, the Servicer, the Master Servicer, nor any
of their affiliates will be obligated to refinance or repurchase any Mortgage
Loan or to sell the Mortgaged Property except to the extent provided in the
related Prospectus Supplement. In the case of defaults, recovery of proceeds
may be delayed by, among other things, bankruptcy of the mortgagor or adverse
conditions in the market where the property is located. In order to minimize
losses on defaulted Mortgage Loans, the Servicer may modify Mortgage Loans
that are in default or as to which a payment default is reasonably
foreseeable. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of
the Securities and may thereby lengthen the period of time elapsed from the
date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. With respect to
certain Contracts, the Contract Rate may be "stepped up" during its term or
may otherwise vary or be adjusted. Under the applicable underwriting
standards, the mortgagor or obligor under each Mortgage Loan or Contract
generally will be qualified on the basis of the Mortgage Rate or Contract Rate
in effect at origination. The repayment of any such Mortgage Loan or Contract
may thus be dependent on the ability of the mortgagor or obligor to make
larger level monthly payments following the adjustment of the Mortgage Rate or
Contract Rate. In addition, certain Mortgage Loans may be subject to temporary
buydown plans ("Buydown Mortgage Loans") pursuant to which the monthly
payments made by the mortgagor during the early years of the Mortgage Loan
will be less than the scheduled monthly payments thereon (the "Buydown
Period"). The periodic increase in the amount paid by the mortgagor of a
Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the mortgagor, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as
immediately after origination (initial Mortgage Rates are generally lower than
the sum of the applicable index at origination and the related margin over
such index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Rate. The
addition of any such deferred interest to the principal balance of any related
class or classes of Securities will lengthen the weighted average life thereof
and may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased. In addition, with respect to certain ARM
Loans subject to negative amortization, during a period of declining interest
rates, it might be expected that each minimum scheduled monthly payment on
such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will
be applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of such Securities will be reduced and
may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased.
As may be described in the related Prospectus Supplement, the related
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related
Trustee to the acquisition of additional Mortgage Loans during a specified
period (rather than used to fund payments of principal to Securityholders
during such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or
revolving period may, upon the occurrence of certain events to be described in
the related Prospectus Supplement, terminate prior to the end of the specified
period and result in the earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Agreement may provide that all or a portion of such
collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior
to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee
of such principal would be to slow the amortization rate of the related
Securities relative to the amortization rate of the related Mortgage Loans, or
to attempt to match the amortization rate of the related Securities to an
amortization schedule established at the time such Securities are issued. Any
such feature applicable to any Securities may terminate upon the occurrence of
events to be described in the related Prospectus Supplement, resulting in the
current funding of principal payments to the related Securityholders and an
acceleration of the amortization of such Securities.
Termination
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate Security Balance of the Securities of such series
declines to a percentage specified in the related Prospectus Supplement
(generally not to exceed 10%) of the Initial Security Balance, under the
circumstances and in the manner set forth therein. In addition, if so provided
in the related Prospectus Supplement, certain classes of Securities may be
purchased or redeemed in the manner set forth therein. See "Description of the
Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans or contracts are expected
to occur with greater frequency in their early years. The rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans,
and on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for
other types of Mortgage Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans and Contracts
will be affected by the general economic condition of the region of the
country in which the related Mortgage Properties or Manufactured Homes 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.
Foreclosures
The number of foreclosures or repossessions and the principal amount
of the Mortgage Loans or Contracts comprising or underlying the Assets that
are foreclosed or repossessed in relation to the number and principal amount
of Mortgage Loans or Contracts that are repaid in accordance with their terms
will affect the weighted average life of the Mortgage Loans or Contracts
comprising or underlying the Assets and that of the related series of
Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing
of a Mortgage Loan or Contract in any Trust Fund by accepting prepayments
thereon and permitting a new loan secured by a mortgage on the same property.
In the event of such a refinancing, the new loan would not be included in the
related Trust Fund and, therefore, such refinancing would have the same effect
as a prepayment in full of the related Mortgage Loan or Contract. A Servicer
may, from time to time, implement programs designed to encourage refinancing.
Such programs may include, without limitation, modifications of existing
loans, general or targeted solicitations, the offering of pre-approved
applications, reduced origination fees or closing costs, or other financial
incentives. In addition, Servicers may encourage the refinancing of Mortgage
Loans or Contracts, including defaulted Mortgage Loans or Contracts, that
would permit creditworthy borrowers to assume the outstanding indebtedness of
such Mortgage Loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans comprising or
underlying the Assets, other than FHA Loans and VA Loans, may include
"due-on-sale clauses" that allow the holder of the Mortgage Loans to demand
payment in full of the remaining principal balance of the Mortgage Loans upon
sale, transfer or conveyance of the related Mortgaged Property.
With respect to any Mortgage Loans, except as set forth in the
related Prospectus Supplement, the Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or
proposed conveyance of the underlying Mortgaged Property and it is entitled to
do so under applicable law; provided, however, that the Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Due-on-Sale Provisions." The
Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. It is expected that the Servicer
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made
by a delinquent obligor in order to avoid a repossession of the Manufactured
Home. In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale clause". See "Certain Legal Aspects of the
Contracts--Transfers of Manufactured Homes; Enforceability of Due-on-Sale
Clauses."
THE DEPOSITOR
ACE Securities Corp., the Depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the Depositor are located at 6707 Fairview Road, Suite D,
Charlotte, North Carolina 28210. Its telephone number is (704) 365-0569. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the Depositor are, in general, to acquire,
own and sell mortgage loans and financial assets; to issue, acquire, own, hold
and sell securities and notes secured by or representing ownership interests
in Mortgage Loans and other financial assets, collections thereon and related
assets; and to engage in any acts which are incidental to, or necessary,
suitable or convenient to accomplish, the foregoing.
All of the shares of capital stock of the Depositor are held by
Altamont Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an Indenture.
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more
other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B) interest
distributions, with disproportionately low, nominal or no principal
distributions; (iv) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series
(collectively, "Accrual Securities"); (v) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case
as described in the related Prospectus Supplement; and/or (vi) provide for
distributions based on a combination of two or more components thereof with
one or more of the characteristics described in this paragraph including a
Strip Security component. If so specified in the related Prospectus
Supplement, distributions on one or more classes of a series of Securities may
be limited to collections from a designated portion of the Assets in the
related Trust Fund. Any such classes may include classes of Offered
Securities.
Each class of Offered Securities of a series will be issued in
minimum denominations corresponding to the Security Balances or, in the case
of certain classes of Strip Securities, notional amounts or percentage
interests specified in the related Prospectus Supplement. The transfer of any
Offered Securities may be registered and such Securities may be exchanged
without the payment of any service charge payable in connection with such
registration of transfer or exchange, but the Depositor or the Trustee or any
agent thereof may require payment of a sum sufficient to cover any tax or
other governmental charge. One or more classes of Securities of a series may
be issued as Definitive Securities or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Owners of Book-Entry Securities Not Entitled to Exercise Rights of
Holders of Securities" and "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same class and series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors--Limited Liquidity for
Securities" and "--Limited Assets for Payment of Securities."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Distributions (other than the final distribution)
will be made to the persons in whose names the Securities are registered at
the close of business on, unless a different date is specified in the related
Prospectus Supplement, the last business day of the month preceding the month
in which the Distribution Date occurs (the "Record Date"), and the amount of
each distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution
Date will be allocated pro rata among the outstanding Securityholders in such
class or by random selection or as described in the related Prospectus
Supplement. Payments will be made either by wire transfer in immediately
available funds to the account of a Securityholder at a bank or other entity
having appropriate facilities therefor, if such Securityholder has so notified
the Trustee or other person required to make such payments no later than the
date specified in the related Prospectus Supplement (and, if so provided in
the related Prospectus Supplement, holds Securities in the requisite amount
specified therein), or by check mailed to the address of the person entitled
thereto as it appears on 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 location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each
Distribution Date will be made from the Available Distribution Amount
described below, in accordance with the terms described in the related
Prospectus Supplement. Generally, the "Available Distribution Amount" for each
Distribution Date equals the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Due Period
(unless a different period is specified in the related Prospectus
Supplement, a "Due Period " with respect to any Distribution Date
will commence on the second day of the month in which the immediately
preceding Distribution Date occurs, or the day after the Cut-off Date
in the case of the first Due Period, and will end on the first day of
the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
FHA insurance, VA Guaranty Policy or insurance policies to be
maintained in respect of each Asset (to the extent such proceeds are
not applied to the restoration of the Asset or released in accordance
with the normal servicing procedures of a Servicer, subject to the
terms and conditions applicable to the related Asset) (collectively,
"Insurance Proceeds"), all other amounts received and retained in
connection with the liquidation of Assets in default in the Trust
Fund ("Liquidation Proceeds"), and other unscheduled recoveries
received subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Servicer, the Master Servicer or any other entity as specified in the
related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from
the Trust Fund for defective documentation or a breach of
representation or warranty received subsequent to the related Due
Period;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account, including
any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Servicer or the Master Servicer or any
other entity as specified in the related Prospectus Supplement with respect to
such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Servicer or any other entity as specified in the
related Prospectus Supplement with respect to interest shortfalls resulting
from prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from or
in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related Prospectus Supplement for a series of Securities will
describe any variation in the calculation of the Available Distribution Amount
for such series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities that
have no Pass-Through Rate or interest rate) may have a different Pass-Through
Rate or interest rate, which will be a fixed, variable or adjustable rate at
which interest will accrue on such class or a component thereof (the
"Pass-Through Rate" in the case of Certificates). The related Prospectus
Supplement will specify the Pass-Through Rate or interest rate for each class
or component or, in the case of a variable or adjustable Pass-Through Rate or
interest rate, the method for determining the Pass-Through Rate or interest
rate. Interest on the Securities will be calculated on the basis of a 360-day
year consisting of twelve 30-day months unless the related Prospectus
Supplement specifies a different basis.
Distributions of interest in respect of the Securities of any class
will be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances,
specified in the related Prospectus Supplement, and any class of Strip
Securities that are not entitled to any distributions of interest) based on
the Accrued Security Interest for such class and such Distribution Date,
subject to the sufficiency of the portion of the Available Distribution Amount
allocable to such class on such Distribution Date. Prior to the time interest
is distributable on any class of Accrual Securities, the amount of Accrued
Security Interest otherwise distributable on such class will be added to the
Security Balance thereof on each Distribution Date. With respect to each class
of Securities and each Distribution Date (other than certain classes of Strip
Securities), "Accrued Security Interest" will be equal to interest accrued
during the related Interest Accrual Period on the outstanding Security Balance
thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. Accrued
Security Interest on certain classes of Strip Securities will be equal to
interest accrued during the related Interest Accrual Period on the outstanding
notional amount thereof immediately prior to each Distribution Date, at the
applicable Pass-Through Rate or interest rate, reduced as described below, or
interest accrual in the manner described in the related Prospectus Supplement.
The method of determining the notional amount for a certain class of Strip
Securities will be described in the related Prospectus Supplement. Reference
to notional amount is solely for convenience in certain calculations and does
not represent the right to receive any distributions of principal. Unless
otherwise provided in the related Prospectus Supplement, the Accrued Security
Interest on a series of Securities will be reduced in the event of prepayment
interest shortfalls, which are shortfalls in collections of interest for a
full accrual period resulting from prepayments prior to the due date in such
accrual period on the Mortgage Loans or Contracts comprising or underlying the
Assets in the Trust Fund for such series. The particular manner in which such
shortfalls are to be allocated among some or all of the classes of Securities
of that series will be specified in the related Prospectus Supplement. The
related Prospectus Supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on (or,
in the case of Accrual Securities, that may otherwise be added to the Security
Balance of) a class of Offered Securities may be reduced as a result of any
other contingencies, including delinquencies, losses and deferred interest on
or in respect of the Mortgage Loans or Contracts comprising or underlying the
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Security
Interest otherwise distributable on a class of Securities by reason of the
allocation to such class of a portion of any deferred interest on the Mortgage
Loans or Contracts comprising or underlying the Assets in the related Trust
Fund will result in a corresponding increase in the Security Balance of such
class. See "Risk Factors--Rate of Prepayments on Assets May Adversely Affect
Average Lives and Yields of Securities" and "--Priority of Payment of
Securities May Adversely Affect Average Lives and Yields of Securities," and
"Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Strip
Securities, will have a "Security Balance" which, at any time, will equal the
then maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included
in the related Trust Fund. The outstanding Security Balance of a Security will
be reduced to the extent of distributions of principal thereon from time to
time and, if and to the extent so provided in the related Prospectus
Supplement, by the amount of losses incurred in respect of the related Assets,
may be increased in respect of deferred interest on the related Mortgage Loans
to the extent provided in the related Prospectus Supplement and, in the case
of Accrual Securities prior to the Distribution Date on which distributions of
interest are required to commence, will be increased by any related Accrued
Security Interest. If so specified in the related Prospectus Supplement, the
initial aggregate Security Balance of all classes of Securities of a series
will be greater than the outstanding aggregate principal balance of the
related Assets as of the applicable Cut-off Date. The initial aggregate
Security Balance of a series and each class thereof will be specified in the
related Prospectus Supplement. Distributions of principal will be made on each
Distribution Date to the class or classes of Securities in the amounts and in
accordance with the priorities specified in the related Prospectus Supplement.
Certain classes of Strip Securities with no Security Balance are not entitled
to any distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such
extent, the descriptions set forth under "--Distributions of Interest on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference in
such sections to Security Balance and Pass-Through Rate or interest rate refer
to the principal balance, if any, of any such component and the Pass-Through
Rate or interest rate, if any, on any such component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment
Premiums that are collected on the Mortgage Loans in the related Trust Fund
will be distributed on each Distribution Date to the class or classes of
Securities entitled thereto in accordance with the provisions described in
such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of
Securities consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by a class of Subordinate Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund. The Prospectus Supplement for a series of
Securities will describe the entitlement, if any, of a class of Securities
whose Security Balance has been reduced to zero as a result of distributions
or the allocation of losses on the related Assets to recover any losses
previously allocated to such class from amounts received on the Assets.
However, if the Security Balance of a class of Securities has been reduced to
zero as the result of principal distributions, the allocation of losses on the
Assets, an optional termination or an optional purchase or redemption, such
class will no longer be entitled to receive principal distributions from
amounts received on the assets of the related Trust Fund, including
distributions in respect of principal losses previously allocated to such
class.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a
Trust Fund, if so provided in the related Prospectus Supplement, the Servicer
or another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds
or funds held in the related Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal
to the aggregate of payments of principal (other than any balloon payments)
and interest (net of related servicing fees and Retained Interest) that were
due on the Assets in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and
if so provided in the related Prospectus Supplement, the Servicer's (or
another entity's) advance obligation may be limited only to the portion of
such delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the class or classes of
Securities entitled thereto, rather than to guarantee or insure against
losses. Advances of the Servicer's (or another entity's) funds will be
reimbursable only out of related recoveries on the Assets (including amounts
received under any form of Credit Support) respecting which such advances were
made (as to any Assets, "Related Proceeds") and from any other amounts
specified in the related Prospectus Supplement, including out of any amounts
otherwise distributable on one or more classes of Subordinate Securities of
such series; provided, however, that any such advance will be reimbursable
from any amounts in the related Collection Account prior to any distributions
being made on the Securities to the extent that the Servicer (or such other
entity) shall determine in good faith that such advance (a "Nonrecoverable
Advance") is not ultimately recoverable from Related Proceeds or, if
applicable, from collections on other Assets otherwise distributable on such
Subordinate Securities. If advances have been made by the Servicer from excess
funds in the related Collection Account, the Servicer is required to replace
such funds in such Collection Account on any future Distribution Date to the
extent that funds in such Collection Account on such Distribution Date are
less than payments required to be made to Securityholders on such date. If so
specified in the related Prospectus Supplement, the obligations of the
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related Prospectus Supplement.
If and to the extent so provided in the related Prospectus
Supplement, the Servicer (or another entity) will be entitled to receive
interest at the rate specified therein on its outstanding advances and will be
entitled to pay itself such interest periodically from general collections on
the Assets prior to any payment to Securityholders or as otherwise provided in
the related Agreement and described in such Prospectus Supplement.
If specified in the related Prospectus Supplement, the Master
Servicer or the Trustee will be required to make advances, subject to certain
conditions described in the Prospectus Supplement, in the event of a Servicer
default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities of a
series, the Servicer, the Master Servicer or the Trustee, as provided in the
related Prospectus Supplement, will forward or cause to be forwarded to each
such holder, to the Depositor and to such other parties as may be specified in
the related Agreement, a statement generally setting forth, in each case to
the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation and such other
customary information as is required to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b) two
scheduled payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Mortgage Loan or Contract liquidated
during the related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to a Servicer (or any other entity) in respect of such
Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (an "REO Property") relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, the date of acquisition;
(x) with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related Mortgage
Loan or Contract immediately following such Distribution Date (calculated as
if such Mortgage Loan or Contract were still outstanding taking into account
certain limited modifications to the terms thereof specified in the
Agreement), (c) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof and (d) if applicable, the aggregate
amount of interest accrued and payable on related servicing expenses and
related advances;
(xi) with respect to any such REO Property sold during the related
Due Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the amount
of any loss to Securityholders in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date, separately
identifying any reduction in such Security Balance due to the allocation of
any loss and increase in the Security Balance of a class of Accrual Securities
in the event that Accrued Security Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the
close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through
Rate or interest rate, for statements to be distributed in any month in which
an adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the close
of business on such Distribution Date;
(xx) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Mortgage
Loans since the preceding Distribution Date;
(xxi) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(xxii) the aggregate amount of payments by the obligors of (a)
default interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
Within a reasonable period of time after the end of each calendar
year, the Servicer, the Master Servicer or the Trustee, as provided in the
related Prospectus Supplement, shall furnish to each Securityholder of record
at any time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their
tax returns. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to Securityholders of that series
of all amounts held in the Collection Accounts or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Mortgage Loan or Contract subject
thereto and (ii) the purchase of all of the assets of the Trust Fund by the
party entitled to effect such termination, under the circumstances and in the
manner set forth in the related Prospectus Supplement. In no event, however,
will the Trust Fund continue beyond the date specified in the related
Prospectus Supplement. Written notice of termination of the Agreement will be
given to each Securityholder, and the final distribution will be made only
upon presentation and surrender of the Securities at the location to be
specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the
Trust Fund, or of a sufficient portion of such assets to retire such class or
classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein. Such price will at least equal the outstanding Security
Balances and any accrued and unpaid interest thereon (including any unpaid
interest shortfalls for prior Distribution Dates). Any sale of the Assets of
the Trust Fund will be without recourse to the Trust Fund or the
Securityholders. Any such purchase or solicitation of bids may be made only
when the aggregate Security Balance of such class or classes declines to a
percentage of the Initial Security Balance of such Securities (not to exceed
10%) specified in the related Prospectus Supplement. In addition, if so
provided in the related Prospectus Supplement, certain classes of Securities
may be purchased or redeemed in the manner set forth therein at a price at
least equal to the outstanding Security Balance of each class so purchased or
redeemed and any accrued and unpaid interest thereon (including any unpaid
interest shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the Depositor,
the Servicer or such other party specified in the related Prospectus
Supplement may, at such party's option, repurchase any Mortgage Loan which is
in default or as to which default is reasonably foreseeable if, in the
Depositor's, the Servicer's or such other party's judgment, the related
default is not likely to be cured by the borrower or default is not likely to
be averted, at a price equal to the unpaid principal balance thereof plus
accrued interest thereon and under the conditions set forth in the applicable
Prospectus Supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating
the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Securities may do so only through Participants and
Indirect Participants or in such other manner as is provided for in the
related Prospectus Supplement. In addition, such investors will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede & Co., as nominee for DTC, on each such date, DTC will forward such
payments to its Participants which thereafter will be required to forward them
to Indirect Participants or Security Owners. The only "Securityholder" (as
such term is used in the Agreement or Indenture, as applicable) will be Cede,
as nominee of DTC or such other entity specified in the related Prospectus
Supplement, and the Security Owners will not be recognized by the Trustee as
Securityholders under the Agreement or Indenture, as applicable. Security
Owners will be permitted to exercise the rights of Securityholders under the
related Agreement or Indenture, as applicable, only indirectly through the
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting
DTC and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the Book-Entry
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Security Owner to pledge its interest in the Book-Entry Securities to persons
or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in the Book-Entry Securities, may be
limited due to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Securityholder under an Agreement only at the direction of
one or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Securities initially issued in book-entry form will be issued as
Definitive Securities to Security Owners or their nominees, rather than to DTC
or its nominee only (i) if the Depositor advises the Trustee in writing that
DTC is no longer willing or able to properly discharge its responsibilities as
depository with respect to the Securities and the Depositor is unable to
locate a qualified successor, (ii) if the Depositor, at its option, elects to
terminate the book-entry system through DTC or (iii) in accordance with such
other provisions described in the related Prospectus Supplement.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for registration, the
Trustee will issue (or cause to be issued) to the Security Owners identified
in such instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders under the Agreement.
None of the Depositor, any Master Servicer, any Servicer, the
Trustee, or any of their affiliates 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 or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion
thereof, that the Trustee will elect to have treated as a real estate mortgage
investment conduit under Sections 860A through 860G of the Code ("REMIC
Securities"), or Grantor Trust Securities will be issued, and the related
Trust Fund will be created, pursuant to a Pooling and Servicing Agreement
among the Depositor, the Trustee and the sole Servicer or Master Servicer, as
applicable. The Assets of such Trust Fund will be transferred to the Trust
Fund and thereafter serviced in accordance with the terms of the Pooling and
Servicing Agreement. In the event there are multiple Servicers of the Assets
of such Trust Fund, or in the event the Securities consist of Notes, each
Servicer will perform such servicing functions pursuant to a related servicing
agreement.
Securities That Are Partnership Interests for Tax Purposes and Notes
Securities that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Pooling and
Servicing Agreement.
A series of Notes issued by a Trust Fund will be issued pursuant to
an Indenture between the related Trust Fund and an Indenture Trustee named in
the related Prospectus Supplement. The Trust Fund will be established pursuant
to a Deposit Trust Agreement between the Depositor and an owner trustee
specified in the Prospectus Supplement relating to such series of Notes. The
Assets securing payment on the Notes will be serviced in accordance with an
Underlying Servicing Agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING
SERVICING AGREEMENTS
General
The following summaries describe the material provisions that may
appear in each Pooling and Servicing Agreement and Underlying Servicing
Agreement (each an "Agreement"). The Prospectus Supplement for a series of
Securities will describe any provision of the Agreement relating to such
series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified by reference to, all of the provisions of the Agreement for
each Trust Fund and the description of such provisions in the related
Prospectus Supplement. 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. As used herein with respect to any series, the term
"Security" refers to all of the Securities of that series, whether or not
offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. A form of a Pooling and Servicing Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part. The Depositor will provide a copy of the Pooling and Servicing Agreement
(without exhibits) relating to any series of Securities without charge upon
written request of a Securityholder of such series addressed to ACE Securities
Corp., 6707 Fairview Road, Suite D, Charlotte, North Carolina 28210,
Attention:
Elizabeth S. Eldridge.
The Servicers, any Master Servicer and the Trustee with respect to
any series of Securities will be named in the related Prospectus Supplement.
In the event there are multiple Servicers for the Assets in a Trust Fund, a
Master Servicer will perform certain administration, calculation and reporting
functions with respect to such Trust Fund and will supervise the related
Servicers pursuant to a Pooling and Servicing Agreement. With respect to
series involving a Master Servicer, references in this Prospectus to the
Servicer will apply to the Master Servicer where non-servicing obligations are
described. If so specified in the related Prospectus Supplement, a manager or
administrator may be appointed pursuant to the Pooling and Servicing Agreement
for any Trust Fund to administer such Trust Fund.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Assets to
be included in the related Trust Fund, together with all principal and
interest to be received on or with respect to such Assets after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the Assets
and the other assets comprising the Trust Fund for such series. Each Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include detailed information to the extent
available and relevant (i) in respect of each Mortgage Loan included in the
related Trust Fund, including without limitation, the city and state of the
related Mortgaged Property and type of such property, the Mortgage Rate and,
if applicable, the applicable index, margin, adjustment date and any rate cap
information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the Loan-to-Value
Ratio as of the date indicated and payment and prepayment provisions, if
applicable; (ii) in respect of each Contract included in the related Trust
Fund, including without limitation the outstanding principal amount and the
Contract Rate and (iii) in respect of each Mortgage Security and Agency
Security, the original and outstanding principal amount, if any, and the
pass-through rate thereon.
With respect to each Mortgage Loan, except as otherwise specified in
the related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in
recordable form. Notwithstanding the foregoing, a Trust Fund may include
Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Depositor delivers to the Trustee or the custodian a copy or a
duplicate original of the Mortgage Note, together with an affidavit certifying
that the original thereof has been lost or destroyed. With respect to such
Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. The Asset Seller or other entity
specified in the related Prospectus Supplement will be required to agree to
repurchase, or substitute for, each such Mortgage Loan that is subsequently in
default if the enforcement thereof or of the related Mortgage is materially
adversely affected by the absence of the original Mortgage Note. The related
Agreement will generally require the Depositor or another party specified in
the related Prospectus Supplement to promptly cause each such assignment of
Mortgage to be recorded in the appropriate public office for real property
records, except in the State of California or in other states where, in the
opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the related Mortgage Loan against the
claim of any subsequent transferee or any successor to or creditor of the
Depositor, the Servicer, the relevant Asset Seller or any other prior holder
of the Mortgage Loan.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in
any material respect, the Trustee (or such custodian) shall immediately notify
the Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related Prospectus
Supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then the Asset Seller
or other entity specified in the related Prospectus Supplement will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Mortgage Loan from the Trustee at a price equal to the
sum of the unpaid principal balance thereof, plus unpaid accrued interest at
the interest rate for such Asset from the date as to which interest was last
paid to the due date in the Due Period in which the relevant purchase is to
occur, plus certain servicing expenses that are payable to the Servicer or
such other price as specified in the related Prospectus Supplement (the
"Purchase Price") or substitute for such Mortgage Loan. There can be no
assurance that an Asset Seller or other named entity will fulfill this
repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Mortgage Loan
if the Asset Seller or other named entity defaults on its obligation. This
repurchase or substitution obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the Trust Fund as a result of
such breach or defect.
Notwithstanding the preceding two paragraphs, the documents with
respect to Home Equity Loans, Home Improvement Contracts and Unsecured Home
Improvement Loans will be delivered to the Trustee (or a custodian) only to
the extent specified in the related Prospectus Supplement. Generally such
documents will be retained by the Servicer, which may also be the Asset
Seller. In addition, assignments of the related Mortgages to the Trustee will
be recorded only to the extent specified in the related Prospectus Supplement.
With respect to each Contract, the Servicer (which may also be the
Asset Seller) generally will maintain custody of the original Contract and
copies of documents and instruments related to each Contract and the security
interest in the Manufactured Home securing each Contract. In order to give
notice of the right, title and interest of the Trustee in the Contracts, the
Depositor will cause UCC-1 financing statements to be executed by the related
Asset Seller identifying the Depositor as secured party and by the Depositor
identifying the Trustee as the secured party and, in each case, identifying
all Contracts as collateral. The Contracts will be stamped or otherwise marked
to reflect their assignment from the Depositor to the Trust Fund only to the
extent specified in the related Prospectus Supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of the Trustee in the Contracts could be defeated. See "Certain Legal
Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or
the Servicer, if the Servicer finds that any such document is missing or
defective in any material respect, the Servicer will be required to
immediately notify the Depositor and the relevant Asset Seller or other entity
specified in the related Prospectus Supplement. If the Asset Seller or such
other entity cannot cure the omission or defect within a specified number of
days after receipt of such notice, then the Asset Seller or such other entity
will be obligated, within a specified number of days of receipt of such
notice, to repurchase the related Contract from the Trustee at the Purchase
Price or substitute for such Contract. There can be no assurance that an Asset
Seller or such other entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Contract if the Asset Seller or such other
entity defaults on its obligation. This repurchase or substitution obligation
constitutes the sole remedy available to the Securityholders or the Trustee
for omission of, or a material defect in, a constituent document. To the
extent specified in the related Prospectus Supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Trust
Fund as a result of such breach or defect.
Mortgage Securities and Agency Securities will be registered in the
name of the Trustee or its nominee on the books of the issuer or guarantor or
its agent or, in the case of Mortgage Securities and Agency Securities issued
only in book-entry form, through the depository with respect thereto, in
accordance with the procedures established by the issuer or guarantor for
registration of such certificates, and distributions on such securities to
which the Trust Fund is entitled will be made directly to the Trustee.
Representations and Warranties; Repurchases
To the extent provided in the related Prospectus Supplement the
Depositor will, with respect to each Asset, assign certain representations and
warranties, as of a specified date (the person making such representations and
warranties, the "Warranting Party") covering, by way of example, the following
types of matters: (i) the accuracy of the information set forth for such Asset
on the schedule of Assets appearing as an exhibit to the related Agreement;
(ii) in the case of a Mortgage Loan, the existence of title insurance insuring
the lien priority of the Mortgage Loan and, in the case of a Contract, that
the Contract creates a valid first security interest in or lien on the related
Manufactured Home; (iii) the authority of the Warranting Party to sell the
Asset; (iv) the payment status of the Asset; (v) in the case of a Mortgage
Loan, the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit
of the security of the Mortgage; and (vi) the existence of hazard and extended
perils insurance coverage on the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof
or such other person acceptable to the Depositor and shall be identified in
the related Prospectus Supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Securities evidencing an interest in such
Asset. In the event of a breach of any such representation or warranty, the
Warranting Party will be obligated to reimburse the Trust Fund for losses
caused by any such breach or either cure such breach or repurchase or replace
the affected Asset as described below. Since the representations and
warranties may not address events that may occur following the date as of
which they were made, the Warranting Party will have a reimbursement, cure,
repurchase or substitution obligation in connection with a breach of such a
representation and warranty only if the relevant event that causes such breach
occurs prior to such date. Such party would have no such obligations if the
relevant event that causes such breach occurs after such date.
Each Agreement will provide that the Servicer and/or Trustee or such
other entity identified in the related Prospectus Supplement will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially
and adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor.
If so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of such series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related Prospectus Supplement. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Servicer will be obligated to purchase or substitute for an
Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to the Assets.
A Servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the related Agreement. A breach of any such representation of the Servicer
which materially and adversely affects the interests of the Securityholders
and which continues unremedied for the number of days specified in the
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights or such other percentage specified in the related Prospectus
Supplement, will constitute an Event of Default under such Agreement. See
"Events of Default" and "Rights Upon Event of Default."
Collection Account and Related Accounts
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and the uninsured
deposits in which are otherwise secured such that the Securityholders have a
claim with respect to the funds in the Collection Account or a perfected first
priority security interest against any collateral securing such funds that is
superior to the claims of any other depositors or general creditors of the
institution with which the Collection Account is maintained or (ii) otherwise
maintained with a bank or trust company, and in a manner, satisfactory to the
Rating Agency or Agencies rating any class of Securities of such series. The
collateral eligible to secure amounts in the Collection Account is limited to
United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Collection Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date
in certain short-term Permitted Investments. Any interest or other income
earned on funds in the Collection Account will, unless otherwise specified in
the related Prospectus Supplement, be paid to the Servicer or its designee as
additional servicing compensation. The Collection Account may be maintained
with an institution that is an affiliate of the Servicer, if applicable,
provided that such institution meets the standards imposed by the Rating
Agency or Agencies. If permitted by the Rating Agency or Agencies, a
Collection Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Servicer or serviced or master
serviced by it on behalf of others.
Deposits. A Servicer or the Trustee will deposit or cause to be
deposited in the Collection Account for one or more Trust Funds on a daily
basis, or such other period provided in the related Agreement, the following
payments and collections received, or advances made, by the Servicer or the
Trustee or on its behalf subsequent to the Cut-off Date (other than payments
due on or before the Cut-off Date, and exclusive of any amounts representing a
Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof retained
by a Servicer as its servicing compensation and net of any Retained Interest;
(iii) Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for the
benefit of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support;"
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(vii) all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described above under "--Assignment of
Assets; Repurchases" and "--Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described below under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset purchased
as described under "Description of the Securities--Termination;"
(viii) any amounts paid by a Servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the Trust Fund as
described below under "--Retained Interest; Servicing Compensation and Payment
of Expenses;"
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of modification
or assumption fees, late payment charges or Prepayment Premiums on the Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(xi) any amount required to be deposited by a Servicer or the Trustee
in connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the Collection
Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Servicer as late collections of interest
(net of related servicing fees and Retained Interest) on and principal of the
particular Assets with respect to which the advances were made or out of
amounts drawn under any form of Credit Support with respect to such Assets;
(iii) to reimburse a Servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent Liquidation Proceeds and Insurance Proceeds collected
on the particular Assets and properties, and net income collected on the
particular properties, with respect to which such fees were earned or such
expenses were incurred or out of amounts drawn under any form of Credit
Support with respect to such Assets and properties;
(iv) to reimburse a Servicer for any advances described in clause
(ii) above and any servicing expenses described in clause (iii) above which,
in the Servicer's good faith judgment, will not be recoverable from the
amounts described in clauses (ii) and (iii), respectively, such reimbursement
to be made from amounts collected on other Assets or, if and to the extent so
provided by the related Agreement and described in the related Prospectus
Supplement, just from that portion of amounts collected on other Assets that
is otherwise distributable on one or more classes of Subordinate Securities,
if any, remain outstanding, and otherwise any outstanding class of Securities,
of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Servicer interest accrued on the advances described in
clause (ii) above and the servicing expenses described in clause (iii) above
while such advances and servicing expenses remain outstanding and
unreimbursed;
(vi) to reimburse a Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the extent
described below under "--Certain Matters Regarding Servicers, the Master
Servicer and the Depositor;"
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described below under
"--Certain Matters Regarding the Trustee;"
(ix) to pay a Servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise, such payments to be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Material Federal Income Tax
Considerations--REMICs--Taxes That May Be Imposed on the REMIC Pool" or in the
applicable Prospectus Supplement, respectively;
(xiii) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver with
respect to the obligation of the Warranting Party to remedy any breach of
representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after its
removal from the Trust Fund whether by reason of purchase or substitution as
contemplated above under "--Assignment of Assets; Repurchase" and
"--Representations and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so
specified in the related Prospectus Supplement, the Agreement for any series
of Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis, or
such other period provided in the related Agreement, the amounts described
under "--Deposits" above for one or more series of Securities. Any amounts on
deposit in any such collection account will be withdrawn therefrom and
deposited into the appropriate Collection Account by a time specified in the
related Prospectus Supplement. To the extent specified in the related
Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
The Servicer will establish and maintain with the Indenture Trustee
an account, in the name of the Indenture Trustee on behalf of the holders of
Notes, into which amounts released from the Collection Account for
distribution to the holders of Notes will be deposited and from which all
distributions to the holders of Notes will be made
Collection and Other Servicing Procedures. The Servicer is required
to make reasonable efforts to collect all scheduled payments under the Assets
and will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided such procedures are consistent with (i) the terms of
the related Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the
general servicing standard specified in the related Prospectus Supplement or,
if no such standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the Servicer will be
permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining, to the
extent required by the Agreement, escrow or impoundment accounts of obligors
for payment of taxes, insurance and other items required to be paid by any
obligor pursuant to the terms of the Assets; processing assumptions or
substitutions in those cases where the Servicer has determined not to enforce
any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties or Manufactured Homes under certain circumstances; and maintaining
accounting records relating to the Assets. The Servicer or such other entity
specified in the related Prospectus Supplement will be responsible for filing
and settling claims in respect of particular Assets under any applicable
instrument of Credit Support. See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any
Asset in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Asset or (ii) in its
judgment, materially impair the security for the Asset or reduce the
likelihood of timely payment of amounts due thereon. The Servicer also may
agree to any modification, waiver or amendment that would so affect or impair
the payments on, or the security for, an Asset if (i) in its judgment, a
material default on the Asset has occurred or a payment default is reasonably
foreseeable and (ii) in its judgment, such modification, waiver or amendment
is reasonably likely to produce a greater recovery with respect to the Asset
on a present value basis than would liquidation. The Servicer is required to
notify the Trustee in the event of any modification, waiver or amendment of
any Asset.
In the case of Multifamily Loans, a mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the Mortgage Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the mortgagor if cure is
likely, inspect the related Multifamily Property and take such other actions
as are consistent with the related Agreement. A significant period of time may
elapse before the Servicer is able to assess the success of any such
corrective action or the need for additional initiatives. The time within
which the Servicer can make the initial determination of appropriate action,
evaluate the success of corrective action, develop additional initiatives,
institute foreclosure proceedings and actually foreclose may vary considerably
depending on the particular Multifamily Loan, the Multifamily Property, the
mortgagor, the presence of an acceptable party to assume the Multifamily Loan
and the laws of the jurisdiction in which the Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or
obligor if cure is likely, inspect the Asset and take such other actions as
are consistent with the Servicing Standard. A significant period of time may
elapse before the Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans
or Contracts may grant to the Servicer and/or the holder or holders of certain
classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to
which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in
the related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described above under "--Representations
and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Servicer
may offer to sell any defaulted Mortgage Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right
of first refusal with respect thereto, if and when the Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Servicer accept the highest cash bid received
from any person (including itself, an affiliate of the Servicer or any
Securityholder) that constitutes a fair price for such defaulted Mortgage Loan
or Contract. In the absence of any bid determined in accordance with the
related Agreement to be fair, the Servicer shall proceed with respect to such
defaulted Mortgage Loan or Contract as described below. Any bid in an amount
at least equal to the Purchase Price described above under "--Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a Mortgage Loan by operation of law or otherwise
and may at any time repossess and realize upon any Manufactured Home, if such
action is consistent with the Servicing Standard and a default on such
Mortgage Loan or Contract has occurred or, in the Servicer's judgment, is
imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC election has been made, the Servicer, on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
Trust Fund subsequent to two years after its acquisition will not result in
the imposition of a tax on the Trust Fund or cause the Trust Fund to fail to
qualify as a REMIC under the Code at any time that any Securities are
outstanding. Subject to the foregoing, the Servicer will be required to (i)
solicit bids for any Mortgaged Property so acquired in such a manner as will
be reasonably likely to realize a fair price for such property and (ii) accept
the first (and, if multiple bids are contemporaneously received, the highest)
cash bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of
Credit Support is not available, the Servicer nevertheless will be obligated
to follow or cause to be followed such normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted Asset. If the
proceeds of any liquidation of the property securing the defaulted Asset are
less than the outstanding principal balance of the defaulted Asset plus
interest accrued thereon at the applicable interest rate, plus the aggregate
amount of expenses incurred by the Servicer in connection with such
proceedings and which are reimbursable under the Agreement, the Trust Fund
will realize a loss in the amount of such difference. The Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Asset, prior to the
distribution of such Liquidation Proceeds to Securityholders, amounts
representing its normal servicing compensation on the Security, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged the Servicer is
not required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
The Pooling and Servicing Agreement will require the Trustee, if it
has not received a distribution with respect to any Mortgage Security or
Agency Security by the fifth business day after the date on which such
distribution was due and payable pursuant to the terms of such Agency
Security, to request the issuer or guarantor, if any, of such Mortgage
Security or Agency Security to make such payment as promptly as possible and
legally permitted to take such legal action against such issuer or guarantor
as the Trustee deems appropriate under the circumstances, including the
prosecution of any claims in connection therewith. The reasonable legal fees
and expenses incurred by the Trustee in connection with the prosecution of any
such legal action will be reimbursable to the Trustee out of the proceeds of
any such action and will be retained by the Trustee prior to the deposit of
any remaining proceeds in the Collection Account pending distribution thereof
to Securityholders of the related series. In the event that the proceeds of
any such legal action may be insufficient to reimburse the Trustee for its
legal fees and expenses, the Trustee will be entitled to withdraw from the
Collection Account an amount equal to such expenses incurred by it, in which
event the Trust Fund may realize a loss up to the amount so charged.
As servicer of the Assets, a Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Assets.
If a Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised
of Mortgage Loans will require the Servicer to cause the mortgagor on each
Mortgage Loan to maintain a hazard insurance policy providing for such
coverage as is required under the related Mortgage or, if any Mortgage permits
the holder thereof to dictate to the mortgagor the insurance coverage to be
maintained on the related Mortgaged Property, then such coverage as is
consistent with the Servicing Standard. Such coverage will be in general in an
amount equal to the lesser of the principal balance owing on such Mortgage
Loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on
the Mortgaged Property on a replacement cost basis or such other amount
specified in the related Prospectus Supplement. The ability of the Servicer to
assure that hazard insurance proceeds are appropriately applied may be
dependent upon its being named as an additional insured under any hazard
insurance policy and under any other insurance policy referred to below, or
upon the extent to which information in this regard is furnished by
mortgagors. All amounts collected by the Servicer under any such policy
(except for amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the mortgagor in accordance with the
Servicer's normal servicing procedures, subject to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the Collection
Account. The Agreement may provide that the Servicer may satisfy its
obligation to cause each mortgagor to maintain such a hazard insurance policy
by the Servicer's maintaining a blanket policy insuring against hazard losses
on the Mortgage Loans. If such blanket policy contains a deductible clause,
the Servicer will be required to deposit in the Collection Account all sums
that would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin, domestic animals and certain
other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Mortgage Loans will typically contain a coinsurance clause that
in effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause generally provides that the insurer's liability in the event of
partial loss does not exceed the lesser of (i) the replacement cost of the
improvements less physical depreciation and (ii) such proportion of the loss
as the amount of insurance carried bears to the specified percentage of the
full replacement cost of such improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will
require the Servicer to cause the mortgagor on each Mortgage Loan to maintain
all such other insurance coverage with respect to the related Mortgaged
Property as is consistent with the terms of the related Mortgage and the
Servicing Standard, which insurance may typically include flood insurance (if
the related Mortgaged Property was located at the time of origination in a
federally designated flood area).
Any cost incurred by the Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the
terms of the Mortgage Loan so permit; provided, however, that the addition of
such cost will not be taken into account for purposes of calculating the
distribution to be made to Securityholders. Such costs may be recovered by the
Servicer from the Collection Account, with interest thereon, as provided by
the Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
Contracts. Generally, the terms of the Agreement for a Trust Fund
comprised of Contracts will require the Servicer to cause to be maintained
with respect to each Contract one or more hazard insurance policies which
provide, at a minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured housing, issued
by a company authorized to issue such policies in the state in which the
Manufactured Home is located, and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the obligor on the related Contract, whichever is less; provided,
however, that the amount of coverage provided by each such hazard insurance
policy shall be sufficient to avoid the application of any co-insurance clause
contained therein. When a Manufactured Home's location was, at the time of
origination of the related Contract, within a federally designated special
flood hazard area, the Servicer shall cause such flood insurance to be
maintained, which coverage shall be at least equal to the minimum amount
specified in the preceding sentence or such lesser amount as may be available
under the federal flood insurance program. Each hazard insurance policy caused
to be maintained by the Servicer shall contain a standard loss payee clause in
favor of the Servicer and its successors and assigns. If any obligor is in
default in the payment of premiums on its hazard insurance policy or policies,
the Servicer shall pay such premiums out of its own funds, and may add
separately such premium to the obligor's obligation as provided by the
Contract, but may not add such premium to the remaining principal balance of
the Contract.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home,
and shall maintain, to the extent that the related Contract does not require
the obligor to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the obligor's interest in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies. The Servicer shall pay
the premium for such blanket policy on the basis described therein and shall
pay any deductible amount with respect to claims under such policy relating to
the Contracts.
FHA Insurance and VA Guarantees
FHA Loans will be insured by the FHA as authorized under the Housing
Act. Certain FHA Loans will be insured under various FHA programs including
the standard FHA 203(b) program to finance the acquisition of one- to
four-family housing units, the FHA 245 graduated payment mortgage program and
the FHA Title I Program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. The Prospectus Supplement
for Securities of each series evidencing interests in a Trust Fund including
FHA Loans will set forth additional information regarding the regulations
governing the applicable FHA insurance programs. Except as otherwise specified
in the related Prospectus Supplement, the following describes FHA insurance
programs and regulations as generally in effect with respect to FHA Loans.
The insurance premiums for FHA Loans are collected by lenders
approved by the Department of Housing and Urban Development ("HUD") or by the
Servicer and are paid to the FHA. The regulations governing FHA single-family
mortgage insurance programs provide that insurance benefits are payable either
upon foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to the United States of America or upon assignment of the
defaulted loan to the United States of America. With respect to a defaulted
FHA Loan, the Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with
the mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than FHA Loans originated under the FHA
Title I Program, beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the FHA Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from
the Servicer. With certain exceptions, at least three full monthly
installments must be due and unpaid under the FHA Loan, and HUD must have
rejected any request for relief from the mortgagor before the Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the related Prospectus
Supplement, the Servicer of each single family FHA Loan will be obligated to
purchase any such debenture issued in satisfaction of such FHA Loan upon
default for an amount equal to the principal amount of any such debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA Loan adjusted to reimburse the Servicer
for certain costs and expenses and to deduct certain amounts received or
retained by the Servicer after default. When entitlement to insurance benefits
results from foreclosure (or other acquisition of possession) and conveyance
to HUD, the Servicer is compensated for no more than two-thirds of its
foreclosure costs, and is compensated for interest accrued and unpaid prior to
such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the FHA Loan to HUD, the insurance payment includes
full compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA Loan, bears interest from
a date 30 days after the borrower's first uncorrected failure to perform any
obligation to make any payment due under the mortgage and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case
at the same interest rate as the applicable HUD debenture interest rate as
described above.
VA Loans will be partially guaranteed by the VA under the
Serviceman's Readjustment Act (a "VA Guaranty Policy"). With respect to a
defaulted VA Loan, the Servicer is, absent exceptional circumstances,
authorized to announce its intention to foreclose only when the default has
continued for three months. Generally, a claim for the guarantee is submitted
after liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of such VA Loan,
interest accrued on the unpaid balance of such VA Loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may
provide blanket coverage) or any combination thereof insuring against loss
occasioned by fraud, theft or other intentional misconduct of the officers,
employees and agents of the Servicer. The related Agreement will allow the
Servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the Servicer so long as certain criteria
set forth in the Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable
law; provided, however, that the Servicer will not take any action in relation
to the enforcement of any due-on-sale provision which would adversely affect
or jeopardize coverage under any applicable insurance policy. Any fee
collected by or on behalf of the Servicer for entering into an assumption
agreement will be retained by or on behalf of the Servicer as additional
servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses." The Contracts may also contain such clauses. The
Servicer will generally permit such transfer so long as the transferee
satisfies the Servicer's then applicable underwriting standards. The purpose
of such transfers is often to avoid a default by the transferring obligor. See
"Certain Legal Aspects of the Contracts--Transfers of Manufactured Homes;
Enforceability of "Due-on-Sale" Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Securities will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a
series of Securities will come from the periodic payment to it of a portion of
the interest payment on each Asset or such other amount specified in the
related Prospectus Supplement. Since any Retained Interest and a Servicer's
primary compensation are percentages of the principal balance of each Asset,
such amounts will decrease in accordance with the amortization of the Assets.
The Prospectus Supplement with respect to a series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may
provide that, as additional compensation, the Servicer may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Servicer pursuant to the Agreement.
The Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Securityholders, and payment of any other
expenses described in the related Prospectus Supplement. Certain other
expenses, including certain expenses relating to defaults and liquidations on
the Assets and, to the extent so provided in the related Prospectus
Supplement, interest thereon at the rate specified therein may be borne by the
Trust Fund.
If and to the extent provided in the related Prospectus Supplement,
the Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the
related Trust Fund during such period prior to their respective due dates
therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Mortgage Loans or
Contracts will provide that on or before a specified date in each year,
beginning with the first such date at least six months after the related
Cut-off Date, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that, on the basis of the examination
by such firm conducted substantially in compliance with either the Uniform
Single Attestation Program for Mortgage Bankers, the Audit Program for
Mortgages serviced for Freddie Mac or such other program used by the Servicer,
the servicing by or on behalf of the Servicer of mortgage loans under
agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with the terms of such agreements or
such program except for any significant exceptions or errors in records that,
in the opinion of the firm, either the Audit Program for Mortgages serviced
for Freddie Mac, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other program, requires it to report.
Each such Agreement will also provide for delivery to the Trustee, on
or before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the Agreement throughout the preceding calendar year or
other specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related Prospectus
Supplement at the address set forth in the related Prospectus Supplement.
Certain Matters Regarding Servicers, the Master Servicer and
the Depositor
The Servicers and Master Servicer under each Agreement will be named
in the related Prospectus Supplement. The entities serving as Servicer or
Master Servicer may be affiliates of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to the Servicer shall be deemed to be to the Master Servicer,
if applicable.
The related Agreement will provide that the Servicer may resign from
its obligations and duties thereunder only upon a determination that its
duties under the Agreement are no longer permissible under applicable law or
are in material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Servicer so causing such a
conflict being of a type and nature carried on by the Servicer at the date of
the Agreement. No such resignation will become effective until the Trustee or
a successor servicer has assumed the Servicer's obligations and duties under
the Agreement.
Each Agreement will further provide that neither any Servicer, the
Depositor nor any director, officer, employee, or agent of a Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided, however, that
neither a Servicer, the Depositor nor any such person will be protected
against any breach of a representation, warranty or covenant made in such
Agreement, or against any liability specifically imposed thereby, or against
any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Each Agreement will further provide that any Servicer, the
Depositor and any director, officer, employee or agent of a Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Securities;
provided, however, that such indemnification will not extend to any loss,
liability or expense (i) specifically imposed by such Agreement or otherwise
incidental to the performance of obligations and duties thereunder, including,
in the case of a Servicer, the prosecution of an enforcement action in respect
of any specific Mortgage Loan or Mortgage Loans or Contract or Contracts
(except as any such loss, liability or expense shall be otherwise reimbursable
pursuant to such Agreement); (ii) incurred in connection with any breach of a
representation, warranty or covenant made in such Agreement; (iii) incurred by
reason of misfeasance, bad faith or gross negligence in the performance of
obligations or duties thereunder, or by reason of reckless disregard of such
obligations or duties; (iv) incurred in connection with any violation of any
state or federal securities law; or (v) imposed by any taxing authority if
such loss, liability or expense is not specifically reimbursable pursuant to
the terms of the related Agreement. In addition, each Agreement will provide
that neither any Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. Any such Servicer or the Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the 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 and any liability
resulting therefrom will be expenses, costs and liabilities of the
Securityholders, and the Servicer or the Depositor, as the case may be, will
be entitled to be reimbursed therefor and to charge the Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the Servicer or the Depositor is a party, or any person succeeding to
the business of the Servicer or the Depositor, will be the successor of the
Servicer or the Depositor, as the case may be, under the related Agreement.
Special Servicers
If and to the extent specified in the related Prospectus Supplement,
a special servicer (a "Special Servicer") may be a party to the related
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related
Prospectus Supplement, and the Servicer will be liable for the performance of
a Special Servicer only if, and to the extent, set forth in such Prospectus
Supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include
(i) any failure by the Servicer to distribute or cause to be distributed to
Securityholders, or to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the Agreement
which continues unremedied for 30 days after written notice of such failure
has been given to the Servicer by the Trustee or the Depositor, or to the
Servicer, the Depositor and the Trustee by Securityholders evidencing not less
than 25% of the Voting Rights; (iii) any breach of a representation or
warranty made by the Servicer under the Agreement which materially and
adversely affects the interests of Securityholders and which continues
unremedied for 30 days after written notice of such breach has been given to
the Servicer by the Trustee or the Depositor, or to the Servicer, the
Depositor and the Trustee by the holders of Securities evidencing not less
than 25% of the Voting Rights; and (iv) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the Servicer indicating its
insolvency or inability to pay its obligations. Material variations to the
foregoing events of default (other than to shorten cure periods or eliminate
notice requirements) will be specified in the related Prospectus Supplement.
The Trustee will, not later than the later of 60 days or such other period
specified in the related Prospectus Supplement after the occurrence of any
event which constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after certain officers of the
Trustee become aware of the occurrence of such an event, transmit by mail to
the Depositor and all Securityholders of the applicable series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class
or classes of Securities will be specified in the related Prospectus
Supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities evidencing not less than 51% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights, the Trustee shall
terminate all of the rights and obligations of the Servicer under the
Agreement and in and to the Mortgage Loans (other than as a Securityholder or
as the owner of any Retained Interest), whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
Prospectus Supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least
$15,000,000 (or such other amount specified in the related Prospectus
Supplement) to act as successor to the Servicer under the Agreement. Pending
such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Servicer under the Agreement.
The holders of Securities representing at least 66 2/3% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights allocated to the respective classes of Securities affected by any event
of default will be entitled to waive such event of default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Securityholders described in clause (i) under "Events of Default under the
Agreements" may be waived only by all of the Securityholders. Upon any such
waiver of an event of default, such event of default shall cease to exist and
shall be deemed to have been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to
institute any proceeding with respect thereto unless such holder previously
has given to the Trustee written notice of default and unless the holders of
Securities evidencing not less than 25% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days (or such other number of days specified in the related
Prospectus Supplement) has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of
the trusts or powers vested in it by any Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Securityholders covered by such Agreement, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the
consent of any Securityholders covered by the Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related Prospectus Supplement, (iii) to make any other provisions with respect
to matters or questions arising under the Agreement which are not materially
inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not adversely affect in any material respect the interests
of any Securityholders covered by the Agreement as evidenced either by an
opinion of counsel to such effect or the delivery to the Trustee of written
notification from each Rating Agency that provides, at the request of the
Depositor, a rating for the Offered Securities of the related series to the
effect that such amendment or supplement will not cause such Rating Agency to
lower or withdraw the then current rating assigned to such Securities. Each
Agreement may also be amended by the Depositor, the Servicer, if any, and the
Trustee, with the consent of the Securityholders affected thereby evidencing
not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, for any purpose; provided,
however, no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, payments received or advanced on Assets which are
required to be distributed on any Security without the consent of the
Securityholder or (ii) reduce the consent percentages described in this
paragraph without the consent of all the Securityholders covered by such
Agreement then outstanding. However, with respect to any series of Securities
as to which a REMIC election is to be made, the Trustee will not consent to
any amendment of the Agreement unless it shall first have received an opinion
of counsel to the effect that such amendment will not result in the imposition
of a tax on the related Trust Fund or cause the related Trust Fund to fail to
qualify as a REMIC, at any time that the related Securities are outstanding.
The Trustee
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with the Depositor and its affiliates, with any Servicer and its
affiliates and with any Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Securities or any Asset or related document
and is not accountable for the use or application by or on behalf of any
Servicer of any funds paid to the Master Servicer or its designee in respect
of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Servicer. If no
Event of Default has occurred and is continuing, the Trustee is required to
perform only those duties specifically required under the related Agreement,
as applicable. However, upon receipt of the various certificates, reports or
other instruments required to be furnished to it, the Trustee is required to
examine such documents and to determine whether they conform to the
requirements of the Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the
Trustee shall be entitled to indemnification out of the Collection Account for
any loss, liability or expense (including costs and expenses of litigation,
and of investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the Trustee's (i) enforcing its rights
and remedies and protecting the interests of the Securityholders during the
continuance of an Event of Default, (ii) defending or prosecuting any legal
action in respect of the related Agreement or series of Securities, (iii)
being the mortgagee of record with respect to the Mortgage Loans in a Trust
Fund and the owner of record with respect to any Mortgaged Property acquired
in respect thereof for the benefit of Securityholders, or (iv) acting or
refraining from acting in good faith at the direction of the holders of the
related series of Securities entitled to not less than 25% (or such other
percentage as is specified in the related Agreement with respect to any
particular matter) of the Voting Rights for such series; provided, however,
that such indemnification will not extend to any loss, liability or expense
that constitutes a specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the Trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the Trustee made
therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Servicer, if any. If no successor trustee shall have been so
appointed and have accepted appointment within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will
adversely affect the rating on any class of the Securities, then the Depositor
may remove the Trustee and appoint a successor trustee acceptable to the
Master Servicer, if any. Securityholders of any series entitled to at least
51% (or such other percentage specified in the related Prospectus Supplement)
of the Voting Rights for such series may at any time remove the Trustee
without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment
by the successor trustee.
MATERIAL TERMS OF THE INDENTURE
General
The following summary describes the material provisions that may
appear in each Indenture. The Prospectus Supplement for a series of Notes will
describe any provision of the Indenture relating to such series that
materially differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified by reference to, all of the provisions of the Indenture for a series
of Notes. A form of an Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Depositor will
provide a copy of the Indenture (without exhibits) relating to any series of
Notes without charge upon written request of a Securityholder of such series
addressed to ACE Securities Corp., 6707 Fairview Road, Suite D, Charlotte,
North Carolina 28210, Attention: Elizabeth S. Eldridge.
Events of Default
Events of default under the Indenture for each series of Notes will
generally include: (i) a default for thirty (30) days (or such other number of
days specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such series
having been incorrect in a material respect as of the time made, and such
breach is not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or (v) any other event of default provided
with respect to Notes of that series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such series may declare the principal amount (or, if the Notes of
that series are Accrual Securities, such portion of the principal amount as
may be specified in the terms of that series, as provided in the related
Prospectus Supplement) of all the Notes of such series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the Securityholders of a majority in aggregate outstanding
amount of the Notes of such series.
If, following an event of default with respect to any series of
Notes, the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such
series and to continue to apply distributions on such collateral as if there
had been no declaration of acceleration if such collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of such series as they would have become due if there had not been such
a declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an event of
default, other than a default in the payment of any principal or interest on
any Note of such series for thirty (30) days or more, unless (a) the
Securityholders of 100% (or such other percentage specified in the related
Prospectus Supplement) of the then aggregate outstanding amount of the Notes
of such series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued
interest, due and unpaid, on the outstanding Notes of such series at the date
of such sale or (c) the Indenture Trustee determines that such collateral
would not be sufficient on an ongoing basis to make all payments on such Notes
as such payments would have become due if such Notes had not been declared due
and payable, and the Indenture Trustee obtains the consent of the
Securityholders of 66 2/3% (or such other percentage specified in the related
Prospectus Supplement) of the then aggregate outstanding amount of the Notes
of such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Notes of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an event of default, the amount available
for distribution to the Securityholders would be less than would otherwise be
the case. However, the Indenture Trustee may not institute a proceeding for
the enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the
Securityholders after the occurrence of such an event of default.
To the extent provided in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the Securityholders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an event of default shall occur and be
continuing with respect to a series of Notes, the Indenture Trustee shall be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Securityholders of such
series, unless such holders offered to the Indenture Trustee security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in complying with such request or direction. Subject
to such provisions for indemnification and certain limitations contained in
the Indenture, the Securityholders of a majority of the then aggregate
outstanding amount of the Notes of such series shall have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee or exercising any trust or power conferred
on the Indenture Trustee with respect to the Notes of such series, and the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such series may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the Securityholders of the outstanding
Notes of such series affected thereby.
Discharge of Indenture
The Indenture will be discharged with respect to a series of Notes
(except with respect to certain continuing rights specified in the Indenture)
upon the delivery to the Indenture Trustee for cancellation of all the Notes
of such series or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all of the Notes of
such series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such series, to replace stolen, lost or mutilated Notes of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect thereof
in accordance with their terms will provide money in an amount sufficient to
pay the principal of and each installment of interest on the Notes of such
series on the maturity date for such Notes and any installment of interest on
such Notes in accordance with the terms of the Indenture and the Notes of such
series. In the event of any such defeasance and discharge of Notes of such
series, holders of Notes of such series would be able to look only to such
money and/or direct obligations for payment of principal and interest, if any,
on their Notes until maturity.
Indenture Trustee's Annual Report
The Indenture Trustee for each series of Notes will be required to
mail each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by such Trust to
the applicable Indenture Trustee in its individual capacity, the property and
funds physically held by such Indenture Trustee as such and any action taken
by it that materially affects such Notes and that has not been previously
reported.
The Indenture Trustee
The Indenture Trustee for a series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue
as such under the related Indenture or if such Indenture Trustee becomes
insolvent. In such circumstances the Depositor will be obligated to appoint a
successor trustee for the applicable series of Notes. Any resignation or
removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates, a Servicer
or any of its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, Credit Support may be provided with
respect to one or more classes thereof or the related Assets. Credit Support
may be in the form of the subordination of one or more classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may
be structured so as to be drawn upon by more than one series to the extent
described therein.
The coverage provided by any Credit Support will be described in the
related Prospectus Supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities, Securityholders evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such
Credit Support may be terminated or replaced and (d) the material provisions
relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor
under any instrument of Credit Support, including (i) a brief description of
its principal business activities, (ii) its principal place of business, place
of incorporation and the jurisdiction under which it is chartered or licensed
to do business, (iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' or policyholders' surplus, if applicable,
as of the date specified in the Prospectus Supplement. See "Risk
Factors--Credit Support is Limited in Amount and Coverage."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of (or may be limited to) certain types of losses or shortfalls. The
related Prospectus Supplement will set forth information concerning the amount
of subordination of a class or classes of Subordinate 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 be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, Credit
Support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of Mortgage Loans prior to distributions on Subordinate Securities evidencing
interests in a different group of Mortgage Loans within the Trust Fund. The
Prospectus Supplement for a series that includes a cross-support provision
will describe the manner and conditions for applying such provisions.
LIMITED GUARANTEE
If so specified in the related Prospectus Supplement with respect to
a series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If so specified in the related Prospectus Supplement with respect to
a series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer
named therein.
LETTER OF CREDIT
Alternative credit support with respect to a series of Securities may
be provided by the issuance of a letter of credit by the bank or financial
institution specified in the related Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued with respect to a series of Securities will be set forth in the
Prospectus Supplement relating to such series.
POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement relating to a
series of Securities, a pool insurance policy for the Mortgage Loans in the
related Trust Fund will be obtained. The pool insurance policy will cover any
loss (subject to the limitations described in the related Prospectus
Supplement) by reason of default to the extent a related Mortgage Loan is not
covered by any primary mortgage insurance policy. The amount and principal
terms of any such coverage will be set forth in the Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a special
hazard insurance policy may also be obtained for the related Trust Fund in the
amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the related Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of
hazard insurance policy for the respective states, in which the Mortgaged
Properties are located. The amount and principal terms of any such coverage
will be set forth in the Prospectus Supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the related Prospectus Supplement, losses
resulting from a bankruptcy proceeding relating to a mortgagor affecting the
Mortgage Loans in a Trust Fund with respect to a series of Securities will be
covered under a mortgagor bankruptcy bond (or any other instrument that will
not result in a downgrading of the rating of the Securities of a series by the
Rating Agency or Rating Agencies that rate such series). Any mortgagor
bankruptcy bond or such other instrument will provide for coverage in an
amount meeting the criteria of the Rating Agency or Rating Agencies rating the
Securities of the related series, which amount will be set forth in the
related Prospectus Supplement. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a
combination thereof will be deposited, in the amounts so specified in such
Prospectus Supplement. The reserve funds for a series may also be funded over
time by depositing therein a specified amount of the distributions received on
the related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with
the reinvestment income thereon, if any, will be applied for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement.
A reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Securities. If so specified
in the related Prospectus Supplement, reserve funds may be established to
provide limited protection against only certain types of losses and
shortfalls. Following each Distribution Date amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from
the reserve fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further
application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related Prospectus Supplement. To
the extent specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such series, and any loss resulting from such investments
will be charged to such reserve fund. However, such income may be payable to
any related Servicer or another service provider as additional compensation.
To the extent specified in the related Prospectus Supplement, the reserve
fund, if any, for a series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
reserve fund, the balance required to be maintained in the reserve fund, the
manner in which such required balance will decrease over time, the manner of
funding such reserve fund, the purposes for which funds in the reserve fund
may be applied to make distributions to Securityholders and use of investment
earnings from the reserve fund, if any.
OVERCOLLATERALIZATION
If specified in the related Prospectus Supplement, subordination
provisions of a Trust Fund may be used to accelerate to a limited extent the
amortization of one or more classes of Securities relative to the amortization
of the related Assets. The accelerated amortization is achieved by the
application of certain excess interest to the payment of principal of one or
more classes of Securities. This acceleration feature creates, with respect to
the Assets or groups thereof, overcollateralization which results from the
excess of the aggregate principal balance of the related Assets, or a group
thereof, over the principal balance of the related class or classes of
Securities. Such acceleration may continue for the life of the related
Security, or may be limited. In the case of limited acceleration, once the
required level of overcollateralization is reached, and subject to certain
provisions specified in the related Prospectus Supplement, such limited
acceleration feature may cease, unless necessary to maintain the required
level of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by applicable state law (which laws may differ substantially), 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 the
security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans. In this regard, the following discussion does not fully
reflect federal regulations with respect to FHA Loans and VA Loans. See
"Description of The Trust Funds--FHA Loans and VA Loans," "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--FHA Insurance and VA Guarantees" and
"Description of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice and law in the state in which the
Mortgaged Property is located. Mortgages, deeds of trust and deeds to secure
debt are herein collectively referred to as "mortgages." Any of the foregoing
types of mortgages will create a lien upon, or grant a title interest in, the
subject property, the priority of which will depend on the terms of the
particular security instrument, as well as separate, recorded, contractual
arrangements with others holding interests in the mortgaged property, the
knowledge of the parties to such instrument as well as the order of
recordation of the instrument in the appropriate public recording office.
However, recording does not generally establish priority over governmental
claims for real estate taxes and assessments and other charges imposed under
governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a
deed to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale
as security for the indebtedness evidenced by the related note. A deed to
secure debt typically has two parties. By executing a 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, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the
benefit of the mortgagor. At origination of a mortgage loan involving a land
trust, the mortgagor executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the mortgage, the law of
the state in which the real property is located, certain federal laws
(including, without limitation, the Soldiers' and Sailors' Civil Relief Act of
1940) and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to
collect the rents for so long as there is no default. If the Mortgagor
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related Prospectus Supplement will make certain representations and
warranties in the Agreement or certain representations and warranties will be
assigned to the Trustee with respect to any Mortgage Loans that are secured by
an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Offered Securities, the Mortgage Loans may also consist of cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by a cooperative housing corporation (a "Cooperative") and in the
related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. The security
agreement will create a lien upon, or grant a title interest in, the property
which it covers, the priority of which will depend on the terms of the
particular security agreement as well as the order of recordation of the
agreement in the appropriate recording office. Such a lien or title interest
is not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The Cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property mortgagor, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the Cooperative's apartment building or
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under a blanket
mortgage, the mortgagee holding a blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not
fully amortize, with a significant portion of principal being due in one final
payment at maturity. The inability of the Cooperative to refinance a mortgage
and its consequent inability to make such final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the Cooperative to extend its term or, in the
alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder
of a blanket mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender that financed the purchase by an individual tenant stockholder of
cooperative shares or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through
ownership of stock or shares in the corporation, receive proprietary lease 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 occupancy rights are financed
through a Cooperative Loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related Cooperative shares.
The lender generally 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 is 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. See "--Foreclosure--Cooperative Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate
(a "land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the
"contract borrower") for the payment of the purchase price, plus interest,
over the term of the land sale contract. Only after full performance by the
borrower of the contract is the contract lender obligated to convey title to
the real estate to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the land sale contract, the contract borrower
is responsible for maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with
the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute,
to enforce the contract strictly according to its terms. The terms of land
sale contracts generally provide that upon default by the contract borrower,
the borrower loses his or her right to occupy the property, the entire
indebtedness is accelerated, and the buyer's equitable interest in the
property is forfeited. The contract lender in such a situation does not have
to foreclose in order to obtain title to the property, although in some cases
a quiet title action is in order if the contract borrower has filed the land
sale contract in local land records and an ejectment action may be necessary
to recover possession. In a few states, particularly in cases of contract
borrower default during the early years of a land sale contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under land sale contracts from
the harsh consequences of forfeiture. Under such statues, a judicial contract
may be reinstated upon full payment of the default amount and the borrower may
have a post-foreclosure statutory redemption right. In other states, courts in
equity may permit a contract borrower with significant investment in the
property under a land sale contract for the sale of real estate to share the
proceeds of sale of the property after the indebtedness is repaid or may
otherwise refuse to enforce the forfeiture clause. Nevertheless, generally
speaking, the contract lender's procedures for obtaining possession and clear
title under a land sale contract for the sale of real estate in a given state
are simpler and less time consuming and costly than are the procedures for
foreclosing and obtaining clear title to a mortgaged property.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of
record in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged property,
the proceeds of which are used to satisfy the judgment. Such sales are made in
accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court
may alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the mortgagor's default and the likelihood that the mortgagor
will be able to reinstate the loan. In some cases, courts have substituted
their judgment for the lender's and have required that lenders reinstate loans
or recast payment schedules in order to accommodate mortgagors who are
suffering from a temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
is not monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford
constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows
a non-judicial public sale to be conducted generally following a request from
the beneficiary/lender to the trustee to sell the property upon any default by
the mortgagor under the terms of the mortgage note or the mortgage instrument
and after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers.
The mortgagor or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying
the entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the mortgagor or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a
deed of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the
deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such
property at the time of sale, due to, among other things, redemption rights
which may exist and the possibility of physical deterioration of the property
during the foreclosure proceedings. For these reasons, it is common for the
lender to purchase the mortgaged property for an amount equal to or less than
the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make 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. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will
be subject to all senior mortgages, prior liens 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 under which the sale was
conducted. Any proceeds remaining after satisfaction of senior mortgage debt
are generally payable to the holders of junior mortgages and other liens and
claims in order of their priority, whether or not the mortgagor is in default.
Any additional proceeds are generally payable to the mortgagor. The payment of
the proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgage or a subsequent ancillary proceeding or may
require the institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have
an interest in the property which is subordinate to the mortgage being
foreclosed, from exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage
has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee have an equity of redemption and may redeem the property
by paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their
equity of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be authorized if the former mortgagor
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser from a foreclosure sale or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to
maintain the property and pay the expenses of ownership until the redemption
period has expired. In some states, a post-sale statutory right of redemption
may exist following a judicial foreclosure, but not following a trustee's sale
under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than two years. With respect
to a series of Securities for which an election is made to qualify the Trust
Fund or a part thereof as a REMIC, the Agreement will permit foreclosed
property to be held for more than two years if the Internal Revenue Service
grants an extension of time within which to sell such property or independent
counsel renders an opinion to the effect that holding such property for such
additional period is permissible under the REMIC Provisions.
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 canceled 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
permit 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 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 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 Cooperatives 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.
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 a building so converted.
Pending Year 2000 Legislation
In July 1999, Congress approved legislation that would limit
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 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. This legislation would also 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 ability of a Servicer to
foreclose on some Mortgage Loans during the first quarter of the year 2000.
These delays could affect the distributions on your Securities.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or
deeds of trust, which are subordinate to first or other senior mortgages or
deeds of trust held by other lenders. The rights of the Trust Fund as the
holder of a junior deed of trust or a junior mortgage are subordinate in lien
and in payment 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" above.
Furthermore, because the terms of the junior mortgage or deed of
trust are subordinate to the terms of the first mortgage or deed of trust, in
the event of a conflict between the terms of the first mortgage or deed of
trust and the junior mortgage or deed of trust, the terms of the first
mortgage or deed of trust will generally govern. 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 right 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 the extent a first mortgagee
expends such sums, such sums will generally have priority over all sums due
under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment
against the mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former mortgagor
equal to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender. Some states require the
lender to exhaust the security afforded under a mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
mortgagor. In certain other states, the lender has the option of bringing a
personal action against the mortgagor 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. In
some cases, a lender will be precluded from exercising any additional rights
under the note or mortgage if it has taken any prior enforcement action.
Consequently, the practical effect of the election requirement, in those
states permitting such election, is that lenders will usually proceed against
the security first rather than bringing a personal action against the
mortgagor. Finally, other statutory provisions limit any deficiency judgment
against the former mortgagor following a judicial 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 lender
from obtaining a large deficiency judgment against the former mortgagor as a
result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of a secured mortgage lender to realize upon its security. For
example, numerous statutory provisions under the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), may interfere
with or affect the ability of the secured mortgage lender to obtain payment of
a Mortgage Loan, to realize upon collateral and/or enforce a deficiency
judgment. For example, under federal bankruptcy law, virtually all actions
(including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of a bankruptcy petition, and often no
interest or principal payments are made during the course of the bankruptcy
proceeding. In a case under the Bankruptcy Code, the secured party is
precluded from foreclosing without authorization from the bankruptcy court. In
addition, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 plan to cure a monetary default in
respect of a Mortgage Loan by paying arrearages within a reasonable time
period and reinstating the original mortgage loan payment schedule even though
the lender accelerated the mortgage loan and final judgment of foreclosure had
been entered in state court (provided no foreclosure sale had yet occurred)
prior to the filing of the debtor's petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the case, that effected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a Mortgage Loan is secured by property not consisting solely of
the debtor's principal residence, the Bankruptcy Code also permits such
Mortgage Loan to be modified. 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 property, thus leaving the lender in the position of a general
unsecured creditor for the difference between the value of the property and
the outstanding balance of the Mortgage Loan. Some courts have permitted such
modifications when the Mortgage Loan is secured both by the debtor's principal
residence and by personal property.
In the case of income-producing Multifamily Properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents
and leases related to the mortgaged property. Under Section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Code may in certain circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and
some state consumer protection laws. 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. These federal laws impose specific statutory liabilities
upon lenders who originate mortgage loans and who fail to comply with the
provisions of the law. In some cases this liability may affect assignees of
the mortgage loans.
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.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking
a security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate,
among other things: emissions of air pollutants; discharges of wastewater or
storm water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; and/or
management of electrical or other equipment containing polychlorinated
biphenyls ("PCBs"). Failure to comply with such laws and regulations may
result in significant penalties, including civil and criminal fines. Under the
laws of certain states, environmental contamination on a property may give
rise to a lien on the property to ensure the availability and/or reimbursement
of cleanup costs. Generally all subsequent liens on such property are
subordinated to such a lien and, in some states, even prior recorded liens are
subordinated to such liens ("Superliens"). In the latter states, the security
interest of the Trustee in a property that is subject to such Superlien could
be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain
states, a secured party which takes a deed in lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, operates a mortgaged property or
undertakes certain types of activities that may constitute management of the
mortgaged property may become liable in certain circumstances for the costs of
remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the property. Such Cleanup Costs may be
substantial. CERCLA imposes strict, as well as joint and several, liability
for environmental remediation and/or damage costs on several classes of
"potentially responsible parties," including current "owners and/or operators"
of property, irrespective of whether those owners or operators caused or
contributed to the contamination on the property. In addition, owners and
operators of properties that generate hazardous substances that are disposed
of at other "off-site" locations may be held strictly, jointly and severally
liable for environmental remediation and/or damages at those off-site
locations. Many states also have laws that are similar to CERCLA. Liability
under CERCLA or under similar state law could exceed the value of the property
itself as well as the aggregate assets of the property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Fund. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have
"participated in the management" of the operations of the borrower, even
though the environmental damage or threat was caused by a prior owner or
current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator" is a person "who without participating in
the management of . . . [the] facility, holds indicia of ownership primarily
to protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender
faces potential liability as an "owner or operator" under CERCLA. Similarly,
when a lender forecloses and takes title to a contaminated facility or
property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property
as an investment (including leasing the facility or property to a third
party), fails to market the property in a timely fashion or fails to properly
address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility
or property on which such a UST is located. As under CERCLA, a lender may lose
its secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste to be
liable under CERCLA; rather, liability could attach to a lender if its
involvement with the management of the facility were broad enough to support
the inference that the lender had the capacity to influence the borrower's
treatment of hazardous waste. The court added that a lender's capacity to
influence such decisions could be inferred from the extent of its involvement
in the facility's financial management. A subsequent decision by the United
States Court of Appeals for the Ninth Circuit in re Bergsoe Metal Corp.,
apparently disagreeing with, but not expressly contradicting, the Fleet
Factors court, held that a secured lender had no liability absent "some actual
management of the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, however, Congress enacted, and on September
30, 1996, the President signed into law the Asset Conservation Lender
Liability and Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). The Asset Conservation Act was intended to clarify the
scope of the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more explicitly defined the kinds of "participation in
management" that would trigger liability under CERCLA and specified certain
activities that would not constitute "participation in management" or
otherwise result in a forfeiture of the secured-creditor exemption prior to
foreclosure or during a workout period. The Asset Conservation Act also
clarified the extent of protection against liability under CERCLA in the event
of foreclosure and authorized certain regulatory clarifications of the scope
of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring
an action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that
person or entity may be bankrupt or otherwise judgment-proof. It is therefore
possible that cleanup or other environmental liability costs could become a
liability of the Trust Fund and occasion a loss to the Trust Fund and to
Securityholders in certain circumstances. The new secured creditor amendments
to CERCLA, also, would not necessarily affect the potential for liability in
actions by either a state or a private party under other federal or state laws
which may impose liability on "owners or operators" but do not incorporate the
secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage
loan or prior to foreclosure or accepting a deed-in-lieu of foreclosure.
Neither the Depositor nor any Servicer makes any representations or warranties
or assumes any liability with respect to: environmental conditions of such
Mortgaged Property; the absence, presence or effect of hazardous wastes or
hazardous substances on, near or emanating from such Mortgaged Property; the
impact on Securityholders of any environmental condition or presence of any
substance on or near such Mortgaged Property; or the compliance of any
Mortgaged Property with any environmental laws. In addition, no agent, person
or entity otherwise affiliated with the Depositor is authorized or able to
make any such representation, warranty or assumption of liability relative to
any such Mortgaged Property.
DUE-ON-SALE CLAUSES
The Mortgage Loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if
the mortgagor sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, with respect to certain loans the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant
to regulations of the United States Federal Home Loan Bank Board, as succeeded
by the Office of Thrift Supervision, which preempt state law restrictions on
the enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage
loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause. The inability to enforce a
"due-on-sale" clause may result in a mortgage that bears an interest rate
below the current market rate being assumed by a new home buyer rather than
being paid off, which may affect the average life of the Mortgage Loans and
the number of Mortgage Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after
a certain period of time following the origination of mortgage loans secured
by liens encumbering owner-occupied residential properties, if such loans are
paid prior to maturity. With respect to Mortgaged Properties that are
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 Mortgage Rates, may increase the likelihood of refinancing or other
early retirement of such loans.
SUBORDINATE FINANCING
Where a 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 any 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 proceedings by the senior
lender.
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. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects 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.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January
1, 1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would
not apply to such mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no mortgage loan originated after the date of such state action will be
eligible for inclusion in a Trust Fund unless (i) such mortgage loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such mortgage loan provides that the terms thereof shall be
construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
mortgagor's counsel has rendered an opinion that such choice of law provision
would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the mortgagor may cancel the recorded mortgage or deed
of trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in the
invalidation of the transaction, thereby permitting the mortgagor to cancel
the recorded mortgage or deed of trust without any payment or prohibiting the
lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally
chartered lenders have historically been subject to a variety of restrictions.
Such restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St. Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by
adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's Mortgage Loan (including a mortgagor
who was in reserve status and is called to active duty after origination of
the Mortgage Loan) may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to mortgagors who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S. Public
Health Service assigned to duty with the military. Because the Relief Act
applies to mortgagors who enter military service (including reservists who are
called to active duty) after origination of the related Mortgage Loan, no
information can be provided as to the number of loans that may be affected by
the Relief Act. Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Securities, and would not be covered by advances. Such
shortfalls will be covered by the Credit Support provided in connection with
such Securities only to the extent provided in the related Prospectus
Supplement. In addition, the Relief Act imposes limitations that would impair
the ability of the Servicer to foreclose on an affected Mortgage Loan during
the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in
the event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Contracts. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), 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
the security for the Contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Contracts may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the
Trustee will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) of the obligee under the Contracts. Each
Contract evidences both (a) the obligation of the obligor to repay the loan
evidenced thereby, and (b) the grant of a security interest in the
Manufactured Home to secure repayment of such loan. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the Manufactured Homes
initially were registered. Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Servicer will transfer physical possession of
the Contracts to the Trustee or its custodian or may retain possession of the
Contracts as custodian for the Trustee. In addition, the Servicer will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the Contracts. The Contracts will be
stamped or marked otherwise to reflect their assignment from the Depositor to
the Trustee only if provided in the related Prospectus Supplement. Therefore,
if, through negligence, fraud or otherwise, a subsequent purchaser were able
to take physical possession of the Contracts without notice of such
assignment, the Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all
50 states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. The Asset Seller may effect
such notation or delivery of the required documents and fees, and obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any manufactured home securing a manufactured housing
conditional sales contract is registered. In the event the Asset Seller fails,
due to clerical error, to effect such notation or delivery, or files the
security interest under the wrong law (for example, under a motor vehicle
title statute rather than under the UCC, in a few states), the Asset Seller
may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws. As
a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Substantially all of
the Contracts contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest
in the Manufactured Home. If, however, a Manufactured Home is permanently
attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained
by the Asset Seller and transferred to the Depositor. With respect to a series
of Securities and if so described in the related Prospectus Supplement, the
Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent
that as of the date of the sale to the Depositor it has obtained a perfected
first priority security interest by proper notation or delivery of the
required documents and fees with respect to substantially all of the
Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured
Homes to be assigned to the Trustee on behalf of the Securityholders. The
Depositor or the Trustee will amend the certificates of title (or file UCC-3
statements) to identify the Trustee as the new secured party, and will deliver
the certificates of title to the Trustee or note thereon the interest of the
Trustee only if specified in the related Prospectus Supplement. Accordingly,
the Asset Seller (or other originator of the Contracts) will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to Servicer's rights
as the secured party. However, in some states, in the absence of an amendment
to the certificate of title (or the filing of a UCC-3 statement), such
assignment of the security interest in the Manufactured Home may not be held
effective or such security interests may not be perfected and in the absence
of such notation or delivery to the Trustee, the assignment of the security
interest in the Manufactured Home may not be effective against creditors of
the Asset Seller (or such other originator of the Contracts) or a trustee in
bankruptcy of the Asset Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Asset Seller (or other originator of the Contracts) on the certificate of
title or delivery of the required documents and fees will be sufficient to
protect the Securityholders against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests. There
also exists a risk in not identifying the Trustee as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a
state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in
the Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the
security interest in the Manufactured Home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a Manufactured Home; accordingly, the Servicer must surrender
possession if it holds the certificate of title to such Manufactured Home or,
in the case of Manufactured Homes registered in states which provide for
notation of lien, the Asset Seller (or other originator) would receive notice
of surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
In the ordinary course of servicing the manufactured housing contracts, the
Servicer takes steps to effect such re-perfection upon receipt of notice of
re-registration or information from the obligor as to relocation. Similarly,
when an obligor under a manufactured housing contract sells a manufactured
home, the Servicer must surrender possession of the certificate of title or,
if it is noted as lienholder on the certificate of title, will receive notice
as a result of its lien noted thereon and accordingly will have an opportunity
to require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under the Agreement, the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even
over a perfected security interest. The Warranting Party will represent in the
Agreement that it has no knowledge of any such liens with respect to any
Manufactured Home securing payment on any Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to
the Trustee or Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
related Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a Contract
must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit so
that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled
to be paid out of the sale proceeds before such proceeds could be applied to
the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to an obligor on a Contract as
described for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940."
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under
this rule is limited to amounts paid under a Contract; however, the obligor
also may be able to assert the rule to set off remaining amounts due as a
defense against a claim brought by the Trustee against such obligor. Numerous
other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the Contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code.
In the case of some of these laws, the failure to comply with their provisions
may affect the enforceability of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate
the maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act
of 1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the
Manufactured Homes. Consequently, in some states the Servicer may be
prohibited from enforcing a "due-on-sale" clause in respect of certain
Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended, provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading
to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest
rates and finance charges by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1983, deadline.
In addition, even where Title V was not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
loans covered by Title V. The related Asset Seller will represent that all of
the Contracts comply with applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Brown & Wood LLP
as to the material federal income tax considerations of the purchase,
ownership and disposition of the Securities offered hereunder. This opinion
assumes compliance with all provisions of the Agreements pursuant to which the
Securities are issued. This discussion is directed solely to Securityholders
that hold the Securities as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended, and does not purport to
discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Securities. See "State Income Tax Considerations." The Depositor recommends
that Securityholders consult their own tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types:
(i) securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as a real estate mortgage
investment conduit under Sections 860A through 860G (the "REMIC Provisions")
of the Code, (ii) Grantor Trust Securities representing interests in a Trust
Fund ("Grantor Trust Fund") as to which no such election will be made, (iii)
securities representing interests in a Trust Fund ("Partnership Trust Fund")
which is treated as a partnership for federal income tax purposes, and (iv)
Debt Securities representing indebtedness of a Partnership Trust Fund for
federal income tax purposes. The Prospectus Supplement for each series of
Securities will indicate which of the foregoing treatments will apply to such
series and, if a REMIC election (or elections) will be made for the related
Trust Fund, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, (i) references to a
"Securityholder" or a "holder" are to the beneficial owner of a Security, (ii)
references to "REMIC Pool" are to an entity or portion thereof as to which a
REMIC election will be made and (iii) to the extent specified in the
applicable Prospectus Supplement, references to "Mortgage Loans" include
Contracts. Except to the extent specified in the applicable Prospectus
Supplement, no REMIC election will be made with respect to Unsecured Home
Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations
do not adequately address certain issues relevant to, and in some instances
provide that they are not applicable to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT will be
considered a Taxable Mortgage Pool if (i) substantially all of the assets of
the entity consist of debt obligations and more than 50% of such obligations
consist of "real estate mortgages," (ii) such entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the debt
obligations on which the entity is the obligor, payments on such obligations
bear a relationship to payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
Classification of REMICS
With respect to each series of REMIC Securities, assuming compliance
with all provisions of the related Pooling and Servicing Agreement, in the
opinion of Brown & Wood LLP, the related Trust Fund (or each applicable
portion thereof) will qualify as a REMIC and the REMIC Securities offered with
respect thereto will be considered to evidence ownership of Regular Securities
or "residual interests" in that REMIC within the meaning of the REMIC
Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set
forth in the Code. The REMIC Pool must fulfill an asset test, which requires
that no more than a de minimis portion of the assets of the REMIC Pool, as of
the close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement will be met
if at all times the aggregate adjusted basis of the nonqualified assets is
less than 1% of the aggregate adjusted basis of all the REMIC Pool's assets.
An entity that fails to meet the safe harbor may nevertheless demonstrate that
it holds no more than a de minimis amount of nonqualified assets. A REMIC Pool
also must provide "reasonable arrangements" to prevent its residual interests
from being held by "disqualified organizations" or agents thereof and must
furnish applicable tax information to transferors or agents that violate this
requirement. The Pooling and Servicing Agreement with respect to each Series
of REMIC Securities will contain provisions meeting these requirements. See
"--Taxation of Owners of Residual Securities--Tax-Related Restrictions on
Transfer of Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool
on the Startup Day or is purchased by the REMIC Pool within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day. Qualified mortgages include whole mortgage loans, such as the Mortgage
Loans, and, generally, certificates of beneficial interest in a grantor trust
that holds mortgage loans and regular interests in another REMIC, such as
lower-tier regular interests in a tiered REMIC. The REMIC Regulations specify
that loans secured by timeshare interests, shares held by a tenant stockholder
in a cooperative housing corporation, and manufactured housing that qualifies
as a "single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if
it were transferred to the REMIC Pool on the Startup Day and that is received
either (i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a "defective obligation" within a two-year
period thereafter. A "defective obligation" includes (i) a mortgage in default
or as to which default is reasonably foreseeable, (ii) a mortgage as to which
a customary representation or warranty made at the time of transfer to the
REMIC Pool has been breached, (iii) a mortgage that was fraudulently procured
by the mortgagor, and (iv) a mortgage that was not in fact principally secured
by real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
above that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after such
90-day period.
Permitted investments include cash flow investments, qualified
reserve assets, and foreclosure property. A cash flow investment is an
investment, earning a return in the nature of interest, of amounts received on
or with respect to qualified mortgages for a temporary period, not exceeding
13 months, until the next scheduled distribution to holders of interests in
the REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in such fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally may not be
held for more than three taxable years after the taxable year of acquisition
unless extensions are granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (i) one or more classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity either are
payable based on a fixed rate or a qualified variable rate, or consist of a
specified, nonvarying portion of the interest payments on qualified mortgages.
Such a specified portion may consist of a fixed number of basis points, a
fixed percentage of the total interest, or a qualified variable rate, inverse
variable rate or difference between two fixed or qualified variable rates on
some or all of the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting of a
specified, nonvarying portion of interest payments on qualified mortgages may
be zero. A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is designated as a
residual interest. An interest in a REMIC Pool may be treated as a regular
interest even if payments of principal with respect to such interest are
subordinated to payments on other regular interests or the residual interest
in the REMIC Pool, and are dependent on the absence of defaults or
delinquencies on qualified mortgages or permitted investments, lower than
reasonably expected returns on permitted investments, unanticipated expenses
incurred by the REMIC Pool or prepayment interest shortfalls. Accordingly, in
the opinion of Brown & Wood LLP, the Regular Securities of a Series will
constitute one or more classes of regular interests, and the Residual
Securities with respect to that Series will constitute a single class of
residual interests with respect to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may
not be accorded the status or given the tax treatment described below.
Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status,
no such regulations have been issued. Any such relief, moreover, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or
a portion of the Trust Fund's income for the period in which the requirements
for such status are not satisfied. The Pooling and Servicing Agreement with
respect to each REMIC Pool will include provisions designed to maintain the
Trust Fund's status as a REMIC under the REMIC Provisions. It is not
anticipated that the status of any Trust Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In the opinion of Brown & Wood LLP, the REMIC Securities will be
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C) of the Code in the
same proportion that the assets of the REMIC Pool underlying such Securities
would be so treated. Moreover, if 95% or more of the assets of the REMIC Pool
qualify for either of the foregoing treatments at all times during a calendar
year, the REMIC Securities will qualify for the corresponding status in their
entirety for that calendar year. If the assets of the REMIC Pool include
Buydown Mortgage Loans, it is possible that the percentage of such assets
constituting "loans . . . secured by an interest in real property which is . .
. residential real property" for purposes of Code Section 7701(a)(19)(C)(v)
may be required to be reduced by the amount of the related funds paid thereon
(the "Buydown Funds"). No opinion is expressed as to the treatment of such
Buydown Funds because the law is unclear as to whether such Buydown Funds
represent an account held by the lender that reduces the lender's investment
in the mortgage loan. Such a reduction of a holder's investment may reduce the
assets qualifying for the 60% of assets test for meeting the definition of a
"domestic building and loan association." Interest (including original issue
discount) on the Regular Securities and income allocated to the class of
Residual Securities will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Securities are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, in the
opinion of Brown & Wood LLP, the Regular Securities generally will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code if
transferred to another REMIC on its Startup Day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC Pool's assets that constitute assets described in the foregoing sections
of the Code will be made with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC Pool
during such calendar quarter. The REMIC will report those determinations to
Securityholders in the manner and at the times required by applicable Treasury
regulations. The Small Business Job Protection Act of 1996 (the "SBJPA of
1996") repealed the reserve method of bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirements in the SBJPA
of 1996 that such institutions must "recapture" a portion of their existing
bad debt reserves is suspended if a certain portion of their assets are
maintained in "residential loans" under Code Section 7701(a)(19)(C)(v), but
only if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be
made to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
The assets of the REMIC Pool will include, in addition to Mortgage
Loans, payments on Mortgage Loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired
by foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that
payments on Mortgage Loans held pending distribution are considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property generally will qualify as "real estate
assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Securities, two or more separate
elections may be made to treat designated portions of the related Trust Fund
as REMICs ("Tiered REMICS") for federal income tax purposes. Upon the issuance
of any such series of REMIC Securities, Brown & Wood LLP will deliver its
opinion that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and
the REMIC Securities issued by the Tiered REMICS, respectively, will be
considered to evidence ownership of Regular Securities or Residual Securities
in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on such Securities is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
Taxation of Owners of Regular Securities
(i) General
In general, interest, original issue discount, and market discount on
a Regular Security will be treated as ordinary income to a holder of the
Regular Security (the "Regular Securityholder"), and principal payments on a
Regular Security will be treated as a return of capital to the extent of the
Regular Securityholder's basis in the Regular Security allocable thereto.
Regular Securityholders must use the accrual method of accounting with regard
to Regular Securities, regardless of the method of accounting otherwise used
by such Regular Securityholder.
(ii) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities
may be, issued with "original issue discount" within the meaning of Code
Section 1273(a). Holders of any Class or Subclass of Regular Securities having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest, in advance of the receipt of the cash attributable to such income.
The following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID
Regulations") under Code Section 1271 through 1273 and 1275 and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act. Regular
Securityholders should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Regular Securities. To the extent such issues are not addressed in such
regulations, the Seller intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Internal Revenue Service will not take a different position as to those
matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service
to apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory
provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of
a taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion therein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Securities.
Each Regular Security (except to the extent described below with
respect to a Regular Security on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Securityholder or by random lot (a "Non-Pro Rata Security")) will be treated
as a single installment obligation for purposes of determining the original
issue discount includible in a Regular Securityholder's income. The total
amount of original issue discount on a Regular Security is the excess of the
"stated redemption price at maturity" of the Regular Security over its "issue
price." The issue price of a Class of Regular Securities offered pursuant to
this Prospectus generally is the first price at which a substantial amount of
such Class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, it is anticipated
that the Trustee will treat the issue price of a Class as to which there is no
substantial sale as of the issue date or that is retained by the Depositor as
the fair market value of the Class as of the issue date. The issue price of a
Regular Security also includes any amount paid by an initial Regular
Securityholder for accrued interest that relates to a period prior to the
issue date of the Regular Security, unless the Regular Securityholder elects
on its federal income tax return to exclude such amount from the issue price
and to recover it on the first Distribution Date. The stated redemption price
at maturity of a Regular Security always includes the original principal
amount of the Regular Security, but generally will not include distributions
of interest if such distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means interest
payable at a single fixed rate or a qualified variable rate (as described
below), provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Regular Security.
Because there is no penalty or default remedy in the case of nonpayment of
interest with respect to a Regular Security, it is possible that no interest
on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in
the applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the
Trustee will treat interest with respect to the Regular Securities as
qualified stated interest. Distributions of interest on an Accrual Security,
or on other Regular Securities with respect to which deferred interest will
accrue, will not constitute qualified stated interest, in which case the
stated redemption price at maturity of such Regular Securities includes all
distributions of interest as well as principal thereon. Likewise, it is
anticipated that the Trustee will treat an interest-only Class or a Class on
which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" Class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a
Regular Security is shorter than the interval between subsequent Distribution
Dates, the interest attributable to the additional days will be included in
the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular
Security will be considered to be zero if such original issue discount is less
than 0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular Security is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the
Regular Security and the denominator of which is the stated redemption price
at maturity of the Regular Security. The Conference Committee Report to the
1986 Act provides that the schedule of such distributions should be determined
in accordance with the assumed rate of prepayment of the Mortgage Loans (the
"Prepayment Assumption") and the anticipated reinvestment rate, if any,
relating to the Regular Securities. The Prepayment Assumption with respect to
a Series of Regular Securities will be set forth in the applicable Prospectus
Supplement. Holders generally must report de minimis original issue discount
pro rata as principal payments are received, and such income will be capital
gain if the Regular Security is held as a capital asset. Under the OID
Regulations, however, Regular Securityholders may elect to accrue all de
minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-Election to Treat All Interest Under
the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Security accrued during an accrual
period for each day on which it holds the Regular Security, including the date
of purchase but excluding the date of disposition. The Trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Security, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the
day before the related Distribution Date on the Regular Security. The
Conference Committee Report to the 1986 Act states that the rate of accrual of
original issue discount is intended to be based on the Prepayment Assumption.
The original issue discount accruing in a full accrual period would be the
excess, if any, of (i) the sum of (a) the present value of all of the
remaining distributions to be made on the Regular Security as of the end of
that accrual period, and (b) the distributions made on the Regular Security
during the accrual period that are included in the Regular Security's stated
redemption price at maturity, over (ii) the adjusted issue price of the
Regular Security at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence is
calculated based on (i) the yield to maturity of the Regular Security at the
issue date, (ii) events (including actual prepayments) that have occurred
prior to the end of the accrual period, and (iii) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount
for each day in the period. With respect to an initial accrual period shorter
than a full accrual period, the daily portions of original issue discount must
be determined according to an appropriate allocation under any reasonable
method.
Under the method described above, the daily portions of original
issue discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
Trustee will determine the yield to maturity of such Security based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Non-Pro Rata Security in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case of
a distribution in retirement of the entire unpaid principal balance of any
Non-Pro Rata Security (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Security (or to
such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Security of
such Class will be adjusted by reducing the present value of the remaining
payments on such Class and the adjusted issue price of such Class to the
extent attributable to the portion of the unpaid principal balance thereof
that was distributed. The Depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but
with the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to
consult their tax advisors as to this treatment.
(iii) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated
redemption price at maturity will be required to include in gross income the
daily portions of the original issue discount on the Regular Security reduced
pro rata by a fraction, the numerator of which is the excess of its purchase
price over such adjusted issue price and the denominator of which is the
excess of the remaining stated redemption price at maturity over the adjusted
issue price. Alternatively, such a subsequent purchaser may elect to treat all
such acquisition premium under the constant yield method, as described below
under the heading "--Election to Treat All Interest Under the Constant Yield
Method" below.
(iv) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of
a qualified floating rate is considered a qualified floating rate only if the
rate is equal to either (a) the product of a qualified floating rate and a
fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35, increased or decreased by a fixed rate. Such rate
may also be subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Securities may be issued under this Prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different
rates at different times during the period it is outstanding such that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that such a Class may be considered to
bear "contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final
regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Security that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest
at a rate that qualifies as a variable rate under the OID Regulations that is
tied to current values of a variable rate (or the highest, lowest or average
of two or more variable rates, including a rate based on the average cost of
funds of one or more financial institutions), or the product of such a rate
and a positive or a negative multiple (plus or minus a specified number of
basis points), or that represents a weighted average of rates on some or all
of the Mortgage Loans, including such a rate that is subject to one or more
caps or floors, or (ii) bearing one or more such variable rates for one or
more periods, or one or more fixed rates for one or more periods, and a
different variable rate or fixed rate for other periods, qualifies as a
regular interest in a REMIC. Accordingly, it is anticipated that the Trustee
will treat Regular Securities that qualify as regular interests under this
rule in the same manner as obligations bearing a variable rate for original
issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Security bearing a variable rate of interest will accrue in the manner
described above under "--Original Issue Discount," with the yield to maturity
and future payments on such Regular Security generally to be determined by
assuming that interest will be payable for the life of the Regular Security
based on the initial rate (or, if different, the value of the applicable
variable rate as of the pricing date) for the relevant Class. Unless required
otherwise by applicable final regulations, it is anticipated that the Trustee
will treat such variable interest as qualified stated interest, other than
variable interest on an interest-only or super-premium Class or a Class
bearing interest at a rate equal to the weighted average of the net rates on
the Mortgage Loans, which will be treated as non-qualified stated interest
includible in the stated redemption price at maturity. Ordinary income
reportable for any period will be adjusted based on subsequent changes in the
applicable interest rate index.
(v) Market Discount
A subsequent purchaser of a Regular Security also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Security (i) is exceeded by the
remaining outstanding principal payments and interest payments other than
qualified stated interest payments due on a Regular Security, or (ii) in the
case of a Regular Security having original issue discount, is exceeded by the
adjusted issue price of such Regular Security at the time of purchase. Such
purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on such Regular Security as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate, or (ii) in
the ratio of stated interest allocable to the relevant period to the sum of
the interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Security issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Security as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the
interest distributable thereon. The deferred portion of such interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includible in
the stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the
adjusted issue price.
Market discount with respect to a Regular Security will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar
to de minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent
payment obligations, a secondary purchaser of a Regular Security that has
"contingent interest" at a discount generally would continue to accrue
interest and determine adjustments on the Regular Security based on the
original projected payment schedule devised by the issuer of the Security. The
holder of such a Regular Security would be required, however, to allocate the
difference between the adjusted issue price of the Regular Security and its
basis in the Regular Security as positive adjustments to the accruals or
projected payments on the Regular Security over the remaining term of the
Regular Security in a manner that is reasonable (e.g., based on a constant
yield to maturity).
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a given Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors
regarding the application of the market discount rules to the Regular
Securities. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
(vi) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at
a premium. If the Regular Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize such premium under
a constant yield method that reflects compounding based on the interval
between payments on the Regular Security. Such election will apply to all
taxable debt obligations (including REMIC regular interests) acquired by the
Regular Securityholder at a premium held in that taxable year or thereafter,
unless revoked with the permission of the Internal Revenue Service. The
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the Regular Securities,
although it is unclear whether the alternatives to the constant interest
method described above under "Market Discount" are available. Amortizable bond
premium generally will be treated as an offset to interest income on a Regular
Security, rather than as a separate deductible item. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which the Code Section 171 election may be deemed to be made.
Amortizable premium on a Regular Security that is subject to
redemption at the option of the issuer generally must be amortized as if the
optional redemption price and date were the Security's principal amount and
maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus,
a holder of a Regular Security would not be able to amortize any premium on a
Regular Security that is subject to optional redemption at a price equal to or
greater than the Securityholder's acquisition price unless and until the
redemption option expires. A Regular Security subject to redemption at the
option of the issuer described in the preceding sentence will be treated as
having matured on the redemption date for the redemption price and then as
having been reissued on that date for that price. Any premium remaining on the
Regular Security at the time of the deemed reissuance will be amortized on the
basis of (i) the original principal amount and maturity date or (ii) the price
and date of any succeeding optional redemption, under the principles described
above.
(vii) Election to Treat All Interest Under the Constant Yield
Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest, original
issue discount, de minimis original issue discount, market discount and de
minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (ii) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply or
if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make such an election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes such an election with respect to a debt instrument with
amortizable bond premium or with market discount, the holder is deemed to have
made elections to amortize bond premium or to report market discount income
currently as it accrues under the constant yield method, respectively, for all
premium bonds held or market discount bonds acquired by the holder in the same
taxable year or thereafter. The election is made on the holder's federal
income tax return for the year in which the debt instrument is acquired and is
irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making such an election.
(viii) Treatment of Losses
Regular Securityholders will be required to report income with
respect to Regular Securities on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the Mortgage Loans, except to the extent it can
be established that such losses are uncollectible. Accordingly, the holder of
a Regular Security, particularly a Subordinate Security, may have income, or
may incur a diminution in cash flow as a result of a default or delinquency,
but may not be able to take a deduction (subject to the discussion below) for
the corresponding loss until a subsequent taxable year. In this regard,
investors are cautioned that while they may generally cease to accrue interest
income if it reasonably appears that the interest will be uncollectible, the
Internal Revenue Service may take the position that original issue discount
must continue to be accrued in spite of its uncollectibility until the debt
instrument is disposed of in a taxable transaction or becomes worthless in
accordance with the rules of Code Section 166. To the extent the rules of Code
Section 166 regarding bad debts are applicable, it appears that Regular
Securityholders that are corporations or that otherwise hold the Regular
Securities in connection with a trade or business should in general be allowed
to deduct as an ordinary loss such loss with respect to principal sustained
during the taxable year on account of any such Regular Securities becoming
wholly or partially worthless, and that, in general, Regular Securityholders
that are not corporations and do not hold the Regular Securities in connection
with a trade or business should be allowed to deduct as a short-term capital
loss any loss sustained during the taxable year on account of a portion of any
such Regular Securities becoming wholly worthless. Although the matter is not
free from doubt, such non-corporate Regular Securityholders should be allowed
a bad debt deduction at such time as the principal balance of such Regular
Securities is reduced to reflect losses resulting from any liquidated Mortgage
Loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all the Mortgage Loans remaining in the Trust Estate have
been liquidated or the applicable Class of Regular Securities has been
otherwise retired. The Internal Revenue Service could also assert that losses
on the Regular Securities are deductible based on some other method that may
defer such deductions for all holders, such as reducing future cashflow for
purposes of computing original issue discount. This may have the effect of
creating "negative" original issue discount which would be deductible only
against future positive original issue discount or otherwise upon termination
of the Class. Regular Securityholders are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Regular Securities. While losses attributable
to interest previously reported as income should be deductible as ordinary
losses by both corporate and non-corporate holders, the Internal Revenue
Service may take the position that losses attributable to accrued original
issue discount may only be deducted as capital losses in the case of
non-corporate holders who do not hold the Regular Securities in connection
with a trade or business. Special loss rules are applicable to banks and
thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Securities.
(ix) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security,
the Regular Securityholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Security. The adjusted basis of a Regular Security generally will
equal the original cost of the Regular Security to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller, by any amortized
premium, and by any recognized losses.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior disposition of property that was held as part of such transaction, (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have
been includible in the gross income of the holder if its yield on such Regular
Security were 110% of the applicable federal rate as of the date of purchase,
over (b) the amount of income actually includible in the gross income of such
holder with respect to such Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate (20%) than ordinary income
of such taxpayers (39.6%) for property held for more than one year. Currently,
the maximum tax rate for corporations is the same with respect to both
ordinary income and capital gains.
Taxation of Owners of Residual Securities
(i) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal
taxable income of holders of Residual Securities ("Residual Holders"), and
will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Holder are determined by allocating
the REMIC Pool's taxable income or net loss for each calendar quarter ratably
to each day in such quarter and by allocating such daily portion among the
Residual Holders in proportion to their respective holdings of Residual
Securities in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that (i) the limitations on deductibility
of investment interest expense and expenses for the production of income do
not apply, (ii) all bad loans will be deductible as business bad debts, and
(iii) the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. The REMIC Pool's gross income includes interest,
original issue discount income and market discount income, if any, on the
Mortgage Loans, reduced by amortization of any premium on the Mortgage Loans,
plus income from amortization of issue premium, if any, on the Regular
Securities, plus income on reinvestment of cash flows and reserve assets, plus
any cancellation of indebtedness income upon allocation of realized losses to
the Regular Securities. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and
realized losses on the Mortgage Loans. The requirement that Residual Holders
report their pro rata share of taxable income or net loss of the REMIC Pool
will continue until there are no Securities of any class of the related Series
outstanding.
The taxable income recognized by a Residual Holder in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest, original issue discount or market discount
income or amortization of premium with respect to the Mortgage Loans, on the
one hand, and the timing of deductions for interest (including original issue
discount) or income from amortization of issue premium on the Regular
Securities, on the other hand. In the event that an interest in the Mortgage
Loans is acquired by the REMIC Pool at a discount, and one or more of such
Mortgage Loans is prepaid, the prepayment may be used in whole or in part to
make distributions in reduction of principal on the Regular Securities, and
(ii) the discount on the Mortgage Loans which is includible in income may
exceed the deduction allowed upon such distributions on those Regular
Securities on account of any unaccrued original issue discount relating to
those Regular Securities. When there is more than one Class of Regular
Securities that distribute principal sequentially, this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier Classes of Regular Securities
to the extent that such Classes are not issued with substantial discount or
are issued at a premium. If taxable income attributable to such a mismatching
is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities,
may increase over time as distributions in reduction of principal are made on
the lower yielding Classes of Regular Securities, whereas, to the extent the
REMIC Pool consists of fixed rate Mortgage Loans, interest income with respect
to any given Mortgage Loan will remain constant over time as a percentage of
the outstanding principal amount of that loan. Consequently, Residual Holders
must have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of such mismatching or unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "--Limitations on Offset or Exemption of REMIC
Income." The timing of such mismatching of income and deductions described in
this paragraph, if present with respect to a Series of Securities, may have a
significant adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business
taxable income to tax-exempt entities; and (iii) it is ineligible for any
statutory or treaty reduction in the 30% withholding tax otherwise available
to a foreign Residual Securityholder. See "--Limitations on Offset or
Exemption of REMIC Income" below. In addition, a Residual Holder's taxable
income during certain periods may exceed the income reflected by such Residual
Holders for such periods in accordance with generally accepted accounting
principles. Investors should consult their own accountants concerning the
accounting treatment of their investment in Residual Securities.
(ii) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of
the Residual Security if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Security is the amount paid for such Residual Security. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount
of loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom such loss was disallowed and may be
used by such Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost
of its Residual Security as an offset to its share of the taxable income of
the related REMIC Pool. However, the taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Although the law is unclear in certain respects, such
recovery of basis by the REMIC Pool will have the effect of amortization of
the issue price of the Residual Securities over their life. However, in view
of the possible acceleration of the income of Residual Holders described above
under "--Taxation of REMIC Income," the period of time over which such issue
price is effectively amortized may be longer than the economic life of the
Residual Securities.
A Residual Security may have a negative value if the net present
value of anticipated tax liabilities exceeds the present value of anticipated
cash flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Internal Revenue Service may provide future
guidance on the proper tax treatment of payments made by a transferor of such
a residual interest to induce the transferee to acquire the interest, and
Residual Holders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater
than the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans, the Residual Holder will not recover a portion of such basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by such holder.
The REMIC Regulations currently in effect do not so provide. See "--Treatment
of Certain Items of REMIC Income and Expense--Market Discount" below regarding
the basis of Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a
Residual Security" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
(iii) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and
expense are subject to differing interpretations. The Depositor makes no
representation as to the specific method that will be used for reporting
income with respect to the Mortgage Loans and expenses with respect to the
Regular Securities, and different methods could result in different timing or
reporting of taxable income or net loss to Residual Holders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Loans is generally the fair market value of the
Mortgage Loans immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. The
accrued portion of such market discount would be recognized currently as an
item of ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"--Taxation of Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "--Taxation of Owners of Regular
Securities--Amortizable Premium," a person that holds a Mortgage Loan as a
capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on Mortgage Loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an
offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the mortgagors on the Mortgage
Loans are expected to be individuals, Code Section 171 will not be available
for premium on Mortgage Loans originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may
argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
(iv) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable federal rate that
would have applied to the Residual Security (if it were a debt instrument) on
the Startup Day under Code Section 1274(d), multiplied by (ii) the adjusted
issue price of such Residual Security at the beginning of such quarterly
period. For this purpose, the adjusted issue price of a Residual Security at
the beginning of a quarter is the issue price of the Residual Security, plus
the amount of such daily accruals of REMIC income described in this paragraph
for all prior quarters, decreased by any distributions made with respect to
such Residual Security prior to the beginning of such quarterly period.
Accordingly, the portion of the REMIC Pool's taxable income that will be
treated as excess inclusions will be a larger portion of such income as the
adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions,
including net operating loss carryforwards, on such Residual Holder's return.
However, net operating loss carryovers are determined without regard to excess
inclusion income. Further, if the Residual Holder is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the
Residual Holder's excess inclusions will be treated as unrelated business
taxable income of such Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income is subject to 30% withholding tax with respect
to certain persons who are not U.S. Persons (as defined below under
"--Tax-Related Restrictions on Transfer of Residual Securities--Foreign
Investors"), and the portion thereof attributable to excess inclusions is not
eligible for any reduction in the rate of withholding tax (by treaty or
otherwise). See "--Taxation of Certain Foreign Investors--Residual Securities"
below. Finally, if a real estate investment trust or a regulated investment
company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to certain persons who are not U.S. Persons. The SBJPA of 1996 has
eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Securities that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November
1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to
any excess inclusions. These rules are effective for taxable years beginning
after December 31, 1986, unless a Residual Holder elects to have such rules
apply only to taxable years beginning after August 20, 1996.
(v) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable federal
rate under Code Section 1274(d) as of the date of the transfer for a term
ending with the last calendar quarter in which excess inclusions are expected
to accrue. Such rate is applied to the anticipated excess inclusions from the
end of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Security, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Security would in no event be liable for such tax
with respect to a transfer if the transferee furnished to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and,
as of the time of the transfer, the transferor does not have actual knowledge
that such affidavit is false. The tax also may be waived by the Internal
Revenue Service if the Disqualified Organization promptly disposes of the
Residual Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and
a Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that it is not a Disqualified Organization or stating such holder's
taxpayer identification number and, during the period such person is the
record holder of the Residual Security, the Pass-Through Entity does not have
actual knowledge that such affidavit is false.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a Residual Security, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
in not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series will
provide that no legal or beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee furnished to the
transferor and the Trustee an affidavit providing its taxpayer identification
number and stating that such transferee is the beneficial owner of the
Residual Security and is not a Disqualified Organization and is not purchasing
such Residual Security on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof) and (ii) the transferor provides a
statement in writing to the Trustee that it has no actual knowledge that such
affidavit is false. Moreover, the Pooling and Servicing Agreement will provide
that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Security with respect to a Series will bear a legend
referring to such restrictions on transfer, and each Residual Holder will be
deemed to have agreed, as a condition of ownership thereof, to any amendments
to the related Pooling and Servicing Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Seller or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of
the REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder (other than a
Residual Holder who is not a U.S. Person as defined below under "Foreign
Investors") is disregarded to all federal income tax purposes if a significant
purpose of the transfer is to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
the transfer, (i) the present value of the expected future distributions on
the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes on each excess
inclusion. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "--Disqualified
Organizations." The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. A safe harbor is provided if (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur liabilities in excess of any cash
flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will
require the transferee of a Residual Security to certify to the matters in the
preceding sentence as part of the affidavit described above under the heading
"--Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of
a Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Security is deemed to have
tax avoidance potential unless, at the time of the transfer, (i) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (ii) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and prior to the end of
the next succeeding taxable year for the accumulated withholding tax liability
to be paid. If the non-U.S. Person transfers the Residual Security back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series
may provide that a Residual Security may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizens or resident of the United States, a corporation,
partnership (except as provided in applicable Treasury regulations) or other
entity treated as a partnership or as a corporation created or organized in or
under the laws of the United States or of any state (including, for this
purpose, the District of Columbia), an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of such trust and one or more such U.S. Persons have the
authority to control all substantial decisions of such trust (or, to the
extent provided in applicable Treasury regulations, certain trusts in
existence on August 20, 1996, which are eligible to elect to be treated as
U.S. Persons).
(vi) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount
realized over the adjusted basis (as described above under "--Taxation of
Owners of Residual Securities--Basis and Losses") of such Residual Holder in
such Residual Security at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Holder will have
taxable income to the extent that any cash distribution to it from the REMIC
Pool exceeds such adjusted basis on that Distribution Date. Such income will
be treated as gain from the sale or exchange of the Residual Holder's Residual
Security, in which case, if the Residual Holder has an adjusted basis in its
Residual Security remaining when its interest in the REMIC Pool terminates,
and if it holds such Residual Security as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as
ordinary income (i) if a Residual Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security
and ending six months after such sale or disposition, acquires (or enters into
any other transaction that results in the application of Code Section 1091)
any residual interest in any REMIC or any interest in a "taxable mortgage
pool" (such as a non-REMIC owner trust) that is economically comparable to a
Residual Security.
(vii) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final
regulations (the "Mark to Market Regulations") under Code Section 475 relating
to the requirement that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities
of a dealer, except to the extent that the dealer has specifically identified
a security as held for investment. The Mark to Market Regulations provide
that, for purposes of this mark to market requirement, a Residual Security is
not treated as a security and thus may not be marked to market. The Mark to
Market Regulations apply to all Residual Securities acquired on or after
January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
(i) Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be
taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include (i) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day, (b) foreclosure, default, or
imminent default of a qualified mortgage, (c) bankruptcy or insolvency of the
REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the receipt of
income from assets that are not the type of mortgages or investments that the
REMIC Pool is permitted to hold, (iii) the receipt of compensation for
services, or (iv) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv) above, it is not a prohibited transaction to sell a qualified
mortgage or cash flow investment held by a REMIC Pool to prevent a default on
Regular Securities as a result of a default on qualified mortgages or to
facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Securities is
outstanding). The REMIC Regulations indicate that the modification of a
Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of
the Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause,
or the conversion of an interest rate by a mortgagor pursuant to the terms of
a convertible adjustable rate Mortgage Loan.
(ii) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued. It is not anticipated that
there will be any contributions to the REMIC Pool after the Startup Day.
(iii) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the
year in which the REMIC Pool acquired such property, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust. It is not anticipated that the REMIC Pool
will have any taxable net income from foreclosure property.
(iv) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which such adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on such date, the REMIC Pool will not be subject to
the prohibited transaction rules on the sale of its assets, provided that the
REMIC Pool credits or distributes in liquidation all of the sale proceeds plus
its cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(v) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns.
Treasury regulations provide that, except where there is a single Residual
Holder for an entire taxable year, the REMIC Pool will be subject to the
procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or
credit in a unified administrative proceeding. The Master Servicer will be
obligated to act as "tax matters person," as defined in applicable Treasury
regulations, with respect to the REMIC Pool as agent of the Residual Holders
holding the largest percentage interest in the Residual Securities. If the
Code or applicable Treasury regulations do not permit the Master Servicer to
act as tax matters person in its capacity as agent of such Residual Holder,
such Residual Holder or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person. The tax matters
person generally has responsibility for overseeing and providing notice to the
other Residual Holders of certain administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in such proceedings
in appropriate circumstances.
(vi) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser or (i) 3% of the
excess, if any, of adjusted gross income over $100,000 ($50,000 in the case of
a married individual filing a separate return) (subject to adjustment for
inflation), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. In the case of a REMIC Pool, such deductions may
include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it
holds in another REMIC. Such investors who hold REMIC Securities either
directly or indirectly through certain pass-through entities may have their
pro rata share of such expenses allocated to them as additional gross income,
but may be subject to such limitation on deductions. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause such investors to be subject to significant
additional tax liability. Temporary Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to
be allocated entirely to the holders of Residual Securities in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence
of a REMIC election. With respect to a REMIC Pool that would be classified as
an investment trust in the absence of a REMIC election or that is
substantially similar to an investment trust, any holder of a Regular Security
that is an individual, trust, estate, or pass-through entity also will be
allocated its pro rata share of such expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. The applicable Prospectus Supplement
will indicate if all such expenses will not be allocable to the Residual
Securities. In general, such allocable portion will be determined based on the
ratio that a REMIC Securityholder's income, determined on a daily basis, bears
to the income of all holders of Regular Securities and Residual Securities
with respect to a REMIC Pool. As a result, individuals, estates or trusts
holding REMIC Securities (either directly or indirectly through a grantor
trust, partnership, S corporation, REMIC, or certain other pass-through
entities described in the foregoing temporary Treasury regulations) may have
taxable income in excess of the interest income at the pass-through rate on
Regular Securities that are issued in a single class or otherwise consistently
with fixed investment trust status or in excess of cash distributions for the
related period on Residual Securities.
Taxation of Certain Foreign Investors
(i) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
The Internal Revenue Service recently issued final regulations (the
"New Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
(ii) Residual Securities
The Conference Committee Report to the 1986 Act indicates that
amounts paid to Residual Holders who are Non-U.S. Persons generally should be
treated as interest for purposes of the 30% (or lower treaty rate) United
States withholding tax. Treasury regulations provide that amount distributed
to Residual Holders may qualify as "portfolio interest," subject to the
conditions described in "Regular Securities" above, but only to the extent
that (i) the Mortgage Loans were issued after July 18, 1984, and (ii) the
Trust Estate or segregated pool of assets therein (as to which a separate
REMIC election will be made), to which the Residual Security relates, consists
of obligations issued in "registered form" within the meaning of Code Section
163 (f) (1). Generally, Mortgage Loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the
30% withholding tax (or lower treaty rate) to the extent of that portion of
REMIC taxable income that constitutes an "excess inclusion." See "--Taxation
of Owners of Residual Securities--Limitations on Offset or Exemption of REMIC
Income" above. If the amounts paid to Residual Holders who are Non-U.S.
Persons are effectively connected with the conduct of a trade or business
within the United States by such Non-U.S. Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such Non-U.S. Persons
will be subject to United States federal income tax at regular rates. If 30%
(or lower treaty rate) withholding is applicable, such amounts generally will
be taken into account for purposes of withholding only when paid or otherwise
distributed (or when the Residual Security is disposed of) under rules similar
to withholding upon disposition of debt instruments that have original issue
discount. See "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences
to them of owning Residual Securities.
(iii) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Holder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Holder is otherwise an exempt recipient under applicable provisions of the
Code. Any amounts to be withheld from distribution on the Regular Securities
would be refunded by the Internal Revenue Service or allowed as a credit
against the Regular Holder's federal income tax liability.
(iv) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal
Revenue Service Publication 938 with respect to a particular Series of Regular
Securities. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or
Net Loss Allocation. Treasury regulations require that Schedule Q be furnished
by the REMIC Pool to each Residual Holder by the end of the month following
the close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Holders, furnished
annually, if applicable, to holders of Regular Securities, and filed annually
with the Internal Revenue Service concerning Code Section 67 expenses (see
"Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "--Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as
holders of the residual interest in a REMIC Pool, including the duty to
account for their shares of the REMIC Pool's income or loss on their returns,
continue for the life of the REMIC Pool, even after the principal and interest
on their Residual Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required
to treat items on its return consistently with their treatment on the REMIC
Pool's return if the Holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each Residual Holder is required to treat
items on its returns consistently with their treatment on the REMIC Pool's
return, unless the Holder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Internal Revenue Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level. A REMIC Pool typically will not register as a tax shelter pursuant to
Code Section 6111 because it generally will not have a net loss for any of the
first five taxable years of its existence. Any person that holds a Residual
Security as a nominee for another person may be required to furnish the
related REMIC Pool, in a manner to be provided in Treasury regulations, with
the name and address of such person and other specified information.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
With respect to each series of Grantor Trust Securities, assuming
compliance with all provisions of the related Agreement, in the opinion of
Brown & Wood LLP, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of the Code and not as a
partnership, an association taxable as a corporation, or a "taxable mortgage
pool" within the meaning of Code Section 7701(i). Accordingly, each holder of
a Grantor Trust Security generally will be treated as the beneficial owner of
an undivided interest in the Mortgage Loans included in the Grantor Trust
Fund.
STANDARD SECURITIES
General
Where there is no Retained Interest or "excess" servicing with
respect to the Mortgage Loans underlying the Securities of a Series, and where
such Securities are not designated as "Stripped Securities," the holder of
each such Security in such Series (referred to herein as "Standard
Securities") will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Grantor Trust Fund represented
by its Standard Security and will be considered the beneficial owner of a pro
rata undivided interest in each of the Mortgage Loans, subject to the
discussion below under "--Recharacterization of Servicing Fees." Accordingly,
the holder of a Standard Security of a particular Series will be required to
report on its federal income tax return its pro rata share of the entire
income from the Mortgage Loans represented by its Standard Security, including
interest at the coupon rate on such Mortgage Loans, original issue discount
(if any), prepayment fees, assumption fees, and late payment charges received
by the Servicer, in accordance with such Securityholder's method of
accounting. A Securityholder generally will be able to deduct its share of the
Servicing Fee and all administrative and other expenses of the Trust Estate in
accordance with its method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own Securities,
either directly or indirectly through certain pass-through entities, will be
subject to limitations with respect to certain itemized deductions described
in Code Section 67, including deductions under Code Section 212 for the
Servicing Fee and all such administrative and other expenses of the Grantor
Trust Fund, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000 ($50,000 in the case of
a married individual filing a separate return) (in each case, as adjusted for
post-1991 inflation), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result, such investors holding
Standard Securities, directly or indirectly through a pass-through entity, may
have aggregate taxable income in excess of the aggregate amount of cash
received on such Standard Securities with respect to interest at the
pass-through rate or as discount income on such Standard Securities. In
addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Retained
Interest with respect to the Mortgage Loans underlying a Series of Securities
or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Securities" and "--Recharacterization of Servicing Fees,"
respectively.
Holders of Standard Securities, particularly any class of a Series
which is a Subordinate Security, may incur losses of interest or principal
with respect to the Mortgage Loans. Such losses would be deductible generally
only as described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that Securityholders on the cash
method of accounting would not be required to report qualified stated interest
as income until actual receipt.
(i) Tax Status
With respect to a series, in the opinion of Brown & Wood LLP, except
with respect to that portion of a Trust Fund consisting of Unsecured Home
Improvement Loans:
1. A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans . . . secured by an interest in real property which is . .
. residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage Loans
represented by that Standard Security is of the type described in such section
of the Code.
2. A Standard Security owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on such assets
will be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in clauses 1
and 2 of the immediately preceding paragraph or whether the amount qualifying
for such treatment must be reduced by the amount of the Buydown Mortgage
Funds. There is indirect authority supporting treatment of an investment in a
Buydown Mortgage Loan as entirely secured by real property if the fair market
value of the real property securing the loan exceeds the principal amount of
the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly,
Securityholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Securityholder's
investment for federal income tax purposes.
(ii) Premium and Discount
The Depositor recommends that Securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount
arising either upon initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Standard Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code
Section 1271 through 1275 will be applicable to a Securityholder's interest in
those Mortgage Loans as to which the conditions for the application of those
sections are met. Rules regarding periodic inclusion of original issue
discount income generally are applicable to mortgages originated after March
2, 1984. The rules allowing for the amortization of premium are available with
respect to mortgage loans originated after September 27, 1985. Under the OID
Regulations, original issue discount could arise by the charging of points by
the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible
by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser" rates on the Mortgage Loans. See
"--Stripped Securities" below regarding original issue discount on Stripped
Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. No prepayment assumption will be assumed for purposes of such accrual
except as set forth in the applicable Prospectus Supplement. However, Code
Section 1272 provides for a reduction in the amount of original issue discount
includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includible by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. No prepayment
assumption will be assumed for purposes of such accrual except as set forth in
the applicable Prospectus Supplement.
(iii) Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Securityholders. In this regard, there are
no authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of
Standard Securities, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan
basis is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Internal Revenue Service guidance indicates that a servicing fee in excess of
reasonable compensation ("excess servicing") will cause the Mortgage Loans to
be treated under the "stripped bond" rules. Such guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be
viewed as retaining an ownership interest in a portion of the interest
payments on the Mortgage Loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of such
Mortgage Loans as "stripped coupons" and "stripped bonds." Subject to the de
minimis rule discussed below under "--Stripped Securities," each stripped bond
or stripped coupon could be considered for this purpose as a non-interest
bearing obligation issued on the date of issue of the Standard Securities, and
the original issue discount rules of the Code would apply to the holder
thereof. While Securityholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to the Servicer, or as including such portion
as a second class of equitable interest. Applicable Treasury regulations treat
such an arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, such a recharacterization should
not have any significant effect upon the timing or amount of income reported
by a Securityholder, except that the income reported by a cash method holder
may be slightly accelerated. See "--Stripped Securities" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
(iv) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Security. In general, the aggregate adjusted basis
will equal the Securityholder's cost for the Standard Security, exclusive of
accrued interest, increased by the amount of any income previously reported
with respect to the Standard Security and decreased by the amount of any
losses previously reported with respect to the Standard Security and the
amount of any distributions (other than accrued interest) received thereon.
Except as provided above with respect to market discount on any Mortgage
Loans, and except for certain financial institutions subject to the provisions
of Code Section 582(c), any such gain or loss generally would be capital gain
or loss if the Standard Security was held as a capital asset. However, gain on
the sale of a Standard Security will be treated as ordinary income (i) if a
Standard Security is held as part of a "conversion transaction" as defined in
Code Section 1258(c), up to the amount of interest that would have accrued on
the Securityholder's net investment in the conversion transaction at 120% of
the appropriate applicable federal rate in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as part
of such transaction or (ii) in the case of a non-corporate taxpayer, to the
extent such taxpayer has made an election under Code Section 163(d)(4) to have
net capital gains taxed as investment income at ordinary income rates.
Long-term capital gains of certain non-corporate taxpayers generally are
subject to a lower maximum tax rate (20%) than ordinary income or short-term
capital gains of such taxpayers (39.6%) for property held for more than one
year. The maximum tax rate for corporations currently is the same with respect
to both ordinary income and capital gains.
STRIPPED SECURITIES
General
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." In the opinion of Brown & Wood LLP, the Securities will
be subject to those rules if (i) the Depositor or any of its affiliates
retains (for its own account or for purposes of resale), in the form of
Retained Interest or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Depositor or any of its affiliates is
treated as having an ownership interest in the Mortgage Loans to the extent it
is paid (or retains) servicing compensation in an amount greater than
reasonable consideration for servicing the Mortgage Loans (see "--Standard
Securities--Recharacterization of Servicing Fees" above), and (iii) a Class of
Securities are issued in two or more Classes or Subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on
the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Standard Securities--Recharacterization of Servicing Fees." Although not
free from doubt, for purposes of reporting to Stripped Securityholders, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to such Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"--Standard Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as an obligation issued at an original issue discount on the date
that such stripped interest is purchased. Although the treatment of Stripped
Securities for federal income tax purposes is not clear in certain respects,
particularly where such Stripped Securities are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, in the opinion of Brown
& Wood LLP, (i) the Grantor Trust Fund will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Security should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. Although it is possible that computations with respect to
Stripped Securities could be made in one of the ways described below under
"--Possible Alternative Characterizations," the OID Regulations state, in
general, that two or more debt instruments issued by a single issuer to a
single investor in a single transaction should be treated as a single debt
instrument. Accordingly, for original issue discount purposes, all payments on
any Stripped Securities should be aggregated and treated as though they were
made on a single debt instrument. The Pooling and Servicing Agreement will
require that the Trustee make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original
issue discount, or, presumably, at a premium. This treatment indicates that
the interest component of such a Stripped Security would be treated as
qualified stated interest under the OID Regulations, assuming it is not an
interest-only or super-premium Stripped Security. Further, these regulations
provide that the purchaser of such a Stripped Security will be required to
account for any discount as market discount rather than original issue
discount if either (i) the initial discount with respect to the Stripped
Security was treated as zero under the de minimis rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described
above under "--REMICs--Taxation of Owners of Regular Securities--Market
Discount," without regard to the de minimis rule therein, assuming that a
prepayment assumption is employed in such computation.
The holder of a Stripped Security will be treated as owning an
interest in each of the Mortgage Loans held by the Grantor Trust Fund and will
recognize an appropriate share of the income and expenses associated with the
Mortgage Loans. Accordingly, an individual, trust or estate that holds a
Stripped Security directly or through a pass-through entity will be subject to
the limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any class of a Series
which is a Subordinate Security, may deduct losses incurred with respect to
the Stripped Security as described above under "--Standard Securities
General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, in the
opinion of Brown & Wood LLP, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation [ s ] . . . principally
secured by an interest in real property which is . . . . residential real
estate" within the meaning of Code Section 860G(a)(3)(A), and "loans . . .
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Securities should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buydown Mortgage Loans is uncertain.
See "--Standard Securities--Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Security must be included in ordinary income as it
accrues, in accordance with a constant yield method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the issue discount required to
be included in the income of a holder of a Stripped Security (referred to in
this discussion as a "Stripped Securityholder") in any taxable year likely
will be computed generally as described above under "--REMICs-- Taxation of
Owners of Regular Securities--Original Issue Discount" and "--Variable Rate
Regular Securities." However, with the apparent exception of a Stripped
Security qualifying as a market discount obligation as described above under
"--General," the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments to be made on the Stripped
Security to such Securityholder, presumably under the Prepayment Assumption,
other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Securityholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Securityholder's Stripped Security. While the matter
is not free from doubt, the holder of a Stripped Security should be entitled
in the year that it becomes certain (assuming no further prepayments) that the
holder will not recover a portion of its adjusted basis in such Stripped
Security to recognize a loss (which may be a capital loss) equal to such
portion of unrecoverable basis.
As an alternative to the method described above, the fact that some
or all of the interest payments with respect to the Stripped Securities will
not be made if the Mortgage Loans are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Securities. However, if final regulations
dealing with contingent interest with respect to the Stripped Securities apply
the same principles as the OID Regulations, such regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a
Stripped Security prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of
Regular Securities." Gain or loss from the sale or exchange of a Stripped
Security generally will be capital gain or loss to the Securityholder if the
Stripped Security is held as a "capital asset" within the meaning of Code
Section 1221, and will be long-term or short-term depending on whether the
Stripped Security has been held for the long-term capital gain holding period
(currently, more than one year). To the extent that a subsequent purchaser's
purchase price is exceeded by the remaining payments on the Stripped
Securities, such subsequent purchaser will be required for federal income tax
purposes to accrue and report such excess as if it were original issue
discount in the manner described above. It is not clear for this purpose
whether the assumed prepayment rate that is to be used in the case of a
Securityholder other than an original Securityholder should be the Prepayment
Assumption or a new rate based on the circumstances at the date of subsequent
purchase.
Purchase of More Than One Class of Stripped Securities. When an
investor purchases more than one Class of Stripped Securities, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Securities should be treated separately or aggregated for purposes of the
rules described above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Securityholder may be
treated as the owner of (i) one installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to interest on
each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing
the Stripped Security's pro rata share of payments of principal and/or
interest to be made with respect thereto. Alternatively, the holder of one or
more Classes of Stripped Securities may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Security, or Classes of Stripped Securities in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to
the remainder. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to such regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition,
Securityholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such
information will include the amount of original issue discount accrued on
Securities held by persons other than Securityholders exempted from the
reporting requirements. However, the amount required to be reported by the
Trustee may not be equal to the proper amount of original issue discount
required to be reported as taxable income by a Securityholder, other than an
original Securityholder that purchased at the issue price. In particular, in
the case of Stripped Securities, such reporting will be based upon a
representative initial offering price of each Class of Stripped Securities
except as set forth in the applicable Prospectus Supplement. The Trustee will
also file such original issue discount information with the Internal Revenue
Service. If a Securityholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Securityholder has not reported all interest and dividend income required to
be shown on his federal income tax return, 31% backup withholding may be
required in respect of any reportable payments, as described above under
"--REMICs--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441
or 1442 to nonresident aliens, foreign corporations, or other Non-U.S. persons
generally will be subject to 30% United States withholding tax, or such lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the Securityholder on the sale or
exchange of such a Security also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
PARTNERSHIP TRUST FUNDS
Classification of Partnership Trust Funds
With respect to each series of Partnership Securities or Debt
Securities, Brown & Wood LLP will deliver its opinion that the Trust Fund will
not be a taxable mortgage pool or an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the related
Agreement and related documents will be complied with, and on counsel's
opinion that the nature of the income of the Trust Fund will exempt it from
the rule that certain publicly traded partnerships are taxable as
corporations.
Characterization of Investments in Partnership Securities and
Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities 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 Debt Securities held by a real
estate investment trust will not constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A), but Partnership Securities held by a
real estate investment trust will qualify under those sections based on the
real estate investments trust's proportionate interest in the assets of the
Partnership Trust Fund based on capital accounts.
Taxation of Debt Securityholders
(i) Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Brown & Wood LLP will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this
characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal
income tax purposes, the Debt Securities might be treated as equity interests
in the Partnership Trust, and the timing and amount of income allocable to
holders of such Debt Securities may be different than as described in the
following paragraph.
Debt Securities generally will be subject to the same rules of
taxation as Regular Securities issued by a REMIC, as described above, except
that (i) income reportable on Debt Securities is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method
and (ii) the special rule treating a portion of the gain on sale or exchange
of a Regular Security as ordinary income is inapplicable to Debt Securities.
See "--REMICs--Taxation of Owners of Regular Securities" and "--Sale or
Exchange of Regular Securities."
Taxation of Owners of Partnership Securities
(i) Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable Prospectus Supplement, the
Depositor will agree, and the Securityholders will agree by their purchase of
Securities, to treat the Partnership Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Partnership Trust Fund, the partners of the partnership
being the Securityholders (including the Depositor), and the Debt Securities
(if any) being debt of the partnership. However, the proper characterization
of the arrangement involving the Partnership Trust Fund, the Partnership
Securities, the Debt Securities, and the Depositor is not clear, because there
is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be
considered debt of the Depositor or the Partnership Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Securityholders as compared to the consequences from treatment of the
Partnership Securities as equity in a partnership, described below. The
following discussion assumes that the Partnership Securities represent equity
interests in a partnership.
(ii) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Securityholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Partnership Trust Fund. It is anticipated that
the Partnership Trust Fund's income will consist primarily of interest earned
on the Mortgage Loans (including appropriate adjustments for market discount,
original issue discount and bond premium) as described above under "--Grantor
Trust Funds--Standard Securities--General," and "--Premium and Discount" and
any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Debt Securities, servicing and other fees, and losses or
deductions upon collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement and related documents). The Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the
interest that accrues on the Partnership Securities in accordance with their
terms for such Due Period, including interest accruing at the applicable
pass-through rate for such Due Period and interest on amounts previously due
on the Partnership Securities but not yet distributed; (ii) any Partnership
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Partnership
Securities over their initial issue price; and (iii) any other amounts of
income payable to the Securityholders for such Due Period. Such allocation
will be reduced by any amortization by the Partnership Trust Fund of premium
on Mortgage Loans that corresponds to any excess of the issue price of
Partnership Securities over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the Depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the Internal Revenue
Service would not require a greater amount of income to be allocated to
Securityholders. Moreover, even under the foregoing method of allocation,
Securityholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Securities on the accrual basis and Securityholders may become liable for
taxes on Partnership Trust Fund income even if they have not received cash
from the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that
is a pension, profit sharing or employee benefit plan or other tax-exempt
entity (including an individual retirement account) may constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of
the Master Servicer but not interest expense) allocable to an individual,
estate or trust Securityholder would be miscellaneous itemized deductions
subject to the limitations described above under "--Grantor Trust
Funds--Standard Securities--General." Accordingly, such deductions might be
disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Partnership Trust
Fund.
Discount income or premium amortization with respect to each Mortgage
Loan would be calculated in a manner similar to the description above under
"--Grantor Trust Funds--Standard Securities--General" and "--Premium and
Discount." Notwithstanding such description, it is intended that the
Partnership Trust Fund will make all tax calculations relating to income and
allocations to Securityholders on an aggregate basis with respect to all
Mortgage Loans held by the Partnership Trust Fund rather than on a Mortgage
Loan-by-Mortgage Loan basis. If the Internal Revenue Service were to require
that such calculations be made separately for each Mortgage Loan, the
Partnership Trust Fund might be required to incur additional expense, but it
is believed that there would not be a material adverse effect on
Securityholders.
(iii) Discount and Premium
It is not anticipated that the Mortgage Loans will have been issued
with original issue discount and, therefore, the Partnership Trust Fund should
not have original issue discount income. However, the purchase price paid by
the Partnership Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Mortgage Loans at the time of purchase.
If so, the Mortgage Loans will have been acquired at a premium or discount, as
the case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis.)
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans.
As indicated above, a portion of such market discount income or premium
deduction may be allocated to Securityholders.
(iv) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If such a termination occurs, it would
cause a deemed contribution of the assets of a Partnership Trust Fund (the
"old partnership") to a new Partnership Trust Fund (the "new partnership") in
exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange. The Partnership Trust Fund will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Partnership Trust Fund may
be subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply due to lack of data.
(v) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
Securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Partnership Security. In addition, both the tax basis in the
Partnership Securities and the amount realized on a sale of an Partnership
Security would include the holder's share of the Debt Securities and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Securities at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of such
aggregate tax basis to the Partnership Securities sold (rather than
maintaining a separate tax basis in each Partnership Security for purposes of
computing gain or loss on a sale of that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give
rise to special tax reporting requirements. The Partnership Trust Fund does
not expect to have any other assets that would give rise to such special
reporting considerations. Thus, to avoid those special reporting requirements,
the Partnership Trust Fund will elect to include market discount in income as
it accrues.
If a Securityholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Securities that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Securities.
(vi) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses
will be determined each Due Period and the tax items for a particular Due
Period will be apportioned among the Securityholders in proportion to the
principal amount of Partnership Securities owned by them as of the close of
the last day of such Due Period. As a result, a holder purchasing Partnership
Securities may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a Due Period convention may not be permitted by
existing regulations. If a Due Period convention is not allowed (or only
applies to transfers of less than all of the partner's interest), taxable
income or losses of the Partnership Trust Fund might be reallocated among the
Securityholders. The Depositor will be authorized to revise the Partnership
Trust Fund's method of allocation between transferors and transferees to
conform to a method permitted by future regulations.
(vii) Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security exceeds the adjusted basis of such
Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder
will be capital gain or loss.
(viii) Section 754 Election
In the event that a Securityholder sells its Partnership Securities
at a profit (loss), the purchasing Securityholder will have a higher (lower)
basis in the Partnership Securities than the selling Securityholder had. The
tax basis of the Partnership Trust Fund's assets would not be adjusted to
reflect that higher (or lower) basis unless the Partnership Trust Fund were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Partnership Trust Fund will not make such an election. As a
result, Securityholder might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Securities.
(ix) Administrative Matters
The Trustee is required to keep or have kept complete and accurate
books of the Partnership Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year
of the Partnership Trust Fund will be the calendar year. The Trustee will file
a partnership information return (Form 1065) with the Internal Revenue Service
for each taxable year of the Partnership Trust Fund and will report each
Securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The
Trustee will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and such nominees will be required to forward such information to the
beneficial owners of the Partnership Securities. Generally, holders must file
tax returns that are consistent with the information return filed by the
Partnership Trust Fund or be subject to penalties unless the holder notifies
the Internal Revenue Service of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Securities so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly-owned agency
or instrumentality of either of the foregoing, and (z) certain information on
Partnership Securities that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Securities through a nominee are required to furnish directly to
the Trustee information as to themselves and their ownership of Partnership
Securities. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any such information statement to the Partnership
Trust Fund. The information referred to above for any calendar year must be
furnished to the Partnership Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Partnership Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the
Pooling and Servicing Agreement and, as such, will be responsible for
representing the Securityholders in any dispute with the Internal Revenue
Service. The Code provides for administrative examination of a partnership as
if the partnership were a separate and distinct taxpayer. Generally, the
statute of limitations for partnership items does not expire until three years
after the date on which the partnership information return is filed. Any
adverse determination following an audit of the return of the Partnership
Trust Fund by the appropriate taxing authorities could result in an adjustment
of the returns of the Securityholders, and, under certain circumstances, a
Securityholder may be precluded from separately litigating a proposed
adjustment to the items of the Partnership Trust Fund. An adjustment could
also result in an audit of a Securityholder's returns and adjustments of items
not related to the income and losses of the Partnership Trust Fund.
(x) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be
considered to be engaged in a trade or business in the United States for
purposes of federal withholding taxes with respect to Non-U.S. Persons,
because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Partnership Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Partnership Trust Fund will withhold as
if it were so engaged in order to protect the Partnership Trust Fund from
possible adverse consequences of a failure to withhold. The Partnership Trust
Fund expects to withhold on the portion of its taxable income that is
allocable to Securityholders who are Non-U.S. Persons pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for Non-U.S. Persons that are taxable as
corporations and 39.6% for all other foreign holders. Amounts withheld will be
deemed distributed to the Non-U.S. Person Securityholders. Subsequent adoption
of Treasury regulations or the issuance of other administrative pronouncements
may require the Partnership Trust Fund to change its withholding procedures.
In determining a holder's withholding status, the Partnership Trust Fund may
rely on Form W-8, Form W-9 or the holder's certification of nonforeign status
signed under penalties of perjury.
Each Non-U.S. Person holder might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Partnership Trust
Fund's income. Each Non-U.S. Person holder must obtain a taxpayer
identification number from the Internal Revenue Service and submit that number
to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A Non-U.S. Person holder generally would be
entitled to file with the Internal Revenue Service a claim for refund with
respect to taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
Securityholder who is a Non-U.S. Person generally will be considered
guaranteed payments to the extent such payments are determined without regard
to the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are Non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30%, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a Non-U.S. Person holder would only be entitled to claim
a refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
(xi) Backup Withholding
Distributions made on the Partnership Securities and proceeds from
the sale of the Partnership Securities will be subject to a "backup"
withholding tax of 31% if, in general, the Securityholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE MAY NOT BE APPLICABLE
DEPENDING UPON A SECURITYHOLDER'S PARTICULAR TAX SITUATION. THE DEPOSITOR
RECOMMENDS THAT PROSPECTIVE PURCHASERS CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP SECURITIES AND DEBT
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership,
and disposition of the Securities offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Securities offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of
other applicable federal, state and local law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and the Code prohibit a broad
range of transactions involving assets of a Plan and persons ("Parties in
Interest") who have certain specified relationships to the Plan unless a
statutory or administrative exemption is available. Certain Parties in
Interest that participate in a prohibited transaction may be subject to an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans,
Contracts, Unsecured Home Improvement Loans, Agency Securities, Mortgage
Securities and other assets included in a related Trust Fund to be deemed Plan
assets. Section 2510.3-101 of the regulations of the United States Department
of Labor ("DOL") provides that when a Plan acquires an equity interest in an
entity, the Plan's assets include both such equity interest and an undivided
interest in each of the underlying assets of the entity, unless certain
exceptions not applicable here apply, or unless the equity participation in
the entity by "benefit plan investors" (i.e., Plans and certain employee
benefit plans not subject to ERISA) is not "significant," both as defined
therein. For this purpose, in general, equity participation by benefit plan
investors will be "significant" on any date if 25% or more of the value of any
class of equity interests in the entity is held by benefit plan investors. To
the extent the Securities are treated as equity interests for purposes of DOL
regulations Section 2510.3-101, equity participation in a Trust Fund will be
significant on any date if immediately after the most recent acquisition of
any Security, 25% or more of any class of Securities is held by benefit plan
investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement
Loans, Agency Securities, Mortgage Securities and other assets included in a
Trust Fund constitute Plan assets, then any party exercising management or
discretionary control regarding those assets, such as the Servicer or Master
Servicer, may be deemed to be a Plan "fiduciary" and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code with respect to the investing Plan. In addition, if the
Mortgage Loans, Contracts, Unsecured Home Improvement Loans, Agency
Securities, Mortgage Securities and other assets included in a Trust Fund
constitute Plan assets, the purchase of Securities by a Plan, as well as the
operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
The DOL issued an individual exemption (the "Exemption"), to DBSI
which generally exempts from the application of the prohibited transaction
provisions of Sections 406(a) and 407 of ERISA, and the excise taxes imposed
on such prohibited transactions pursuant to Section 4975(a) and (b) of the
Code, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of Securities
underwritten by an Underwriter (as hereinafter defined), that (a) represent a
beneficial ownership interest in the assets of a Trust Fund and entitle the
holder the pass-through payments of principal, interest and/or other payments
made with respect to the assets of the Trust Fund or (b) are denominated as a
debt instrument and represent an interest in a REMIC, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations," the term "Underwriter" shall include (a) DBSI,
(b) any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with DBSI, and (c) any
member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a class of
Securities.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of
Securities to be eligible for exemptive relief thereunder. First, the
acquisition of Securities by a Plan must be on terms that are at least as
favorable to the Plan as they would be in an arm's-length transaction with an
unrelated party. Second, the Exemption only applies to Securities evidencing
rights and interests not subordinated to the rights and interests evidenced by
the other Securities of the same series. Third, the Securities at the time of
acquisition by the Plan must be rated in one of the three highest generic
rating categories by Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service ("Moody's"),
Duff & Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch"). Fourth,
the Trustee cannot be an affiliate of any member of the "Restricted Group"
which consists of the Underwriter, the Depositor, the Trustee, the Master
Servicer, any Servicer, any insurer and any obligor with respect to Assets
constituting more than 5% of the aggregate unamortized principal balance of
the Assets in the related Trust Fund as of the date of initial issuance of the
Securities. Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the Securities; the sum of all payments made to and retained by
the Depositor pursuant to the assignment of the Assets to the related Trust
Fund must represent not more than the fair market value of such obligations;
and the sum of all payments made to and retained by the Servicer must
represent not more than reasonable compensation for such person's services
under the related Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the investing Plan must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended. In addition, the Trust Fund must meet the following requirements: (i)
the assets of the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) securities evidencing
interests in such other investment pools must have been rated in one of the
three highest generic rating categories by S&P, Moody's, DCR, or Fitch for at
least one year prior to the Plan's acquisition of the securities; and (iii)
securities evidencing interests in such other investment pools must have been
purchased by investors other than Plans for at least one year prior to any
Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make
its own determination that the general conditions set forth above will be
satisfied with respect to such Security. However, to the extent Securities are
subordinate, the Exemption will not apply to an investment by a Plan. In
addition, any Securities representing a beneficial ownership interest in
Unsecured Home Improvement Loans or Revolving Credit Line Loans will not
satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407 of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c) (1)(A) through (D)
of the Code) in connection with the direct or indirect sale, exchange,
transfer, holding or the direct or indirect acquisition or disposition in the
secondary market of Securities by Plans. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Security on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Securities,
an Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in
connection with (1) the direct or indirect sale, exchange or transfer of
Securities in the initial issuance of Securities between the Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan assets in the
Securities is (a) an obligor with respect to 5% or less of the fair market
value of the Assets or (b) an affiliate of such a person, (2) the direct or
indirect acquisition or disposition in the secondary market of Securities by a
Plan and (3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust Fund. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Securities so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the
excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the
servicing, management and operation of the Mortgage Pools, provided that the
general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a "party in interest" (within the
meaning of Section 3(14) of ERISA) or a "disqualified person" (within the
meaning of Section 4975(e)(2) of the Code) with respect to an investing Plan
by virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in such
Securities ("Non-Equity Securities") would not cause the assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee, or Underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because such parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such
parties has investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may
be available. Accordingly, Non-Equity Securities may not be purchased using
the assets of any Plan if any of the Depositor, the Servicer, the Trustee or
Underwriter has investment authority with respect to such assets.
In addition, certain affiliates of the Depositor might be considered
or might become Parties in Interest with respect to a Plan. Also, any holder
of Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager," PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving
bank collective investment funds, PTCE 95-60, which exempts certain
transactions involving insurance company general accounts, or PTCE 96-23,
which exempts certain transactions effected on behalf of a Plan by certain
"in-house" asset managers. It should be noted, however, that even if the
conditions specified in one or more of these exemptions are met, the scope of
relief provided by these exemptions may not necessarily cover all acts that
might be construed as prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase
Securities should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment, the availability of
the exemptive relief provided in the Exemption and the potential applicability
of any other prohibited transaction exemption in connection therewith. In
particular, a Plan fiduciary which proposes to cause a Plan to purchase
Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should
consider the applicability of PTCE 83-1, which provides exemptive relief for
certain transactions involving mortgage pool investment trusts. The Prospectus
Supplement with respect to a series of Securities may contain additional
information regarding the application of the Exemption, PTCE 83-1 or any other
exemption, with respect to the Securities offered thereby. In addition, any
Plan fiduciary that proposes to cause a Plan to purchase Strip Securities
should consider the federal income tax consequences of such investment.
Any Plan fiduciary considering whether to purchase a Security 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.
The sale of Securities to a Plan is in no respect a representation by
the Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT CONSIDERATIONS
Each class of Offered Securities will be rated at the date of
issuance in one of the four highest rating categories by at least one Rating
Agency. The related Prospectus Supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" for purposes
of the SMMEA. Generally, only classes of Offered Securities that (i) are rated
in one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a series representing interests in, or secured by, a Trust
Fund consisting of loans secured by first liens on real property and
originated by certain types of originators specified in SMMEA, will be
"mortgage related securities" for purposes of SMMEA. Those classes of Offered
Securities qualifying as "mortgage related securities" will constitute legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including, but not limited to, state
chartered savings banks, commercial banks, savings and loan associations and
insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the
United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991,
cut-off for such enactments, limiting to varying extents the ability of
certain entities (in particular, insurance companies) to invest in mortgage
related securities secured by liens on residential, or mixed residential and
commercial, properties, in most cases by requiring the affected investors to
rely solely upon existing state law, and not SMMEA.
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 "mortgage related securities" without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
such regulations as the applicable federal regulatory authority may prescribe.
In this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell
for their own account, without limitation as to a percentage of the bank's
capital and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. ss.1.5), certain "Type IV securities," defined in 12 C.F.R. ss.1.2(l)
to include certain "residential mortgage related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement")
of the Federal Financial Institutions Examination Council ("FFIEC"), which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the Office of Thrift
Supervision, effective May 26, 1998, and by the NCUA, effective October 1,
1998. The 1998 Policy Statement sets forth general guidelines which depository
institutions must follow in managing risks (including market, credit,
liquidity, operational (transaction), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes. Until October 1, 1998, federal credit
unions will still be subject to the FFIEC's now-superseded "Supervisory Policy
Statement on Securities Activities" dated January 28, 1992, as adopted by the
NCUA with certain modifications, which prohibited depository institutions from
investing in certain "high-risk mortgage securities," except under limited
circumstances, and set forth certain investment practices deemed to be
unsuitable for regulated institutions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
those classes under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
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
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and with regard to any Offered
Securities issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain classes of Offered Securities as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Securities for legal investment, financial
institution regulatory, or other purposes, or as to the ability of particular
investors to purchase any Offered Securities under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity
of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their own legal advisors
in determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in
any jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. If
so specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Deutsche Bank Securities Inc.
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will
not be obligated to pay for any Securities agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Securities, underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the
form of discounts, concessions or commissions. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the
Securities will be distributed by DBSI acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or
agreed to purchase. If DBSI acts as agent in the sale of Securities, DBSI will
receive a selling commission with respect to each series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Mortgage Loans as of the Cut-off Date. The
exact percentage for each series of Securities will be disclosed in the
related Prospectus Supplement. To the extent that DBSI elects to purchase
Securities as principal, DBSI may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Securities of such series.
The Depositor will indemnify DBSI and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments DBSI and any underwriters may be required
to make in respect thereof.
In the ordinary course of business, DBSI and the Depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's mortgage loans
pending the sale of such mortgage loans or interests therein, including the
Securities.
The Depositor anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, only those classes rated in one of
the four highest rating categories by any Rating Agency will be offered
hereby. Any unrated class may be initially retained by the Depositor, and may
be sold by the Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences
to Securityholders of an investment in the Securities of a Series, will be
passed upon for the Depositor by Brown & Wood LLP, Washington, D.C.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood
of receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
<PAGE>
INDEX OF DEFINED TERMS
1986 Act....................................................................115
1998 Policy Statement.......................................................156
Accrual Securities...........................................................15
Accrued Security Interest....................................................55
Adjustable Rate Assets.......................................................32
Agency Securities.............................................................1
Agreement....................................................................63
ARM Contracts................................................................37
ARM Loans....................................................................34
ARM Unsecured Home Improvement Loans.........................................36
Asset Conservation Act......................................................102
Asset Group..................................................................15
Asset Seller.................................................................32
Assets........................................................................1
Available Distribution Amount................................................54
Balloon Payment Assets.......................................................25
Bankruptcy Code..............................................................99
Bi-weekly Assets.............................................................32
Book-Entry Securities........................................................53
Buy Down Assets..............................................................32
Buydown Funds...............................................................113
Buydown Mortgage Loans.......................................................49
Buydown Period...............................................................49
Capitalized Interest Account.................................................14
Cash Flow Agreements..........................................................1
Cede..........................................................................4
CERCLA......................................................................100
Certificates..................................................................1
Charter Act..................................................................39
Cleanup Costs...............................................................101
Code.........................................................................18
Collection Account...........................................................67
Commission....................................................................3
contract borrower............................................................93
contract lender..............................................................93
Contract Rate................................................................11
Contracts.....................................................................1
Convertible Assets...........................................................32
Cooperative..................................................................92
Cooperative Loans............................................................92
Cooperatives.................................................................33
Counterparty.................................................................31
Covered Trust................................................................29
CPR..........................................................................48
Credit Support................................................................1
Crime Control Act...........................................................105
Cut-off Date.................................................................17
DBSI.........................................................................20
DCR.........................................................................152
Debt Securities..............................................................18
Definitive Securities........................................................31
Deposit Trust Agreement......................................................15
Depositor.....................................................................8
Determination Date...........................................................54
Disqualified Organization...................................................128
DOL.........................................................................151
DTC...........................................................................4
ERISA........................................................................20
excess servicing............................................................138
Exchange Act..................................................................4
Excluded Plan...............................................................153
Exemption....................................................................20
Fannie Mae....................................................................1
Fannie Mae Certificates......................................................12
FDIC.........................................................................67
FFIEC.......................................................................156
FHA...........................................................................9
FHA Loans....................................................................33
Financial Instrument.........................................................31
Fitch.......................................................................152
Foreign Investors...........................................................129
Freddie Mac...................................................................1
Freddie Mac Act..............................................................40
Freddie Mac Certificate Group................................................41
Freddie Mac Certificates.....................................................12
Garn-St. Germain Act........................................................103
GEM Assets...................................................................32
Ginnie Mae....................................................................1
Ginnie Mae Certificates......................................................12
GPM Assets...................................................................32
Grantor Trust Fund..........................................................110
Grantor Trust Securities.....................................................18
Home Equity Loans.............................................................9
Home Improvement Contracts....................................................9
Home Ownership Act...........................................................27
Housing Act..................................................................27
HUD..........................................................................76
Increasing Payment Assets....................................................32
Indenture....................................................................15
Indenture Trustee.............................................................9
Indirect Participants........................................................61
Insurance Proceeds...........................................................54
Interest Accrual Period......................................................46
Interest Reduction Assets....................................................32
land sale contract...........................................................93
Land Sale Contracts...........................................................9
Level Payment Assets.........................................................32
Liquidation Proceeds.........................................................54
Loan-to-Value Ratio..........................................................34
Lock-out Date................................................................35
Lock-out Period..............................................................35
Manufactured Home............................................................11
manufactured housing contracts...............................................28
Mark to Market Regulations..................................................131
Master Servicer...............................................................8
Moody's.....................................................................152
Mortgage Loans................................................................1
Mortgage Notes...............................................................33
Mortgage Rate.................................................................9
Mortgage Securities..........................................................12
Mortgaged Properties..........................................................9
Mortgages....................................................................33
mortgagor....................................................................91
Multifamily Mortgage Loan....................................................33
Multifamily Properties........................................................9
NCUA........................................................................155
new partnership.............................................................147
New Regulations.............................................................134
Non-Equity Securities.......................................................154
Non-Pro Rata Security.......................................................115
Nonrecoverable Advance.......................................................58
Notes.........................................................................1
OCC.........................................................................155
Offered Securities............................................................1
OID Regulations.............................................................111
old partnership.............................................................147
Originators..................................................................27
Participants.................................................................61
Parties in Interest.........................................................151
Partnership Securities.......................................................18
Partnership Trust Fund......................................................110
Pass-Through Entity.........................................................128
Pass-Through Rate............................................................15
PCBs........................................................................100
Permitted Investments........................................................68
Plan.........................................................................20
Plans.......................................................................151
Pooling and Servicing Agreement...............................................8
Pre-Funded Amount............................................................14
Pre-Funding Account..........................................................14
Pre-Funding Period...........................................................14
prepayment...................................................................48
Prepayment Assumption.......................................................116
Prepayment Premium...........................................................35
PTCE........................................................................154
Purchase Price...............................................................65
Rating Agency................................................................21
RCRA........................................................................101
Record Date..................................................................53
Regular Securities...........................................................18
Regular Securityholder......................................................115
Related Proceeds.............................................................58
Relief Act..................................................................105
REMIC.........................................................................3
REMIC Pool..................................................................111
REMIC Provisions............................................................110
REMIC Regulations...........................................................111
REMIC Securities.............................................................63
REO Property.................................................................59
Residual Holders............................................................123
Residual Securities..........................................................18
Restricted Group............................................................152
Retained Interest............................................................78
Revolving Credit Line Loans..................................................35
RICO........................................................................105
S&P.........................................................................152
SBJPA of 1996...............................................................114
secured-creditor exemption..................................................101
Securities....................................................................1
Security.....................................................................63
Security Balance.............................................................15
Security Owners...............................................................4
Securityholders...............................................................4
senior lien..................................................................26
Senior Securities............................................................15
Servicemen's Readjustment Act................................................43
Servicer......................................................................8
Servicing Standard...........................................................71
Single Family Mortgage Loan..................................................33
Single Family Properties......................................................9
SMMEA........................................................................20
SPA..........................................................................48
Special Servicer.............................................................80
Standard Securities.........................................................136
Startup Day.................................................................111
Step-up Rate Assets..........................................................32
Strip Securities.............................................................15
Stripped Agency Securities...................................................42
Stripped Securityholder.....................................................142
Subordinate Securities.......................................................15
Sub-prime Mortgage Loans.....................................................26
Subsequent Assets............................................................14
Superliens..................................................................100
Taxable Mortgage Pools......................................................111
thrift institutions.........................................................127
Tiered REMICS...............................................................114
Title V.....................................................................104
Title VIII..................................................................105
Trust Assets..................................................................3
Trust Fund....................................................................1
Trustee.......................................................................9
UCC..........................................................................61
Underlying Servicing Agreement................................................8
Unsecured Home Improvement Loans..............................................1
UST.........................................................................101
VA............................................................................9
VA Guaranty Policy...........................................................77
VA Loans.....................................................................33
Value........................................................................34
Voting Rights................................................................81
Warranting Party.............................................................66
