As filed with the Securities and Exchange Commission on September 30, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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ACE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 56-2088493
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6525 MORRISON BOULEVARD
SUITE 318
CHARLOTTE, NORTH CAROLINA 28211
(704) 365-0569
---------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
ELIZABETH S. ELDRIDGE
ACE SECURITIES CORP.
6525 MORRISON BOULEVARD
SUITE 318
CHARLOTTE, NORTH CAROLINA 28211
(704) 365-0569
--------------------------------------------------------
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
EDWARD E. GAINOR
BROWN & WOOD LLP
815 CONNECTICUT AVENUE, N.W.
SUITE 701
WASHINGTON, D.C. 20006
(202) 973-0626
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
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If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. |X|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================================
Amount Being Proposed Maximum Proposed Maximum Amount of
Title of Securities Being Registered Registered Offering Price Per Aggregate Offering Registration
Unit(1) Price(1) Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Notes and Asset-Backed $1,000,000 100% $1,000,000 $278
Certificates
================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
which is part of this Registration Statement is a combined prospectus and
includes all the information currently required in a prospectus relating to
securities covered by Registration Statement No. 333-56213 previously filed by
the Registrant.
-----------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, SEPTEMBER [ ], 1999
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES
[ ]
ORIGINATOR AND SERVICER
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- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of
this prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trust fund only and
will not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
The trust fund will issue certificates including the following:
CLASS INTEREST
CLASS PRINCIPAL AMOUNT(1) RATE
----- ------------------- --------
[ ].............................. $[ ] [ ]
[ ].............................. [ ] [ ]
[ ].............................. [ ] [ ]
-------------------
(1) These amounts are approximate, as described in this prospectus supplement.
(2) Interest will accrue on the Class [ ] and [ ] Certificates at [described as
applicable].
This prospectus supplement and the accompanying prospectus relate only to
the offering of the certificates listed in the table above and not to the other
classes of certificates that will be issued by the trust fund as described in
this prospectus supplement.
[Describe assets of trust fund.]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Describe underwriting arrangements.]
On or about [ ], delivery of the certificates offered by this prospectus
supplement will be made through the book-entry facilities of [ ].
Underwriter:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates 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 certificates, and (2) this
prospectus supplement, which describes the specific terms of your
certificates.
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 certificates 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 certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the certificates
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 table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
<TABLE>
<CAPTION>
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
Page Page
---- ----
<S> <C> <C> <C>
Summary of Terms..................................S-7 Final Scheduled Distribution Date.............S-24
The Offered Certificates.......................S-7 Reports to Certificateholders.................S-24
The Mortgage Loans.............................S-9 Optional Purchase of Mortgage Loans;
Servicing of the Mortgage Loans................S-9 Termination of the Trust Fund ................S-24
Optional Purchase of Mortgage Loans............S-9 The Trustee...................................S-25
Tax Status....................................S-10 [The Insurance Policy............................S-25
ERISA Considerations..........................S-10 The Insurer...................................S-25
Legal Investment Considerations...............S-10 Insurer Financial Information.................S-25
Ratings of the Certificates...................S-10 Where You Can Obtain Additional
Risk Factors.....................................S-11 Information About the Insurer ................S-26
[Some of the loans in the mortgage pool Year 2000 Readiness Disclosure................S-26
are more likely to default than others, Financial Strength Ratings of the Insurer.....S-26
and higher than expected defaults on these The Insurance Policy..........................S-26
loans could reduce the yield on your Description of the Mortgage Pool.................S-26
certificates .................................S-11 General.......................................S-26
[Mortgage Loan Interest Rates May Limit Adjustable Rate Mortgage Loans................S-27
Interest Rates on the Certificates ...........S-11 [The Index....................................S-27
[Potential Inadequacy of Credit The Mortgage Loans............................S-27
Enhancement for the Class [ ] Certificates ...S-12 [Subsequent Mortgage Loans....................S-36
[Special Risks for the Class [ ] Additional Information...........................S-36
Certificates .................................S-13 [Originator/Servicer.............................S-37
[Effect of Lack of Primary Mortgage General.......................................S-37
Insurance on the Class [ ] Certificates ......S-13 Lending Activities and Loan Sales.............S-37
Unpredictability and Effect of Loan Servicing................................S-37
Prepayments ..................................S-14 Underwriting Guidelines.......................S-38
Geographic Concentration of Mortgage Servicing Practices and Experience............S-38
Loans ........................................S-15 The Pooling and Servicing Agreement..............S-39
Real Estate Market May Affect Performance General.......................................S-39
of Mortgage Loans ............................S-15 Assignment of Mortgage Loans..................S-39
[Early Principal Payment From Cash Voting Rights.................................S-40
Remaining in Pre-Funding Account .............S-15 General Servicing Provisions..................S-40
You will not receive physical Prepayment Interest Shortfalls................S-41
certificates, which can cause delays in Advances......................................S-41
distributions and hamper your ability to Servicing Advances............................S-41
pledge or resell your certificates ...........S-16 Collection of Taxes and Insurance Premiums....S-42
Potential Disruption of Computer Systems .....S-16 Insurance Coverage............................S-42
Limited Ability to Resell Certificates........S-16 Purchases of Defaulted Mortgage Loans.........S-42
Description of the Certificates..................S-17 Evidence as to Compliance.....................S-42
General.......................................S-17 Servicing Compensation and Payment of
[Pre-Funding Account..........................S-18 Expenses ...................................S-42
Book-Entry Registration.......................S-18 Subservicing..................................S-43
Distributions of Interest.....................S-20 Resignation or Removal of the Servicer........S-43
[Determination of Index.......................S-21 Yield Considerations.............................S-44
Distributions of Principal....................S-21 General.......................................S-44
Credit Enhancement............................S-22 Overcollateralization.........................S-45
[The Reserve Fund.............................S-23
Page
<PAGE>
Page Page
---- ----
[Subordination of the Class [ ] Use of Proceeds..................................S-50
Certificates .................................S-46 Underwriting.....................................S-50
Weighted Average Life.........................S-46 ERISA Considerations.............................S-50
Material Federal Income Tax Considerations.......S-49 Experts..........................................S-50
General.......................................S-49 Legal Matters....................................S-51
Taxation of Offered Certificates..............S-49 Ratings..........................................S-51
State Income Tax Considerations..................S-49 Glossary of Defined Terms........................S-52
Legal Investment Considerations..................S-49 Annex I..........................................S-53
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS
Page Page
---- ----
<S> <C> <C> <C>
Description of the Trust Funds......................2 Material Terms of the Indenture.................60
Assets...........................................2 Description of Credit Support......................64
Mortgage Loans...................................4 General.........................................64
Contracts........................................8 Subordinate Securities..........................65
Agency Securities...............................10 Cross-Support Provisions........................65
Mortgage Securities.............................14 Limited Guarantee...............................65
FHA Loans and VA Loans..........................15 Financial Guaranty Insurance Policy or
Pre-Funding Accounts............................16 Surety Bond ..................................65
Accounts........................................16 Letter of Credit................................65
Credit Support..................................17 Pool Insurance Policies.........................65
Cash Flow Agreements............................17 Special Hazard Insurance Policies...............66
Use of Proceeds....................................17 Borrower Bankruptcy Bond........................66
Yield Considerations...............................17 Reserve Funds...................................66
General.........................................17 Overcollateralization...........................67
Interest Rate...................................18 Certain Legal Aspects of Mortgage Loans............67
Timing of Payment of Interest...................18 General.........................................67
Payments of Principal; Prepayments..............18 Types of Mortgage Instruments...................68
Prepayments--Maturity and Weighted Interest in Real Property.......................68
Average Life .................................20 Cooperative Loans...............................69
Other Factors Affecting Weighted Average Life..21 Land Sale Contracts.............................70
The Depositor......................................24 Foreclosure.....................................71
Description of the Securities......................24 Junior Mortgages................................75
General.........................................24 Anti-Deficiency Legislation and Other
Distributions...................................25 Limitations on Lenders .......................76
Available Distribution Amount...................26 Environmental Considerations....................77
Distributions of Interest on the Due-on-Sale Clauses.............................79
Securities....................................27 Prepayment Charges..............................80
Distributions of Principal of the Subordinate Financing...........................80
Securities....................................28 Applicability of Usury Laws.....................81
Components......................................29 Alternative Mortgage Instruments................81
Distributions on the Securities of Soldiers' and Sailors' Civil Relief Act
Prepayment Premiums ..........................29 of 1940 ......................................82
Allocation of Losses and Shortfalls.............29 Forfeitures in Drug and RICO Proceedings........82
Advances in Respect of Delinquencies............29 Certain Legal Aspects of the Contracts.............83
Reports to Securityholders......................30 General.........................................83
Termination.....................................33 Security Interests in the Manufactured Homes....83
Optional Purchases..............................33 Enforcement of Security Interests in
Book-Entry Registration and Definitive Manufactured Homes ...........................85
Securities ...................................33 Soldiers' and Sailors' Civil Relief Act
Description of the Agreements......................38 of 1940 ......................................86
Agreements Applicable to a Series...............38 Consumer Protection Laws........................86
Material Terms of the Pooling and Servicing Transfers of Manufactured Homes;
Agreements and Underlying Servicing Enforceability of "Due-on-Sale" Clauses ......86
Agreements ...................................39 Applicability of Usury Laws.....................87
<PAGE>
Page Page
---- ----
Material Federal Income Tax Considerations.........87 ERISA Considerations..............................134
General.........................................87 General........................................134
REMICs..........................................89 Pre-Funding Accounts...........................138
FASITs.........................................114 Legal Investment..................................139
Grantor Trust Funds............................118 Methods of Distribution...........................141
Standard Securities............................119 Additional Information............................142
Stripped Securities............................122 Incorporation of Certain Documents by Reference...143
Partnership Trust Funds........................127 Legal Matters.....................................144
Consequences for Particular Investors..........133 Financial Information.............................144
State and Other Tax Considerations................133 Rating............................................144
Page
</TABLE>
<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 CERTIFICATES, 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 MORTGAGE
LOANS IN THE TRUST FUND OR IN ANY POOL, THAT PERCENTAGE HAS BEEN
CALCULATED ON THE BASIS OF THE TOTAL PRINCIPAL BALANCE OF THOSE
MORTGAGE LOANS AS OF [ ], UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN
THIS PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF THE CERTIFICATES --
DISTRIBUTIONS OF PRINCIPAL" HOW THE PRINCIPAL BALANCE OF A MORTGAGe
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 MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR
PRINCIPAL BALANCES, UNLESS WE SPECIFY OTHERWISE.]
<PAGE>
THE OFFERED CERTIFICATES
ACE Securities Corp.'s [ ] Pass-Through Certificates consist of the
following classes: [ ]. Only the [ ] Certificates are being offered by this
prospectus supplement. These certificates will be issued in book-entry form.
See "Description of the Certificates -- General" in this prospectus
supplement for a discussion of the minimum denominations and the incremental
denominations of each class of certificates.
The certificates represent ownership interests in a trust fund, the
assets of which consist primarily of [describe assets of trust fund.]
The certificates will have an approximate total initial principal amount
of $[ ]. Any difference between the total principal amount of the certificates
on the date they are issued and the approximate total principal amount of the
certificates on the date of this prospectus supplement will not exceed 5%.
PAYMENTS ON THE CERTIFICATES
Principal and interest on the certificates will be payable on the [25th]
day of each month, beginning in [ ]. However, if the [25th] day is not a
business day, distributions will be made on the next business day after the
[25th] day of the month.
INTEREST PAYMENTS
Interest will accrue on each class of certificates, [other than the Class
[ ] Certificate], at the applicable annual rates described in this prospectus
supplement.
See "Description of the Certificates -- Distributions of Interest" in
this prospectus supplement.
PRINCIPAL PAYMENTS
The amount of principal payable on the certificates, [other than the
Class [ ] Certificate], will be determined by (1) funds actually received on
the mortgage loans in [each] pool that are available to make payments on the
certificates, (2) the amount of interest received or advanced on the mortgage
loans that is used to pay principal on the certificates, calculated as
described in this prospectus supplement, (3) [formulas that allocate a portion
of principal payments received on the mortgage loans to each class of
certificates, as described in this prospectus supplement,] and (4) [ ]. Funds
actually received on the mortgage loans may consist of expected, scheduled
payments, and unexpected payments resulting from prepayments or defaults by
borrowers, liquidation of defaulted mortgage loans, or repurchases of mortgage
loans under the circumstances described in this prospectus supplement.
We explain how principal is paid on the certificates under "Description
of the Certificates -- Distributions of Principal" in this prospectus
supplement.
[PREPAYMENT PENALTIES ON THE MORTGAGE LOANS
The holder of the Class [ ] Certificate will be entitled to receive any
prepayment penalties received on the mortgage loans. These amounts will not be
available to make payments on other classes of certificates.
See "Description of the Certificates" and "Description of the Mortgage
Pools -- General" in this prospectus supplement.]
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the certificates will be the assets of the trust fund. The trust fund will
have no other source of cash and no entity other than the trust fund will be
required or expected to make any payments on the certificates.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE CERTIFICATES
[Describe any applicable financial guaranty insurance policy or guarantee.]
[Subordination of Payments
The [ ] certificates will have a payment priority as a group over the
Class [ ] Certificates both for payments of interest and payments of
principal. No amounts will be paid to the Holder of the Class [ ] Certificate
on any distribution date until all amounts due to the senior certificates and
the Class [ ] Certificates on that date have been paid and
overcollateralization has reached the required level.]
[Overcollateralization
On the closing date, the total principal balance of the mortgage loans is
expected to [approximately equal the total principal amount of the
certificates]. Any interest received on the mortgage loans in excess of the
amount needed to pay interest on the certificates and certain expenses and
fees of the trust fund will be used to reduce the total principal amount of
the certificates to a level set by the rating agencies until the mortgage
loans have a total principal balance that exceeds the total outstanding
principal amount of the certificates by the amount required by the rating
agencies. This condition is referred to as "overcollateralization." We cannot
assure you that sufficient interest will be generated by the mortgage loans to
create overcollateralization, to increase overcollateralization to the level
required by the rating agencies, or to maintain it at that level.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement for the
Class [ ] Certificates" and "Description of the Certificates -- Credit
Enhancement -- Subordination" and "-- Overcollateralization" in this
prospectus supplement.]
[Allocation of Losses
As described in this prospectus supplement, amounts representing losses
on the mortgage loans in excess of overcollateralization will be applied to
reduce the principal amount of the Class [ ] Certificates until their
principal amount has been reduced to zero.
o If a loss has been allocated to reduce the principal amount of your
Class [ ] Certificate, you will receive no payment in respect of that
reduction at that time.
o After overcollateralization has been created and has been increased to
the required level, you will receive the amount of that loss if there
are sufficient funds to pay you, as described in this prospectus
supplement, but you will not receive any interest on that amount.
After the principal amount of the Class [ ] Certificates has been reduced
to zero, amounts representing losses on the mortgage loans will be paid to
holders of the senior certificates by [ ], to the extent funds available are
insufficient to cover such losses.
See "Description of the Certificates -- Credit Enhancement -- Allocation
of Losses" and "The Insurance Policy" in this prospectus supplement.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the assets
of the trust fund will consist of [two] pools of mortgage loans with a total
principal balance of approximately $[ ]. The mortgage 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.
[Description of mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
[The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.]
See "Description of the Mortgage Pools" in this prospectus supplement for
a general description of the mortgage loans and "[Originator/Servicer]" in
this prospectus supplement for a description of the underwriting guidelines
applied in originating the mortgage loans.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust fund by the depositor from time to time, from
[ ] until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
See "Description of the Certificates --Pre-Funding Account" in this
prospectus supplement.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
See "[Originator/Servicer]" and "The Pooling and Servicing Agreement" in
this prospectus supplement.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other property of the trust fund, [other than the insurance policy], after the
total principal balance of the mortgage loans declines to less than [ ]% of
their initial total principal balance; if [ ] does not exercise that option, [
] may purchase the Mortgage Loans and other property of the trust fund.
If the mortgage loans and other assets are purchased, the
certificateholders will be paid accrued interest and principal equal to the
outstanding principal amount of the certificates.
See "Description of the Certificates -- Optional Purchase of Mortgage
Loans; Termination of the Trust Fund" in this prospectus supplement for a
description of the purchase price to be paid for the mortgage loans.
TAX STATUS
[REMIC, grantor trust or FASIT status to be described as applicable.]
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 certificates.
ERISA CONSIDERATIONS
[To be provided as applicable.]
See "ERISA Considerations" in this prospectus supplement and in the
prospectus for a more complete discussion of these issues.
LEGAL INVESTMENT CONSIDERATIONS
[Only the Class [ ] Certificates] will 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 certificates that prospective investors should consider.
See "Legal Investment Considerations" in this prospectus supplement and
in the prospectus.
RATINGS OF THE CERTIFICATES
The certificates will initially have the following ratings from [ ]:
[Rating [Rating
Class Agency] Agency]
----- ------ ------
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
These ratings are not recommendations to buy, sell or hold these certificates.
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 certificates may be lower
than anticipated.
See "Ratings" in this prospectus supplement for a more complete
discussion of the certificate ratings.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT
IN THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS.
[SOME OF THE LOANS IN THE MORTGAGE POOL
ARE MORE LIKELY TO DEFAULT THAN OTHERS,
AND HIGHER THAN EXPECTED DEFAULTS ON
THESE LOANS COULD REDUCE THE YIELD ON
YOUR CERTIFICATES The payment schedules for most of
the mortgage loans in the pool
require the borrower to pay off the
principal balance of the loan
gradually over the life of the
loan. Some of the mortgage loans in
the pool, however, have payment
schedules under which the borrowers
makes relatively small payments of
principal over the life of the
loan, and then must make a large
final payment at maturity that pays
off the entire principal balance
outstanding. This final payment is
usually much larger than the
previous monthly payments. Because
the borrower's ability to make this
final payment usually depends on
the ability to refinance the loan
or sell the underlying property,
the risk of default is greater than
on other types of loans. High rates
of default on these types of loans
in the pool will result in greater
losses on your certificates.
The ability of a borrower to
refinance the type of loan
described above or sell the
mortgaged property will depend upon
a number of factors, including:
o the level of mortgage interest
rates;
o the borrower's equity in the
mortgage property;
o general economic conditions;
and
o the availability of credit.
We cannot predict how these factors
will affect the default rate of
these mortgage loans in the pool.
You should refer to "Description of
the Mortgage Pool" for information
on the percentage of loans in the
mortgage loan pool that consists of
these loans.]
[MORTGAGE LOAN INTEREST RATES MAY LIMIT
INTEREST RATES ON THE CERTIFICATES [LIBOR may increase or decrease at
different times and in different
amounts than the index applicable
to the adjustable rate mortgage
loans.]
[The trust fund will include a
reserve fund whose primary asset
will be [describe as applicable]].
See "Description of the
Certificates -- The Reserve Fund"
in this prospectus supplement. For
detailed information on the
interest rates of the mortgage
loans, see "Description of the
Mortgage Pools" in this prospectus
supplement.]
[POTENTIAL INADEQUACY OF CREDIT
ENHANCEMENT FOR THE CLASS [ ]
CERTIFICATES The Class [ ] Certificates are not
insured by any financial guaranty
insurance policy. The
overcollateralization feature
described in this prospectus
supplement is intended to enhance
the likelihood that holders of
Class [ ] Certificates will receive
regular payments of interest and
principal, but is limited in nature
and may be insufficient to cover
all losses on the mortgage loans or
shortfalls in interest payments on
the mortgage loans.
In order to create, increase and
maintain overcollateralization, it
will be necessary that the mortgage
loans generate more interest than
is needed to pay interest on the
certificates as well as fees and
expenses of the trust fund and
other amounts that are described in
this prospectus supplement. We
expect that the mortgage loans will
generate more interest than is
needed to pay those amounts, at
least during certain periods,
because the weighted average of the
interest rates on the mortgage
loans will be higher, at the time
the certificates are issued, than
the weighted average of the
interest rates on the certificates.
We cannot assure you, however, that
enough excess interest will be
generated to reach the
overcollateralization levels
required by the rating agencies.
The following factors will affect
the amount of excess interest that
the mortgage loans will generate:
o Prepayments. Every time a
mortgage loan with an interest
rate higher than the weighted
average of the interest rates on
the certificates is prepaid,
total excess interest after the
date of prepayment will be
reduced because that mortgage
loan will no longer be
outstanding and generating
interest. The effect on your
certificates of this reduction
will be influenced by the amount
of prepaid loans and the
characteristics of the prepaid
loans. Prepayment of a
disproportionately high number
of high interest rate mortgage
loans would have a greater
negative effect on future excess
interest.
o Defaults. The rate of defaults
on the mortgage loans may turn
out to be higher than expected.
Defaulted mortgage loans may be
liquidated, and liquidated
mortgage loans will no longer be
outstanding and generating
interest.
o Level of LIBOR. If LIBOR
increases, more money will be
needed to pay interest to
certificateholders, so less
money will be available as
excess interest.]
[SPECIAL RISKS FOR THE CLASS [ ]
CERTIFICATES The rights of holders of Class [ ]
Certificates to receive payments of
interest are subordinate to the
rights of holders of senior
certificates to receive payments of
interest, and the rights of holders
of Class [ ] Certificates to
receive payments of principal are
subordinate to the rights of
holders of senior certificates to
receive payments of principal.
In addition, you should consider
the following:
o If you buy a Class [ ]
Certificate and losses on the
mortgage loans exceed excess
interest and any
overcollateralization that has
been created, the principal
amount of your certificate will
be reduced proportionately with
the principal amounts of the
other Class [ ] Certificates by
the amount of that excess;
o If, after overcollateralization
is created in the required
amount, the mortgage loans
generate interest in excess of
the amount needed to pay
interest and principal on the
certificates and fees and
expenses of the trust fund, the
excess interest will be used to
pay you and other holders of
Class [ ] Certificates the
amount of any reduction in the
principal balances of the Class
[ ] Certificates caused by
application of losses.
o We cannot assure you, however,
that any excess interest will be
generated and, in any event, no
interest will be paid to you on
the amount by which your
principal balance was reduced
because of the application of
losses.
See "Description of the
Certificates -- Credit Enhancement
-- Subordination" and "--
Allocation of Losses" in this
prospectus supplement.]
[EFFECT OF LACK OF PRIMARY MORTGAGE
INSURANCE ON THE CLASS [ ] CERTIFICATES Approximately [ ]% of the mortgage
loans have loan-to-value ratios
greater than 80%. None of the
mortgage loans are covered by a
primary mortgage insurance policy.
If borrowers default on their
mortgage loans, there is a greater
likelihood of losses than if the
loans were insured. We cannot
assure you that the applicable
credit enhancement will be adequate
to cover those losses.
See "Description of the
Certificates -- Credit Enhancement
-- Subordination" and "--
Allocation of Losses" in this
prospectus supplement.]
UNPREDICTABILITY AND EFFECT OF
PREPAYMENTS Borrowers may prepay their mortgage
loans in whole or in part at any
time; [however, approximately [ ]%
of the mortgage loans require the
payment of a prepayment penalty in
connection with some voluntary
prepayments, which may discourage
these borrowers from prepaying
their mortgage loans]. Prepayments
of principal may also be caused by
liquidations of or insurance
payments on the mortgage loans. A
prepayment of a mortgage loan will
usually result in a prepayment on
the certificates.
The prepayment experience on the
mortgage loans may affect the
average life of the certificates.
The rate of principal payments on
the mortgage loans is from time to
time 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
mortgage loans or that the rate of
payments will conform to the model
described in this prospectus
supplement.
If prevailing interest rates fall
significantly below the interest
rates on the mortgage loans,
principal prepayments are likely to
be higher than if prevailing rates
remain at or above the interest
rates on the mortgage loans. As a
result, the actual maturity of the
certificates could occur
significantly earlier than
expected. Conversely, if prevailing
interest rates rise significantly
above the interest rates on the
mortgage loans, principal
prepayments are likely to be lower
than if prevailing rates remain at
or below the interest rates on the
mortgage loans and the maturity of
the certificates could occur
significantly later than expected.
In addition, certain prepayments
may result in the collection of
less interest than would otherwise
be the case in the month of
prepayment.
o If you purchase your
certificates at a discount and
principal is repaid more slowly
than you anticipate, then your
yield may be lower than you
anticipate.
o If you purchase your
certificates at a premium and
principal is repaid faster than
you anticipate, then your yield
may be lower than you
anticipate.
See "Yield Considerations" in this
prospectus supplement for a
description of factors that may
influence the rate and timing of
prepayments on the mortgage loans.
GEOGRAPHIC CONCENTRATION OF MORTGAGE
LOANS Approximately [ ]% of the mortgage
loans expected to be in the pool on
the closing date are secured by
properties in [California].
Delinquencies, defaults and losses
on the mortgage loans may be higher
than if fewer of the mortgage loans
were concentrated in one state
because the following conditions in
[California] will have a
disproportionate impact on the
mortgage loans in general:
o Declines in the [California]
residential real estate market
may reduce the values of
properties located in that
state, which would result in an
increase in the 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
uninsured hazards, such as
earthquakes, as well as floods,
wildfires, mudslides and other
natural disasters.
Natural disasters affect regions of
the United States from time to
time, and may result in increased
losses on mortgage loans in those
regions, or in insurance payments
that will constitute prepayments of
those mortgage loans.
For additional information
regarding the geographic
distribution of the mortgage loans
in each pool, see the applicable
table under "Description of the
Mortgage Pools" in this prospectus
supplement.
REAL ESTATE MARKET MAY AFFECT
PERFORMANCE OF MORTGAGE LOANS A decline in the real estate values
or in economic conditions generally
could increase the rates of
delinquencies, foreclosures and
losses on the mortgage loans to a
level that is significantly higher
than those experienced currently;
and no assurance can be given that
values of the properties securing
the mortgage loans will not decline
since the date of origination of
the mortgage loan. If the credit
enhancement described in this
prospectus supplement is not enough
to protect your certificates from
these losses, the yield on your
certificates may be reduced.
[EARLY PRINCIPAL PAYMENT FROM CASH
REMAINING IN PRE-FUNDING ACCOUNT If the cash in the pre-funding
account on the closing date is not
used to acquire additional mortgage
loans by [ ], then that cash will
be [paid to you on a proportionate
basis with the other
certificateholders in reduction of
the principal balance of your
certificates.] If the amount of
that cash is substantial, you will
receive a significant unexpected
early payment of principal in (or
before) [ ]. We cannot assure you
that you will be able to reinvest
that money in another investment
with a comparable yield.]
YOU WILL NOT RECEIVE PHYSICAL
CERTIFICATES, WHICH CAN CAUSE DELAYS IN
DISTRIBUTIONS AND HAMPER YOUR ABILITY TO
PLEDGE OR RESELL YOUR CERTIFICATES Unless you are the purchaser of the
residual certificates, your
ownership of the certificates will
be registered electronically with
DTC. The lack of physical
certificates could:
o result in payment delays on the
certificates because the trustee
will be sending distributions on
the certificates to DTC instead
of directly to you;
o make it difficult for you to
pledge your certificates if
physical certificates are
required by the party demanding
the pledge; and
o could hinder your ability to
resell the certificates because
some investors may be unwilling
to buy certificates that are not
in physical form.
See "Description of the
Certificates -- Book-Entry
Registration" in this prospectus
supplement.
POTENTIAL DISRUPTION OF COMPUTER SYSTEMS The transition from the year 1999
to the year 2000 may interfere with
the ability of computer systems
used by the servicer, the trustee,
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 mortgage loans
and calculation and distribution of
payments on the certificates.
LIMITED ABILITY TO RESELL CERTIFICATES The underwriter is not required to
assist in resales of the
certificates, although it may do
so. A secondary market for any
class of certificates 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
certificates. The certificates will
not be listed on any securities
exchange.
[Additional risk factors to be provided as applicable.]
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The [ ] Pass-Through Certificates will consist of the following
Classes: [ ] (together, the "Certificates").
The [ ] Certificates are referred to herein as the "Senior
Certificates." Only the Class [ ] Certificates (the "Offered Certificates")
are offered hereby. The Class [ ] Certificates are referred to herein as the
"LIBOR Certificates." The Class [ ] Certificates are referred to herein as the
"Subordinate Certificates." The Class R Certificate is also referred to as the
"Residual Certificate."
The Class [ ] Certificate will be issued as a single Certificate in
fully registered, certificated form.
The Certificates represent beneficial ownership interests in a trust
fund (the "Trust Fund"), the assets of which consist primarily of (1)
[describe mortgage loans] mortgage loans (the "Mortgage Loans"), (2) the
assets that from time to time are identified as deposited in respect of the
Mortgage Loans in the Collection Account and the Certificate Account (each as
defined herein), (3) property acquired by foreclosure of Mortgage Loans or
deed in lieu of foreclosure, (4) any applicable insurance policies and all
proceeds thereof, and (5) [describe other assets, as applicable].
Each Class of Offered Certificates will be issued in the respective
approximate initial total principal amount set forth or described on the cover
page hereof. The total principal amount of each Class of Offered Certificates
is referred to herein as the "Class Principal Amount" for that Class. The
Class [ ] Certificate will be issued without a principal amount or interest
rate, and will be entitled only to the amounts that are described herein. The
total Certificate Principal Amount (as defined herein) of the Certificates and
the initial Class Principal Amount of each Class of Offered Certificates may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined herein) of the Mortgage Loans is increased or decreased as
described under "Description of the Mortgage Pools" herein.
Distributions on the Certificates will be made on the [25th] day of
each month or, if the [25th] day is not a Business Day, on the next succeeding
Business Day, commencing in [ ] (each, a "Distribution Date"), to
Certificateholders 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 preceding 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 banks in New York or [California] are
closed.
Distributions on the Offered Certificates will be made to each
registered holder entitled thereto, either (1) by check mailed to the
Certificateholder's address as it appears on the books of the Trustee (as
defined herein), or (2) at the request, submitted to the Trustee in writing at
least five Business Days prior to the related Record Date, of any holder of an
Offered Certificate (at the holder's expense) in immediately available funds;
provided, that the final distribution in respect of any Certificate will be
made only upon presentation and surrender of the Certificate at the Corporate
Trust Office (as defined herein) of the Trustee. See "-- The Trustee" herein.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will
be deposited in an account (the "Pre-Funding Account") maintained by [ ],
which account shall be part of the trust fund. During the period (the
"Pre-Funding Period") from [ ] until [ ], the Pre-Funding Amount will be
maintained in the Pre-Funding Account. The Pre-Funded Amount will be reduced
during the Pre-Funding Period by the amount of Subsequent Mortgage Loans (as
defined herein) deposited in the trust fund in accordance with the Pooling and
Servicing Agreement. During the Pre-Funding Period, the Pre-Funded Amount will
be used only to purchase Subsequent Mortgage Loans. Immediately following the
Pre-Funding Period, any Pre-Funded Amount remaining will be distributed to [to
be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to
be provided as applicable] and all investment earnings on amounts on deposit
in the Pre-Funding Account will be distributed to [to be provided as
applicable] following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Offered Certificates (the "Book-Entry Certificates")
will be issued, maintained and transferred on the book-entry records of The
Depository Trust Company ("DTC") in the United States [, or through Cedelbank
("Cedel") or the Euroclear System ("Euroclear") in Europe] and through
[its/their] participating organizations (each, a "Participant"). The
Book-Entry Certificates will be issued in minimum denominations in principal
amount of $25,000 and integral multiples of $1 in excess thereof.
Each Class of Book-Entry Certificates will be represented by one or
more certificates registered in the name of the nominee of DTC. ACE Securities
Corp. (the "Depositor") has been informed by DTC that DTC's nominee will be
Cede & Co. [Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries, which in turn will hold
positions in customers' securities accounts in the depositaries' names on the
books of DTC.] No person acquiring an interest in a Book-Entry Certificate
(each, a "Beneficial Owner") will be entitled to receive a certificate
representing an interest (a "Definitive Certificate"), except as set forth
below under "-- Definitive Certificates" and in the Prospectus under
"Description of the Certificates -- Book-Entry Registration and Definitive
Securities -- Definitive Securities."
Unless and until Definitive Certificates are issued, it is
anticipated that:
o the only "Certificateholder" of the Offered Certificates will be
Cede & Co., as nominee of DTC, and Beneficial Owners will not be
Certificateholders as that term is used in the Pooling and
Servicing Agreement (as defined herein).
o Beneficial Owners will receive all distributions of principal of,
and interest on, the Offered Certificates from the Trustee
through DTC [, Cedel or Euroclear, as applicable,] and
[its/their] Participants.
o while the Offered Certificates are outstanding, under the rules,
regulations and procedures creating and affecting DTC [Cedel and
Euroclear] and [its/their] operations, DTC [Cedel and Euroclear]
[is/are] required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Offered Certificates
and is required to receive and transmit distributions of
principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Beneficial
Owners have accounts with respect to Offered Certificates are
similarly required to make book-entry transfers and receive and
transmit distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess
certificates, DTC [Cedel and Euroclear] [has/have] in place a
mechanism by which Beneficial Owners will receive distributions
and will be able to transfer their interest.
None of the Depositor, GACC, the Servicer or the Trustee [or
additional parties] (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 Certificates 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.
For a more complete description of book-entry registration and
clearance and the rules and regulations governing DTC [,Cedel and Euroclear],
see "Description of the Securities -- Book-Entry Registration and Definitive
Securities" in the Prospectus" [and "Global Clearance, Settlement and Tax
Documentation Procedures" in Annex I to this Prospectus Supplement].
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under "
Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities." Upon the occurrence of an event
described in that section, the Trustee is required to direct DTC to notify
Participants who have ownership of Book-Entry Certificates as indicated on the
records of DTC of the availability of Definitive Certificates for their
Book-Entry Certificates. Upon surrender by DTC of the Definitive Certificates
representing the Book-Entry Certificates and upon receipt of instructions from
DTC for re-registration, the Trustee will re-issue the Book-Entry Certificates
as Definitive Certificates in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of the Definitive Certificates as Certificateholders under the Pooling
and Servicing Agreement.
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Distribution Date in
respect of each Class of Certificates (other than the Class [ ] Certificate)
will equal the sum of [to be provided as applicable]. Interest will accrue on
the Offered Certificates on the basis of a 360-day year and the actual number
of days in each Accrual Period.
o The "Interest Rate" for each Class of Certificates will be the
applicable annual rate described below.
[If [ ] does not exercise its option to purchase the Mortgage Loans
when it is first entitled to do so, as described under "-- Optional Purchase
of Mortgage Loans; Termination of the Trust Fund" herein, then with respect to
each succeeding Distribution Date, the [ ] will be increased to %]. Subject to
the preceding proviso, the Interest Rates for the Class [ ] Certificates will
be the applicable annual rate determined as follows:
o [To be provided as applicable].
o The "Net Mortgage Rate" for any Mortgage Loan equals the Mortgage
Rate thereof minus the Total Expense Rate (as defined herein).
o The "Total Expense Rate" for each Distribution Date is the sum of
[the Servicing Fee Rate and the Trustee Fee Rate (each as defined
herein)].
The "Certificate Principal Amount" of any Offered Certificate for any
date of determination will equal that Certificate Principal Amount on [ ] (the
"Closing Date") as reduced by all amounts previously distributed on that
Certificate in respect of principal and, in the case of a Class [ ]
Certificate, any Applied Loss Amount (as defined herein) previously allocated
to that Certificate.
For each Distribution Date, the "Accrual Period" applicable to each
Class of Offered Certificates will be the period beginning on the immediately
preceding Distribution Date (or on the Closing Date, in the case of the first
Accrual Period) and ending on the day immediately preceding the related
Distribution Date.
o The "Interest Remittance Amount" for any Distribution Date will
equal the sum of [to be provided as applicable].
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
[To be provided as applicable.]
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of the prepayment, instead of
for a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Prepayments in part will be applied as of
the date of receipt. Full or partial prepayments (or proceeds of other
liquidations) received in any Prepayment Period will be distributed to holders
of Offered Certificates on the Distribution Date following that Prepayment
Period. To the extent that, as a result of a full or partial prepayment, a
borrower is not required to pay a full month's interest on the amount prepaid,
a shortfall (a "Prepayment Interest Shortfall") in the amount available to
make distributions of interest on the Certificates could result. A Prepayment
Interest Shortfall will result from a prepayment in full only if that
prepayment is received on or after the [16th] day of a calendar month. If a
prepayment in full is received on or prior to the [15th] day of a calendar
month, there will be an excess of interest over one month's interest for that
Mortgage Loan ("Prepayment Interest Excess") available for distribution to
Certificateholders on the related Distribution Date. The Servicer is obligated
to fund Prepayment Interest Shortfalls that exceed Prepayment Interest Excess,
but only in an amount up to the total of the Servicing Fees for the applicable
Distribution Date. See "The Pooling and Servicing Agreement -- Prepayment
Interest Shortfalls" herein. Any such payment by the Servicer is referred to
herein as "Compensating Interest." Any Prepayment Interest Shortfalls not
funded by the Servicer ("Net Prepayment Interest Shortfalls") will reduce the
Interest Remittance Amount available for distribution on the related
Distribution Date.
[DETERMINATION OF INDEX
On the second Business Day preceding the beginning of each Accrual
Period (each such date, an "Index Determination Date"), the Trustee will
determine the Index for that Accrual Period.
On each Index Determination Date, the Index for the next succeeding
Accrual Period will be established by the Trustee as follows:
[To be provided as applicable.]]
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Class [ ] Certificates will be made
primarily from [to be provided as applicable.]
o The "Principal Distribution Amount" for [each Mortgage Pool for]
any Distribution Date will be equal to the sum of [to be provided
as applicable].
o The "Principal Remittance Amount" for [each Mortgage Pool for]
any Distribution Date will be equal to the sum of [to be provided
as applicable.]
o The "Due Period" for any Distribution Date is the one-month
period beginning on [the second day of the calendar month
immediately preceding the month in which that Distribution Date
occurs and ending on the first day of the month in which that
Distribution Date occurs.]
o The "Prepayment Period" for each Distribution Date is the
one-month period beginning on the Cut-off Date, in the case of
[the first Distribution Date, and on the day immediately
following the close of the immediately preceding Prepayment
Period, in the case of each subsequent Distribution Date, and
ending on the [ ]th day (or if that day is not a Business Day,
the immediately preceding Business Day) of the month in which
that Distribution Date occurs].
On each Distribution Date, the Principal Distribution Amount will be
distributed in the following order of priority:
[To be provided as applicable].
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of [the
Insurance Policy, the subordination of the Subordinate Certificates, the
priority of application of Realized Losses (as defined herein) and
overcollateralization], in each case as described herein. [The Insurance
Policy is described under "The Insurance Policy" below.]
[SUBORDINATION. The rights of holders of the Class [ ] Certificates
to receive distributions with respect to the Mortgage Loans will be
subordinated, to the extent described herein, to the rights of holders of the
Senior Certificates, as described under "-- Distributions of Interest" and "--
Distributions of Principal." This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior Certificates of the full
amount of interest and principal distributable thereon, and to afford holders
of Senior Certificates limited protection against Realized Losses incurred on
the Mortgage Loans.
No amounts will be distributed to the holder of the Class [ ]
Certificate until all amounts due to the holders of the Class [ ] Certificates
have been distributed.
The limited protection afforded to holders of Class [ ] Certificates
by means of the subordination of Subordinate Certificates having a lower
priority of distribution will be accomplished by the preferential right of
holders of Offered Certificates to receive, prior to any distribution in
respect of interest or principal, respectively, being made on any Distribution
Date in respect of Certificates having a lower priority of distribution, the
amounts of interest due them and principal available for distribution,
respectively, on that Distribution Date.]
[ALLOCATION OF LOSSES. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during any Prepayment Period, the related Net Liquidation
Proceeds, to the extent allocable to principal, may be less than the
outstanding principal balance of the Mortgage Loan. The amount of that
insufficiency is a "Realized Loss." Realized Losses on Mortgage Loans will
have the effect of reducing amounts distributable in respect of, first, the
Class [ ] Certificate (both through the application of Monthly Excess Interest
to fund the deficiency and through a reduction in the Overcollateralization
Amount for the related Distribution Date), and second, the Class [ ]
Certificates, before reducing amounts distributable in respect of the Senior
Certificates.
o A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage
Loan as to which the Servicer has determined that all amounts
that it expects to recover in respect of that Mortgage Loan have
been recovered (exclusive of any possibility of a deficiency
judgment).
To the extent that Realized Losses occur, those Realized Losses will
reduce the Total Loan Balance, and thus may reduce the Overcollateralization
Amount. As described herein, the Overcollateralization Amount is created,
increased and maintained by application of Monthly Excess Cashflow to make
distributions of principal on the Offered Certificates.
If on any Distribution Date after giving effect to all Realized
Losses incurred during the related Due Period and distributions of principal
on that Distribution Date, the total Certificate Principal Amount of the
Certificates exceeds the Total Loan Balance for that Distribution Date (such
excess, an "Applied Loss Amount"), the Class Principal Amount of the Class [ ]
Certificates will be reduced by that amount, until the Class Principal Amount
thereof has been reduced to zero. The Class Principal Amounts of the Senior
Certificates will not be reduced by allocation of Applied Loss Amounts.
Holders of Class [ ] Certificates will not receive any distributions
in respect of Applied Loss Amounts, except to the extent of available Monthly
Excess Cashflow as described below.]
[OVERCOLLATERALIZATION. The weighted average Net Mortgage Rate of the
Mortgage Loans is generally expected to be higher than the weighted average of
the interest rates of the Certificates, thus generating certain excess
interest collections. To the extent described herein, Monthly Excess Interest
will be applied on any Distribution Date in reduction of the Certificate
Principal Amounts of the Offered Certificates. This application of interest
collections as distributions of principal will cause the total Certificate
Principal Amount of the Certificates to amortize more rapidly than the Total
Loan Balance, creating, increasing and maintaining overcollateralization.
However, Realized Losses will reduce overcollateralization, and could result
in an Overcollateralization Deficiency.
For each Distribution Date, the Monthly Excess Interest and any
Excess Principal will be the "Monthly Excess Cashflow," which will be in the
following order of priority:
[To be provided as applicable.]]
[THE RESERVE FUND
The Reserve Fund will be an asset of the Trust Fund but not of the
REMIC. The holder of the Residual Certificate will be the owner of the Reserve
Fund, and amounts on deposit in the Reserve Fund will be invested at the
direction of the holder of the Residual Certificate as provided in the Pooling
and Servicing Agreement. The Reserve Fund will consist of [to be provided as
applicable].
Withdrawals will be made from the Reserve Fund for the benefit of the
Offered Certificates as described under "-- Overcollateralization" above.
The only asset of the Reserve Fund on the Closing Date will be [to be
provided as applicable.]
If on any Distribution Date the sum of the amount on deposit in the
Reserve Fund and the Overcollateralization Amount exceeds the Targeted
Overcollateralization Amount, the excess will be released to the Residual
Certificateholder, provided that the amount remaining in the Reserve Fund
equals or exceeds the reserve fund requirement specified in the Pooling and
Servicing Agreement.]
FINAL SCHEDULED DISTRIBUTION DATE
It is expected that scheduled distributions on the Mortgage Loans,
assuming no defaults or losses that are not covered by the limited credit
support described herein, will be sufficient to make timely distributions of
interest on the Offered Certificates and to reduce the Class Principal Amount
of each Class of the Senior Certificates to zero not later than [ ] and of the
Class [ ] Certificates not later than [ ]. As to each Class, the actual final
Distribution Date may be earlier or later, and could be substantially earlier,
than the applicable Final Scheduled Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Trustee will make available to each
Certificateholder a statement containing the following information:
o the amount of principal distributed on that date to holders of
each Class of Offered Certificates;
o the amount of interest distributed on that date to holders of
each Class of Offered Certificates;
o the Interest Rate applicable to each Class of Offered
Certificates;
o the Class Principal Amount of each Class of Offered Certificates
after distributions on that date;
o the amount of the Servicing Fees and Trustee Fee paid with
respect to that date;
o the Total Loan Balance as of the related Distribution Date;
o the amount of any Realized Losses on the Mortgage Loans during
the immediately preceding calendar month and total Realized
Losses since the Cut-off Date;
o the number and aggregate Principal Balance of Mortgage 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 Pooling
and Servicing Agreement.
OPTIONAL PURCHASE OF MORTGAGE LOANS; TERMINATION OF THE TRUST FUND
On any Distribution Date after the date on which the Total Loan
Balance is less than [ ]% of the Cut-off Date Balance, the holder of the [ ]
will (subject to the terms of the Pooling and Servicing Agreement) have the
option to purchase the Mortgage Loans, any REO Property and any other related
property for a price equal to the sum of (1) 100% of the total outstanding
principal balance of the Mortgage Loans plus accrued interest thereon at the
applicable Mortgage Rate, (2) the fair market value of all other property
being purchased, (3) any unpaid Servicing Fees and certain other amounts
payable to the Servicer and the Trustee and (4) [ ]; provided, that the
purchase price will not be less than the total Certificate Principal Amount of
the Offered Certificates, plus accrued interest thereon. If the holder of the
[ ] does not exercise that option, the [ ] will then have the same purchase
option. If either purchase option is exercised, the Trust Fund will be
terminated (such event, an "Optional Termination").
If the [ ] does not exercise its option as described above when it is
first entitled to do so, [to be provided as applicable].
THE TRUSTEE
[ ], a [ ] banking corporation, will be the Trustee under the Pooling
and Servicing Agreement (the "Trustee"). The Trustee will be paid a monthly fee
(the "Trustee Fee") calculated as a fixed percentage equal to [ ]% annually (the
"Trustee Fee Rate") on the Total Loan Balance. As additional compensation, the
Trustee will be entitled to [to be provided as applicable]. The Trustee's
"Corporate Trust Office" for purposes of presentment and surrender of the
Offered Certificates for the final distribution thereon and for all other
purposes is located at [ ], or such address as the Trustee may designate from
time to time by notice to the Certificateholders, the Depositor and the
Servicer.
[THE INSURANCE POLICY
The following information has been supplied by [ ] (the "Insurer")
for inclusion in this Prospectus Supplement. Accordingly, the Depositor, the
Servicer and the Underwriter do not make any representation as to the accuracy
and completeness of this information.
The Insurer 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 Certificate Guaranty Insurance Policy (the
"Insurance Policy") and the Insurer set forth below under this heading "The
Insurance Policy." Additionally, the Insurer makes no representation regarding
the Certificates or the advisability of investing in the Certificates.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
YEAR 2000 READINESS DISCLOSURE
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] [description of
Mortgage Loans] Mortgage Loans with original terms to maturity from the first
due date of the scheduled monthly payment (a "Monthly Payment") of not more
than [30] years, having a total Principal Balance as of the Cut-off Date
(after giving effect to Monthly Payments due on that date) of approximately $[
] (the "Cut-off Date Balance"). The Mortgage Loans were originated or acquired
by the originators described herein generally in accordance with the
underwriting guidelines described herein.
Wherever reference is made herein to a percentage of some or all of
the Mortgage Loans, the percentage is determined (unless otherwise specified)
on the basis of the total Principal Balance of the related Mortgage Loans as
of the Cut-off Date.
All of the Mortgage Loans are secured by mortgages or deeds of trust
or other similar security instruments creating [to be provided as applicable.]
The Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from German American Capital Corporation ("GACC"), which acquired
the Mortgage Loans from [ ]. See "[Originator/Servicer]" and "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans" herein.
Pursuant to its terms, each Mortgage Loan, other than a loan secured
by a condominium unit, is required to be covered by a standard hazard
insurance policy in an amount generally equal to the lower of the unpaid
principal amount thereof or the replacement value of the improvements on the
Mortgaged Property. Generally, a condominium association is responsible for
maintaining hazard insurance covering the entire building. See "Description of
Mortgage and Other Insurance Hazard -- Insurance on the Loans -- Standard
Hazard Insurance Policies" in the Prospectus.
[Approximately [ ]% of the Mortgage Loans have Loan-to-Value Ratios
in excess of 80%. None of those Mortgage Loans or any other Mortgage Loans are
covered by primary mortgage insurance policies. The "Loan-to-Value Ratio" of a
Mortgage Loan at any time is the ratio of the principal balance of the
Mortgage Loan at the date of determination to (a) in the case of a purchase,
the lesser of the sale price of the Mortgaged Property and its appraised value
at the time of sale, or (b) in the case of a refinance or modification, the
appraised value of the Mortgaged Property at the time of refinance or
modification.]
[Approximately [ ]% of the Mortgage Loans are fully amortizing.
Approximately [ ]% of the Mortgage Loans will have original terms to maturity
that are shorter than their amortization schedules, leaving final payments
("Balloon Payments") due on their maturity dates that are significantly larger
than other monthly payments (such loans, "Balloon Loans"). The Balloon Loans
are generally expected to have original terms to maturity of [15] years. The
ability of the borrower to repay a Balloon Loan at maturity frequently will
depend on the borrower's ability to refinance the loan. Any loss on a Balloon
Loan as a result of the borrower's inability to refinance the loan will be
borne by Certificateholders, to the extent not covered by the applicable
credit enhancement. Neither the Servicer nor the Trustee will make any
Advances with respect to delinquent Balloon Payments.]
ADJUSTABLE RATE MORTGAGE LOANS
[Describe adjustment of adjustable rate Mortgage Loans, as applicable.]
[THE INDEX
The Index applicable to the determination of the Mortgage Rates for
the Adjustable Rate Mortgage Loans will be [described as applicable].]
THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate
total characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, the Mortgage Loans may be removed from the Trust Fund as a
result of incomplete documentation or otherwise, if the Depositor deems
removal necessary or appropriate. In addition, a limited number of other
mortgage loans may be included in the Trust Fund prior to the issuance of the
Offered Certificates.
Number of Mortgage Loans............................
Initial Pool Balance................................ $
Mortgage Rates: %
Weighted Average...............................
Range.......................................... % to %
Weighted Average Remaining Term to
Maturity (in months) ...............................
The Principal Balances of the Mortgage Loans range from approximately
$[ ] to approximately $[ ]. The Mortgage Loans have an average Principal
Balance of approximately $[ ].
The weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number,
total Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the percentages in the following tables may not equal the totals due to
rounding.)
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The average Cut-off Date Principal Balance is approximately $ .
</TABLE>
<TABLE>
<CAPTION>
LOAN-TO-VALUE RATIOS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF ORIGINAL NUMBER OF TOTAL BY TOTAL
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately %.
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE RATES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
- -------------
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately % per annum.
</TABLE>
<TABLE>
<CAPTION>
LOAN TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF MATURITIES NUMBER OF TOTAL BY TOTAL
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average original term to maturity is approximately months.
</TABLE>
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
REMAINING TERM TO NUMBER OF TOTAL BY TOTAL
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average remaining term to maturity of the fully
amortizing Mortgage Loans is approximately months.
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
LOAN PURPOSES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
DOCUMENTATION TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
CREDIT GRADES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT PENALTIES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PREPAYMENT PENALTY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MAXIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average Maximum Rate of the Adjustable Rate Mortgage
Loans is approximately % per annum.
</TABLE>
<TABLE>
<CAPTION>
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MINIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average Minimum Rate of the Adjustable Rate Mortgage
Loans is approximately % per annum.
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
RANGE OF GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average Gross Margin of the Adjustable Rate Mortgage
Loans is approximately % per annum.
</TABLE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
INITIAL FIXED MORTGAGE LOANS
TERM/SUBSEQUENT NUMBER OF TOTAL BY TOTAL
ADJUSTABLE RATE TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PERIODIC CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
INITIAL CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
INITIAL CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust Fund to purchase additional Mortgage
Loans (the "Subsequent Mortgage Loans") on [any] date, as specified in the
Pooling and Servicing Agreement (each, a "Subsequent Transfer Date") will be
subject to the Subsequent Mortgage Loans meeting the following criteria: [to
be provided as applicable]. These criteria will be based on the
characteristics of the Subsequent Mortgage Loans on the related Subsequent
Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary
significantly from time to time subject to the requirements described above,
and may bear no particular relationship to the characteristics of the initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool
and the Mortgaged Properties is based upon the Mortgage Pool as constituted at
the close of business on the Cut-off Date, as adjusted for Monthly Payments
due on or before that date. A Current Report on Form 8-K will be available to
purchasers of the Offered Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Offered Certificates. In
the event that Mortgage Loans are removed from or added to the Mortgage Pool
as set forth herein under "Description of the Mortgage Pool," the removal or
addition, to the extent material, will be noted in the Current Report on Form
8-K.
[ORIGINATOR/SERVICER
The information in this section has been provided by [servicer]. None
of the Depositor, GACC, the Trustee, the Insurer, the Underwriter or any of
their respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
GENERAL
[Description of the Originator/Servicer.]
LENDING ACTIVITIES AND LOAN SALES
[ ] originates real estate loans through its network of offices and
loan origination centers. [ ] also participates in secondary market activities
by originating and selling mortgage loans while continuing to service the
majority of the loans sold. In other cases [ ]'s whole loan sale agreements
provide for the transfer of servicing rights.
[ ]'s primary lending activity is funding loans to enable borrowers
to purchase or refinance residential real property, which loans are secured by
first or second liens on the related real property. [ ]'s single-family real
estate loans are predominantly "conventional" mortgage loans, meaning that
they are not insured by the Federal Housing Administration or partially
guaranteed by the U.S. Department of Veterans Affairs.
The following table summarizes [ ]'s one- to four-family residential
mortgage loan origination and sales activity for the periods shown below.
Sales activity may include sales of mortgage loans purchased by [ ] from other
loan originators.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31,
---------------------- ----------------------------
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
------------------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Originated and $ $ $ $ $ $ $
purchased......
Sales.......... $ $ $ $ $ $ $
</TABLE>
LOAN SERVICING
The Servicer services all of the mortgage loans it originates that
are retained in its portfolio and continues to service at least a majority of
the loans that have been sold to investors. Servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent borrowers, and supervising foreclosure in the event of unremedied
defaults. The Servicer's servicing activities are audited periodically by
applicable regulatory authorities. Certain financial records of the Servicer
relating to its loan servicing activities are reviewed annually as part of the
audit of the Servicer's financial statements conducted by its independent
accountants.
UNDERWRITING GUIDELINES
The Mortgage Loans were originated generally in accordance with
guidelines (the "Underwriting Guidelines") established by [ ]. The
Underwriting Guidelines are primarily intended to evaluate the value and
adequacy of the mortgaged property as collateral and are also intended to
consider the borrower's credit standing and repayment ability. On a
case-by-case basis and only with the approval of two or more senior lending
officers, [ ] may determine that, based upon compensating factors, a
prospective borrower not strictly qualifying under the underwriting risk
category guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment and
time in residence at the applicant's current address. It is expected that a
substantial number of the Mortgage Loans will have been originated under
underwriting exceptions.
[Describe originator's underwriting guidelines.]
SERVICING PRACTICES AND EXPERIENCE
In general, when a borrower fails to make a required payment on a
residential mortgage loan, [ ] attempts to cause the deficiency to be cured by
corresponding with the borrower. In most cases deficiencies are cured
promptly. Pursuant to [ ]'s customary procedures for residential mortgage
loans serviced by it for its own account, [ ] generally mails a notice of
intent to foreclose to the borrower after the loan has become 31 days past due
(two payments due but not received) and, within one month thereafter, if the
loan remains delinquent, typically institutes appropriate legal action to
foreclose on the property securing the loan. If foreclosed, the property is
sold at public or private sale and may be purchased by [ ]. In California,
real estate lenders are generally unable as a practical matter to obtain a
deficiency judgment against the borrower on a loan secured by single-family
real estate.
The following table sets forth the delinquency and loss experience at
the dates indicated for residential (one- to four-family and multifamily)
first lien mortgage loans serviced by the Servicer that were originated or
purchased by the Servicer:
[To be provided as applicable.]
There can be no assurance that the delinquency and loss experience of
the Mortgage Loans will correspond to the loss experience of the Servicer's
mortgage portfolio set forth in the table above. The statistics shown above
represent the delinquency and loss experience for the Servicer's total
servicing portfolio only for the periods presented, whereas the total
delinquency and loss experience on the Mortgage Loans will depend on the
results over the life of the Trust Fund. The Servicer's portfolio includes
mortgage loans with payment and other characteristics that are not
representative of the payment and other characteristics of the Mortgage Loans.
A substantial number of the Mortgage Loans may also have been originated based
on Underwriting Guidelines that are less stringent than those generally
applicable to the servicing portfolio reflected in the table. If the
residential real estate market experiences an overall decline in property
values, the actual rates of delinquencies, foreclosures and losses could be
higher than those previously experienced by the Servicer. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses on to the Mortgage Loans.]
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of [ ] among the
Depositor, the Servicer and the Trustee. Reference is made to the Prospectus
for important information in addition to that set forth in this Prospectus
Supplement regarding the terms and conditions of the Pooling and Servicing
Agreement and the Offered Certificates. Offered Certificates in certificated
form will be transferable and exchangeable at the Corporate Trust Office of
the Trustee. [ ] serve as Certificate Registrar and Paying Agent.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will assign the Mortgage Loans to the Trustee, together
with all principal and interest received with respect to the Mortgage Loans on
and after the Cut-off Date, other than Monthly Payments due on or before that
date. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Pooling and Servicing Agreement that will specify with respect
to each Mortgage Loan, among other things, the original principal balance and
the Principal Balance as of the close of business on the Cut-off Date, the
Mortgage Rate, the Monthly Payment and the maturity date.
The Trustee will, concurrently with the assignment to it of the
property constituting the Trust Fund, authenticate and deliver the
Certificates.
[As to each Mortgage Loan, the following documents are generally
required to be delivered to the Trustee or its custodian (the "Custodian") in
accordance with the Pooling and Servicing Agreement:
o the related original Mortgage Note endorsed without recourse to
the Trustee or in blank;
o the original Mortgage with evidence of recording indicated
thereon (or, if the original recorded Mortgage has not yet been
returned by the recording office, a copy certified to be a true
and complete copy of the Mortgage sent for recording), the
original security agreement and related documents;
o an original assignment of the Mortgage to the Trustee or in blank
in recordable form and originals of all intervening assignments,
if any, showing a complete chain of title from origination to the
Trustee;
o the policies of title insurance issued with respect to each
Mortgage Loan; and
o the originals of any assumption, modification, extension or
guaranty agreements.
Where necessary to protect the interest of the Trustee in the Mortgage Loans,
the assignments of each Mortgage to the Trustee are required to be submitted
for recording promptly after the Closing Date.]
Under the terms of the agreements (the "Mortgage Loan Purchase
Agreements") pursuant to which GACC purchased the Mortgage Loans from [the
Originator] and the Depositor purchased the Mortgage Loans from GACC, the
Custodian [has conducted an initial review of the mortgage loan documents and
has notified] the Depositor, GACC and [the Originator] as to each mortgage
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 Mortgage Loan on the Mortgage Loan schedule or otherwise
defective. If any Mortgage Loan document is not delivered or any material
defect in a document is not cured within the time period specified in the
Mortgage Loan Purchase Agreements, [the Originator] will be required to
repurchase the affected Mortgage 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 mortgage loan.
[[The Originator] has made to GACC and the Depositor under the
Mortgage Loan Purchase Agreements 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." GACC's and the Depositor's
rights under these representations and warranties will be assigned to the
Trustee for the benefit of Certificateholders. In the event of a breach of any
of these representations or warranties that materially and adversely affects
the value of any Mortgage Loan or the interests of Certificateholders or the
Insurer, [the Originator] 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 Mortgage Loan from the Trust Fund for the Repurchase
Price or, in certain circumstances, to substitute another mortgage loan.]
To the extent that any Mortgage Loan as to which a representation or
warranty has been breached is not repurchased by [the Originator] and a
Realized Loss occurs on the Mortgage Loan, holders of Offered Certificates, in
particular the Class [ ]Certificates, may incur a loss if the applicable
credit enhancement is not sufficient to cover that loss.
VOTING RIGHTS
Voting rights of Certificateholders under the Pooling and Servicing
Agreement will be allocated among the Classes of Certificates and among the
Certificates of each Class as provided in the Pooling and Servicing Agreement.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance
with the provisions of the Pooling and Servicing Agreement.
[The Servicer will be required to use reasonable efforts to collect
all amounts due under each Mortgage Loan and to administer the Mortgage Loans
in accordance with generally accepted servicing practices. See
"[Originator/Servicer] -- Servicing Practices and Experience." The Servicer
will be required to deposit all amounts collected and recovered with respect
to the Mortgage Loans within three Business Days of receipt thereof in a
separate account in the name of the Trustee (the "Collection Account"); on the
[ ] day of each month, or if that date is not a Business Day, on the
immediately following Business Day, the Servicer will be required to transfer
the Interest Remittance Amount and the Principal Remittance Amount to a
separate account maintained by the Trustee for the benefit of the
Certificateholders (the "Certificate Account").
The Servicer will be prohibited under the Pooling and Servicing
Agreement from making any material modification to the terms of a Mortgage
Loan, including a change in the Mortgage Rate other than as provided in the
Mortgage Note, deferral or forgiveness of a Monthly Payment or extension of
the maturity date, unless the Mortgage Loan is in default or default is, in
the judgment of the Servicer, reasonably foreseeable.
The Servicer will also be prohibited from waiving any prepayment
premium except in the case of a default or imminent default, and then may
waive the prepayment premium only if the waiver would maximize amounts
collected under the Mortgage Loan.]
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
Monthly Payment dates, the borrower pays interest on the amount prepaid only
from the last Monthly Payment date to the date of prepayment, with a resulting
reduction in interest payable for the month during which the prepayment is
made. [Any Prepayment Interest Shortfall resulting from a prepayment in full
or in part is required to be paid by the Servicer, but only to the extent that
the shortfall does not exceed the total of the Servicing Fees for the
applicable Distribution Date.]
ADVANCES
[The Servicer will be obligated to make advances ("Advances") with
respect to delinquent payments of principal of and interest on the Mortgage
Loans (other than Balloon Payments), adjusted to the related Mortgage Rate
less the Servicing Fee Rate, to the extent that those Advances, in its
judgment, are recoverable from future payments and collections, insurance
payments or proceeds of liquidation of a Mortgage Loan. The Trustee will be
obligated to make any required Advance if the Servicer fails in its obligation
to do so, to the extent provided in the Pooling and Servicing Agreement. The
Servicer or the Trustee, as applicable, will be entitled to recover any
Advances made by it with respect to a Mortgage Loan out of late payments
thereon or out of related liquidation proceeds and insurance proceeds or, if
the Servicer determines that those Advances are not recoverable from those
sources, then from collections on other Mortgage Loans. These reimbursements
may result in Realized Losses.
The purpose of making Advances is to maintain a regular cash flow to
Certificateholders, rather than to guarantee or insure against losses. No
party will be required to make any Advances with respect to reductions in the
amount of the Monthly Payments on Mortgage Loans due to reductions made by a
bankruptcy court in the amount of a Monthly Payment owed by a borrower or a
reduction of the applicable Mortgage Rate by application of the Relief Act.]
SERVICING ADVANCES
The Servicer will be required to advance its own funds for certain
purposes, including preserving and restoring Mortgaged Properties, payment of
delinquent taxes and insurance premiums, managing and disposing of REO
Properties, and legal proceedings. Advances for these and similar purposes are
referred to as "Servicing Advances." The Servicer will be reimbursed for
Servicing Advances made with respect to a Mortgage Loan out of late payments
thereon, to the extent provided in the Pooling and Servicing Agreement, or out
of related liquidation proceeds and insurance proceeds, if the Servicer
determines that Servicing Advances are not recoverable from those sources,
then from collections and other recoveries on other Mortgage Loans. The
Pooling and Servicing Agreement will require that the Servicer not make a
Servicing Advance that is not expected to be recoverable from proceeds of the
related Mortgage Loan unless, in the Servicer's judgment, making that
Servicing Advance is in the best interests of the Certificateholders.
COLLECTION OF TAXES AND INSURANCE PREMIUMS
The Servicer will, to the extent required by the related loan
documents, maintain escrow accounts for the collection of hazard insurance
premiums as well as real estate taxes and similar items with respect to the
Mortgage Loans, and will make Servicing Advances with respect to delinquencies
in required escrow payments by the related borrowers.
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
their respective officers and employees.
PURCHASES OF DEFAULTED MORTGAGE LOANS
The Servicer may, but will not be obligated to, purchase any Mortgage
Loan that becomes three months or more delinquent in payment or as to which
the Servicer has started foreclosure proceedings, for a price equal to the
unpaid principal balance plus interest accrued and unpaid.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that each year a
firm of independent accountants will furnish a statement to the Trustee to the
effect that the firm has examined certain documents and records relating to
the servicing of mortgage 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 as 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 Mortgage Loan calculated as [ ]% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Mortgage Loan. The
Servicer will also be entitled to receive, to the extent provided in the
Pooling and Servicing Agreement, additional compensation, in the form of any
interest or other income earned on funds it has deposited in the Collection
Account pending remittance to the Trustee, as well as certain customary fees
and charges paid by borrowers (other than prepayment premiums).
[The Servicing Fee is subject to reduction as described above under
"-- Prepayment Interest Shortfalls."]
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Pooling and Servicing
Agreement, but it may employ one or more subservicers. If the Servicer chooses
to employ subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Pooling 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 Pooling and Servicing Agreement not to
resign except with the consent of the Trustee, unless the Servicer delivers to
the Trustee 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 Pooling and Servicing Agreement.
If the Servicer is in default under the Pooling and Servicing
Agreement, or the Trustee or Certificateholders having a majority of Voting
Rights may remove the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment, including
any Advance, to the Trustee for one Business Day after receipt of
written notice that the payment has not been made;
o failure by the Servicer to make a required Servicing Advance for
60 days after receipt of written notice that the Servicing
Advance has not been made;
o failure by the Servicer to fulfill any other material requirement
under the Pooling and Servicing Agreement within the applicable
time period;
o failure by the Servicer to be qualified to service mortgage loans
for either Fannie Mae or Freddie Mac;
o insolvency of the Servicer; and
o other events specified in the Pooling and Servicing Agreement.]
[If the Servicer is removed, the Trustee will immediately assume the
role of Servicer under the Pooling and Servicing Agreement unless another
Servicer is appointed pursuant to the Pooling and Servicing Agreement. The
Trustee will solicit bids from prospective successor Servicers as provided in
the Pooling and Servicing Agreement. If a qualifying bid is not received, the
Trustee will continue to service the Mortgage Loans if it is legally qualified
to do so until the Trustee appoints a successor Servicer as provided in the
Pooling and Servicing Agreement. If the servicing rights are sold, any
proceeds of the sale after deduction of expenses will be paid to the
predecessor Servicer.]
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Offered
Certificates will be affected by the rate of principal payments on the
Mortgage Loans (including prepayments, which may include amounts received by
virtue of purchase, condemnation, insurance or foreclosure) on the Mortgage
Loans. Yields will also be affected by the extent to which Mortgage Loans
bearing higher Mortgage Rates prepay at a more rapid rate than Mortgage Loans
with lower Mortgage 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 Offered Certificates and other
factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage 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
Mortgage Loans generally have due-on-sale clauses.
[Approximately [ ]% of the Mortgage Loans are subject to prepayment
premiums during intervals ranging from one to five years following
origination, as described under "Description of the Mortgage Pools" herein.
The prepayment premiums may have the effect of reducing the amount or the
likelihood of prepayment of these Mortgage Loans during intervals when a
prepayment premium would be payable.]
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage
Loans, repurchases of Mortgage Loans due to certain breaches of
representations and warranties or defective documentation and exercise by the
holder of the Residual Certificate of its right to purchase all of the
Mortgage Loans as described herein. The timing of changes in the rate of
prepayments, liquidations and purchases of the related Mortgage 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 Mortgage
Loans will depend on future events and on a variety of factors (as described
more fully herein and in the Prospectus under "Yield Considerations") no
assurance can be given as to the rate or the timing of principal payments on
the Offered Certificates. In general, the earlier a prepayment of principal of
the related Mortgage 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 Certificates 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.
[The Originator] will represent and warrant that as of the Closing Date each
Mortgaged Property was free of material damage. In the event of an uncured
breach of this representation and warranty that materially and adversely
affects the value of a Mortgage Loan, [the Originator] will be required to
repurchase the affected Mortgage Loan or, under certain circumstances,
substitute another mortgage loan. If any damage caused by earthquakes,
flooding, storms, wildfires, or landslides (or other cause) occurs after the
Closing Date, [the Originator] will not have any repurchase obligation. In
addition, the standard hazard policies covering the Mortgaged Properties
generally do not cover damage caused by earthquakes, flooding and landslides,
and earthquake, flood or landslide insurance may not have been obtained with
respect to the affected Mortgaged Properties. As a consequence, Realized
Losses could result. 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 Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may
reduce the weighted average lives of the Offered Certificates and will reduce
the yields on the Offered Certificates to the extent they are purchased at a
premium.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the related Certificates of principal
amounts that would otherwise be distributed over the remaining terms of those
Mortgage Loans. The rate of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in
their early years.
The yields on the Class [ ] Certificates may be adversely affected by
Net Prepayment Interest Shortfalls on the Mortgage Loans.
The yields to investors in the Offered Certificates may be affected
by the purchase of defaulted Mortgage Loans by the Servicer and by the
exercise by [ ] of its right to purchase the Mortgage Loans, as described
under "Description of the Certificates -- Optional Purchase of Mortgage Loans;
Termination of the Trust Fund" herein, or the failure of [ ] to exercise that
right.
If the purchaser of an Offered Certificate 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 Mortgage Loans, the
actual yield may be lower than that so calculated. Conversely, if the
purchaser of a Certificate 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 Mortgage Loans, the actual yield may
be lower than that so calculated.
[The Interest Rates applicable to the Offered Certificates will be
affected by the level of [ ] from time to time, and by the Mortgage Rates of
the Mortgage Loans from time to time as described under "Risk Factors --
Mortgage Loan Interest Rates May Limit Interest Rates on the Certificates."]
OVERCOLLATERALIZATION
[Describe as applicable.]
[SUBORDINATION OF THE CLASS [ ] CERTIFICATES
As described herein, the Senior Certificates are senior to the Class
[ ]Certificates, and the Senior Certificates will have a preferential right to
receive amounts in respect of interest to the extent of the Interest
Remittance Amount and amounts in respect of principal to the extent of the
Principal Distribution Amount for the related Mortgage Pool. As a result, the
yield on the Class [ ]Certificates will be particularly sensitive to
delinquencies and losses on the Mortgage Loans.]
WEIGHTED AVERAGE LIFE
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 lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a [ ]
prepayment standard or model. The model used in this Prospectus Supplement
represents [ ]. [ ] does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the Mortgage
Loans to be included in the Trust Fund.
[The following tables were prepared based on the following
assumptions, among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amounts are as set forth on the cover
of this Prospectus Supplement, and the Interest Rates are as
described herein;
o each Monthly Payment of principal and interest is timely received
on the first day of each month starting in [ ];
o principal prepayments are received in full on the first day of
each month starting in [ ] and there are no Net Prepayment
Interest Shortfalls;
o prepayments are received on the Mortgage Loans at the [ ] rate;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ]th day of each month, starting
in [ ];
o there are no re-purchases or substitutions of the Mortgage Loans;
o [the Mortgage Rates of the Adjustable Rate Mortgage Loans adjust
semi-annually;]
o [the value of the Index is [ ]%;]
o [the value of LIBOR is %;]
o the Certificates are issued on [ ];
o the sum of the Trustee Fee Rate and the Servicing Fee Rate is [
]%; and
o the Mortgage Loans were aggregated into assumed mortgage loans
having the following characteristics:]
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING
GROSS TERM TO TERM TO LOAN
PRINCIPAL COUPON MATURITY MATURITY AGE GROSS
LOAN TYPE BALANCE($) RATE(%) (MONTHS) (MONTHS) (MONTHS) MARGIN(%)
- --------- ---------- ------- -------- -------- -------- ---------
The actual characteristics of the Mortgage Loans may, and the
performance of the Mortgage Loans will, differ from the assumptions used in
constructing the tables set forth below, which are hypothetical in nature and
are 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 Mortgage Loans will prepay at a constant rate until
maturity, that all of the Mortgage Loans will prepay at the same rate or that
there will be no defaults or delinquencies on the Mortgage Loans. Moreover,
the diverse remaining terms to maturity of the Mortgage Loans could produce
slower or faster principal distributions than indicated, even if the weighted
average remaining term to maturity of the Mortgage Loans is as assumed. Any
difference between those assumptions and the actual characteristics and
performance of the Mortgage Loans or actual prepayment or loss experience will
cause the percentages of initial Class Principal Amounts outstanding over time
and the weighted average lives of the Offered Certificates to differ (which
difference could be material) from the corresponding [assumed prepayment
rates].
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Offered Certificates and set
forth the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at the indicated [assumed prepayment rates].
The weighted average life of an Offered Certificate is determined by
(1) multiplying the net reduction, if any, of the applicable Class Principal
Amount by the number of years from the date of issuance of the Offered
Certificate 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
described in (1) above.
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE
CLASS [ ] CERTIFICATES OUTSTANDING UNDER THE FOLLOWING [PREPAYMENT RATES]
Distribution Date [ ] [ ] [ ] [ ] [ ] [ ]
- ----------------- --- --- --- --- --- ---
Initial Percentage............. 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Termination...................
Without Optional Termination................
- ----------
* Based upon the assumption that [ ] exercises its option to repurchase the
Mortgage Loans as described under "Description of the Certificates --
Optional Purchase of Mortgage Loans; Termination of the Trust Fund"
herein, except in the case of the "Weighted Average Life With Optional
Termination."
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
[The Trust Agreement provides that the Trustee will elect to treat
the Trust Fund as a REMIC. Upon the issuance of the Offered Certificates,
Brown & Wood LLP ("Tax Counsel") will deliver its opinion to the effect that,
assuming compliance with the Pooling and Servicing Agreement, for federal
income tax purposes, the Trust Fund will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code"),
and that the Offered Certificates will represent the ownership of regular
interests in the REMIC.]
TAXATION OF OFFERED CERTIFICATES
[To be provided as applicable.]
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 Offered Certificates. 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
Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
[The [Senior Certificates] will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"), for so long as they are rated in one of the two
highest rating categories by one or more nationally recognized rating
agencies, and, as such, are legal investments for certain entities to the
extent provided in SMMEA.] These investments, however, will be subject to
general regulatory considerations governing investment practices under state
and federal laws.
Institutions whose investment activities are subject to review by
certain regulatory authorities may be or may become subject to restrictions,
which may be retroactively imposed by the regulatory authorities, on the
investment by those institutions in certain mortgage related securities. In
addition, several states have adopted or may adopt regulations that prohibit
certain state-chartered institutions from purchasing or holding similar types
of securities.
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Offered Certificates may be purchased
by them.
See "Legal Investment Considerations" in the Prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be applied by
the Depositor, or an affiliate thereof, toward the purchase of the Mortgage
Loans. The Mortgage 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 and
GACC have agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Depositor, all of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will
be effected in each case from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case,
at the time of sale. The Underwriter may effect these transactions by selling
the Certificates to or through dealers, and dealers may receive from the
Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profit on the resale of
the Certificates purchased by them, may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended (the "Act"). The
Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.]
Expenses incurred by the Depositor in connection with this offering
are expected to be approximately $[ ].
The Underwriter is an affiliate of the Depositor and GACC.
ERISA CONSIDERATIONS
[Employee benefit plans ("Plans") that are subject to the Employee
Retirement Income Security Act off 1974, as amended ("ERISA"), and any person
utilizing the assets of a Plan, may not purchase the Class [ ] Certificates,
except that any insurance company may purchase the Class [ ] Certificates with
assets of its general account if the exemptive relief granted by the
Department of Labor for transactions involving insurance company general
accounts in Prohibited Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July
12, 1995) is available with respect to the investment. The Pooling and
Servicing Agreement will include certain restrictions on the transfer of the
Offered Certificates.]
See "ERISA Considerations" in the accompanying Prospectus.
EXPERTS
[Describe as applicable.]
LEGAL MATTERS
Certain legal matters with respect to the Certificates 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 [ ] Certificates that they
be rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency] (the "Rating
Agencies "). It is a condition to the issuance of the Class [ ] Certificates
that they be rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency].
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 Offered Certificates of distributions in the amount
of scheduled payments on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Offered Certificates. The ratings on
the Offered Certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility that
holders of Offered Certificates might suffer a lower than anticipated yield
due to prepayments.
The security ratings assigned to the Offered Certificates 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 Offered Certificates
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
Offered Certificates or, if it does, what rating would be assigned by the
other rating agency. The rating assigned by the other rating agency to the
Offered Certificates could be lower than the ratings assigned by the Rating
Agencies.
<PAGE>
GLOSSARY OF DEFINED TERMS
[To be provided.]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered ACE
Securities Corp. [ ] Pass-Through Certificates (the "Global Securities") will
be available only in book-entry form. Investors in the Global Securities may
hold the Global Securities through any of DTC, Cedel or Euroclear. The Global
Securities will be tradable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
mortgage loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
interest payment date to and excluding the settlement date, on the basis of
either the actual number of days in the accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Securities. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (that would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedel or
Euroclear cash debt will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one-day period may substantially reduce
or offset the amount of overdraft charges, although this result will depend on
each Cedel Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last interest payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months
as applicable to the related class of Global Securities. For transactions
settling on the 31st of the month, payment will include interest accrued to
and excluding the first day of the following month. The payment will then be
reflected in the account of the Cedel Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one day period. If settlement is not completed on
the intended value date (that is, the trade fails), receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
o borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's
customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected
in their Cedel or Euroclear account in order to settle the sale
side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Cedel or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (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
Global Securities that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of 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 Beneficial Owners 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
Certificate Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (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 United States
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 United States
persons prior to that date 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 foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
<PAGE>
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES,
[ ,]
ORIGINATOR AND SERVICER
---------------------
PROSPECTUS SUPPLEMENT
---------------------
DEUTSCHE BANC ALEX. BROWN
The information in this prospectus supplement s not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, SEPTEMBER [ ], 1999
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
- -----------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] 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-[ ] of
this prospectus supplement and on page [ ] 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
- ----- ------------------- ------- --------- -------- ------------
[ ] $[ ] [ ]% $[ ] [ ]% $[ ]
- ---------
(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.
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.
[Describe assets of trust fund.]
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.
[Describe underwriting arrangements.]
On or about [ ], 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 [ ]
<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>
<TABLE>
<CAPTION>
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
Page Page
---- ----
<S> <C> <C> <C>
Summary of Terms..................................S-7 Payments......................................S-18
The Offered Notes..............................S-7 Payment Priorities............................S-19
The Mortgage Loans.............................S-8 Overcollateralization.........................S-19
[The Pre-Funding Account.......................S-9 Maturity Date.................................S-19
Servicing of the Mortgage Loans................S-9 Reports to Noteholders........................S-19
Optional Purchase of Mortgage Loans............S-9 Optional Redemption...........................S-20
Tax Status.....................................S-9 Rights of Noteholders Upon Occurrence of
ERISA Considerations...........................S-9 Event of Default ...........................S-20
Legal Investment Considerations................S-9 The Indenture Trustee.........................S-21
Ratings of the Notes...........................S-9 [The Insurance Policy............................S-21
Risk Factors.....................................S-11 The Insurer...................................S-21
Unpredictability and Effect of Prepayments....S-11 Insurer Financial Information.................S-21
[Effect of Creation and Maintenance Where You Can Obtain Additional Information
of Overcollateralization on Payments About the Insurer ..........................S-21
of Principal on the Notes ....................S-11 Year 2000 Readiness Disclosure................S-21
Geographic Concentration of Mortgage Financial Strength Ratings of the Insurer.....S-21
loans ........................................S-12 The Insurance Policy..........................S-21
[Some of the Loans in the Mortgage Description of the Mortgage Pool.................S-22
Pool Are More Likely to Default Than General.......................................S-22
Others, And Higher Than Expected Payments on the Mortgage Loans................S-22
Defaults On These Loans could Reduce Characteristics of the Mortgage Loans.........S-22
the Yield On Your Notes ......................S-13 [Subsequent Mortgage Loans....................S-29
[Effect of Lack of Primary Mortgage Additional Information...........................S-30
Insurance on the Notes .......................S-13 The Originator...................................S-30
Real Estate Market May Affect General.......................................S-30
Performance of Mortgage Loans ................S-13 Underwriting Criteria.........................S-30
[Early Principal Payment From Cash The Servicer.....................................S-30
Remaining in Pre-Funding Account .............S-14 General.......................................S-31
You Will Not Receive Physical Notes, Year 2000 Compliance..........................S-31
Which Can Cause Delays In Description of the Transfer and Servicing
Distributions and Hamper Your Ability Agreements ......................................S-31
to Pledge or Resell Your Notes................S-14 Sale and Assignment of the Mortgage Loans.....S-31
Potential Disruption of Computer Systems......S-14 Trust Fees and Expenses.......................S-32
Limited Ability to Resell Notes...............S-14 Voting Rights.................................S-33
Description of the Trust.........................S-15 General Servicing Provisions..................S-33
General.......................................S-15 No Delinquency Advances.......................S-33
The Owner Trustee.............................S-15 Servicing Advances............................S-33
The Residual Certificate......................S-15 Insurance Coverage............................S-33
Description of the Notes.........................S-15 Evidence as to Compliance.....................S-33
General.......................................S-15 Servicing Compensation and Payment
[Pre-Funding Account..........................S-16 of Expenses ................................S-34
Book-Entry Registration.......................S-17 Subservicing..................................S-34
Resignation or Removal of the Servicer........S-34
<PAGE>
Page Page
---- ----
Collection Account, Note Distribution General.......................................S-44
Account and Certificate Distribution Certain U.S. Federal Income Tax
Account ....................................S-35 Documentation Requirements .................S-44
The Owner Trustee and Indenture Trustee.......S-36 State Income Tax Considerations..................S-44
Duties of the Owner Trustee and Indenture ERISA Considerations.............................S-44
Trustee ....................................S-36 Legal Investment Considerations..................S-45
Yield Considerations.............................S-38 Use of Proceeds..................................S-45
General.......................................S-38 Underwriting.....................................S-45
Overcollateralization.........................S-40 Experts..........................................S-46
Maturity Date.................................S-40 Legal Matters....................................S-46
Weighted Average Life.........................S-40 Ratings..........................................S-46
Material Federal Income Tax Considerations.......S-44 Glossary of Defined Terms........................S-48
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS
Page Page
---- ----
<S> <C> <C> <C>
Description of the Trust Funds......................2 Description of Credit Support......................63
Assets...........................................2 General............................................63
Mortgage Loans...................................4 Subordinate Securities..........................64
Contracts........................................8 Cross-Support Provisions........................64
Agency Securities...............................10 Limited Guarantee...............................64
Mortgage Securities.............................14 Financial Guaranty Insurance Policy or
FHA Loans and VA Loans..........................15 Surety Bond ....................................65
Pre-Funding Accounts............................16 Letter of Credit................................65
Accounts........................................16 Pool Insurance Policies.........................65
Credit Support..................................17 Special Hazard Insurance Policies...............65
Cash Flow Agreements............................17 Borrower Bankruptcy Bond........................65
Use of Proceeds....................................17 Reserve Funds...................................65
Yield Considerations...............................17 Overcollateralization...........................66
General.........................................17 Certain Legal Aspects of Mortgage Loans............66
Interest Rate...................................18 General.........................................67
Timing of Payment of Interest...................18 Types of Mortgage Instruments...................67
Payments of Principal; Prepayments..............18 Interest in Real Property.......................68
Prepayments--Maturity and Weighted Average Life....20 Cooperative Loans...............................68
Other Factors Affecting Weighted Average Life......21 Land Sale Contracts.............................69
The Depositor......................................24 Foreclosure.....................................70
Description of the Securities......................24 Junior Mortgages................................74
General.........................................24 Anti-Deficiency Legislation and Other
Distributions...................................25 Limitations on Lenders .......................75
Available Distribution Amount...................26 Environmental Considerations....................76
Distributions of Interest on the Securities.....27 Due-on-Sale Clauses.............................79
Distributions of Principal of the Securities....28 Prepayment Charges..............................79
Components......................................29 Subordinate Financing...........................80
Distributions on the Securities of Prepayment Applicability of Usury Laws.....................80
Premiums ..........................................29 Alternative Mortgage Instruments................81
Allocation of Losses and Shortfalls.............29 Soldiers' and Sailors' Civil Relief Act
Advances in Respect of Delinquencies...............29 of 1940 ......................................81
Reports to Securityholders......................30 Forfeitures in Drug and RICO Proceedings........82
Termination.....................................32 Certain Legal Aspects of the Contracts.............82
Optional Purchases..............................33 General.........................................82
Book-Entry Registration and Definitive Security Interests in the Manufactured Homes....83
Securities ........................................33 Enforcement of Security Interests in
Description of the Agreements......................38 Manufactured Homes ...........................85
Agreements Applicable to a Series...............38 Soldiers' and Sailors' Civil Relief Act of 1940....85
Material Terms of the Pooling and Consumer Protection Laws........................85
Servicing Agreements and Underlying Transfers of Manufactured Homes;
Servicing Agreements .........................39 Enforceability of "Due-on-Sale" Clauses ......86
Material Terms of the Indenture.................60 Applicability of Usury Laws.....................86
<PAGE>
Page Page
---- ----
Material Federal Income Tax Considerations.........86 ERISA Considerations..............................133
General.........................................86 General........................................133
REMICs..........................................88 Pre-Funding Accounts...........................137
FASITs.........................................113 Legal Investment..................................139
Grantor Trust Funds............................118 Methods of Distribution...........................141
Standard Securities............................118 Additional Information............................142
Stripped Securities............................122 Incorporation of Certain Documents by Reference...143
Partnership Trust Funds........................126 Legal Matters.....................................143
Consequences for Particular Investors..........133 Financial Information.............................143
State and Other Tax Considerations................133 Rating............................................143
</TABLE>
<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 MORTGAGE LOANS IN
THE TRUST, THAT PERCENTAGE HAS BEEN CALCULATED ON THE BASIS OF THE TOTAL
PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ], UNLESS WE SPECIFY
OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF
THE NOTES -- RELATED DEFINITIONS" HOW THE PRINCIPAL BALANCE OF a MORTGAGE
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 MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR PRINCIPAL
BALANCES DETERMINED BY THAT METHOD, UNLESS WE SPECIFY OTHERWISE.
<PAGE>
THE OFFERED NOTES
ACE Securities Corp. [ ] Trust [ ] is offering the Class [ ] Asset Backed
Notes as part of Series [ ]. 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 [describe assets of the
trust.]
The notes will have an approximate total initial principal amount of $[
]. 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 [25]th day of
each month, beginning in [ ]. However, if the [25]th day is not a business
day, payments will be made on the next business day after the [25]th 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 mortgage loans that are available to make
payments on the notes, (2) the amount of interest received on the mortgage
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
mortgage loans that is released to the residual certificate, calculated as
described in this prospectus supplement,] and (4) [ ]. Funds actually received
on the mortgage loans may consist of expected, scheduled payments, and
unexpected payments resulting from prepayments or defaults by borrowers,
liquidation of defaulted mortgage loans, or repurchases of mortgage 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 [ ] 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 will be required or expected
to make any payments on the notes.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE NOTES
[Describe any applicable financial guaranty insurance policy or guarantee.]
[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 mortgage loans is
expected to exceed the total principal amount of the notes by approximately [
]%. This condition is referred to as "overcollateralization." Any interest
received on the mortgage 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 [ ], until the
mortgage loans have a total principal balance that exceeds the total
outstanding principal amount of the notes by the amount required by [ ]. We
cannot assure you that sufficient interest will be generated by the mortgage
loans to increase overcollateralization to the level required by [ ], or to
maintain it at that level.
See "Description of the Notes -- Overcollateralization" in this prospectus
supplement.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the assets of
the trust will consist primarily of [describe mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
See "Description of the Mortgage Pool" in this prospectus supplement for
a general description of the mortgage loans and "The Originator" in this
prospectus supplement for a description of the underwriting guidelines applied
in originating the mortgage loans.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust by the depositor from time to time, from [ ]
until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
See "Description of the Notes -- Pre-Funding Account" in this prospectus
supplement.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
See "The Servicer" and "Description of the Transfer and Servicing
Agreements" in this prospectus supplement.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other assets of the trust, after the total principal balance of the mortgage
loans declines to less than [ ]% of their initial total principal balance; if
[ ] does not exercise that option, [ ] may purchase the mortgage loans and
other assets of the trust.
If the mortgage 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 mortgage
loans.
TAX STATUS
[Tax status to be described as applicable.]
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
[To be provided as applicable.]
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 "[ ]" by [Rating Agency], and "[ ]" by
[Rating Agency].
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
PREPAYMENTS Borrowers may prepay their mortgage
loans in whole or in part at any
time; however, approximately [ ] of
the mortgage loans require the
payment of a prepayment penalty in
connection with any voluntary
prepayment during [ ]. The
prepayment penalties may be waived
by the servicer. A prepayment of a
mortgage 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 mortgage 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 mortgage loans, the credit
quality of the mortgage loans and
the collateral for the mortgage
loans.
See "Yield Considerations" in this
prospectus supplement for a
description of factors that may
influence the rate and timing of
prepayments on the mortgage loans.
[The prepayment experience of the
mortgage 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 MAINTENANCE OF
OVERCOLLATERALIZATION ON PAYMENTS OF
PRINCIPAL ON THE NOTES We describe in this prospectus
supplement the underwriting
guidelines used in originating the
mortgage loans, the collateral for
the mortgage loans and the
servicing of the mortgage loans.
These and other factors will affect
the rate of defaults and losses on
the mortgage loans, which in turn
will affect the rate at which
overcollateralization is created or
maintained. When
overcollateralization is less than
the level required by [ ], a
portion of interest collections on
the mortgage 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 [ ], a
portion of principal collections on
the mortgage loans will be released
to the residual certificate. This
will slow the rate at which you
receive payments of principal.]
GEOGRAPHIC CONCENTRATION OF MORTGAGE
LOANS Approximately [ ]% of the mortgage
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 mortgage loans
may be higher than if fewer of the
mortgage loans were concentrated in
one state because the following
conditions in [California] will
have a disproportionate impact on
the mortgage 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
mortgage 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 mortgage 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 mortgage
loans.
Natural disasters affect regions of
the United States from time to
time, and may result in increased
losses on mortgage loans in those
regions, or in insurance payments
that will constitute prepayments of
those mortgage loans.
For additional information
regarding the geographic
distribution of the mortgage loans
in the trust, see the applicable
table under "Description of the
Mortgage Pool" in this prospectus
supplement.
[SOME OF THE LOANS IN THE MORTGAGE POOL
ARE MORE LIKELY TO DEFAULT THAN OTHERS,
AND HIGHER THAN EXPECTED DEFAULTS ON
THESE LOANS COULD REDUCE THE YIELD ON
YOUR NOTES The payment schedules for most of
the mortgage loans in the pool
require the borrower to pay off the
principal balance of the loan
gradually over the life of the
loan. Some of the mortgage loans in
the pool, however, have payment
schedules under which the borrowers
makes relatively small payments of
principal over the life of the
loan, and then must make a large
final payment at maturity that pays
off the entire principal balance
outstanding. This final payment is
usually much larger than the
previous monthly payments. Because
the borrower's ability to make this
final payment usually depends on
the ability to refinance the loan
or sell the underlying property,
the risk of default is greater than
on other types of loans. High rates
of default on these types of loans
in the pool will result in greater
losses on your notes.
The ability of a borrower to
refinance the type of loan
described above or sell the
mortgaged property will depend upon
a number of factors, including:
o the level of mortgage interest
rates;
o the borrower's equity in the
mortgage property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these factors
will affect the default rate of
these mortgage loans in the pool.
You should refer to "Description of
the Mortgage Pool" for information
on the percentage of loans in the
mortgage pool that consists of
these loans.]
[EFFECT OF LACK OF PRIMARY MORTGAGE
INSURANCE ON THE NOTES Approximately [ ]% of the mortgage
loans have loan-to-value ratios
greater than [ ]%. None of the
mortgage loans are covered by a
primary mortgage insurance policy.
If borrowers default on their
mortgage loans, there is a greater
likelihood of losses than if the
loans were insured. We cannot
assure you that the applicable
credit enhancement will be adequate
to cover those losses.
See "Description of the Notes" in
this prospectus supplement.]
REAL ESTATE MARKET MAY AFFECT
PERFORMANCE OF MORTGAGE LOANS A decline in the real estate values
or in economic conditions generally
could increase the rates of
delinquencies, foreclosures and
losses on the mortgage loans to a
level that is significantly higher
than those experienced currently;
and no assurance can be given that
values of the properties securing
the mortgage loans will not decline
since the date of origination of
the mortgage loan. If the credit
enhancement described in this
prospectus supplement is not enough
to protect your notes from these
losses, the yield on your notes may
be reduced.
[EARLY PRINCIPAL PAYMENT FROM CASH
REMAINING IN PRE-FUNDING ACCOUNT If the cash in the pre-funding
account on the closing date is not
used to acquire additional mortgage
loans by [ ], then that cash will
be [paid to you on a proportionate
basis with the other noteholders in
reduction of the principal balance
of your notes.] If the amount of
that cash is substantial, you will
receive a significant unexpected
early payment of principal in (or
before) [ ]. We cannot assure you
that you will be able to reinvest
that money in another investment
with a comparable yield.]
YOU WILL NOT RECEIVE PHYSICAL NOTES,
WHICH CAN CAUSE DELAYS IN DISTRIBUTIONS
AND HAMPER YOUR ABILITY TO PLEDGE OR
RESELL YOUR NOTES Your ownership of the notes will be
registered electronically with DTC.
The lack of physical notes could:
o result in payment delays on the
notes because the indenture
trustee will be sending
distributions on the notes to
DTC instead of directly to you;
o make it difficult for you to
pledge your notes if physical
notes are required by the party
demanding the pledge; and
o could hinder your ability to
resell the notes because some
investors may be unwilling to
buy notes that are not in
physical form.
See "Description of the Notes --
Book-Entry Registration" in this
prospectus supplement.
POTENTIAL DISRUPTION OF COMPUTER SYSTEMS The transition from the year 1999
to the 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 mortgage 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. The certificates will not be
listed on any securities exchange.
[Additional risk factors to be provided as applicable.]
<PAGE>
DESCRIPTION OF THE TRUST
GENERAL
ACE Securities Corp. [ ] Trust [ ] (the "Trust" or the "Issuer") will
be a [statutory business trust] [common law trust] formed under the laws of [
] pursuant to an amended and restated Trust Agreement (the "Trust Agreement")
dated as of [ ] (the "Cut-off Date") between ACE Securities Corp. as depositor
(the "Depositor") and [ ] 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 Mortgage
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 [ ] (the "Closing Date"), the Trust will purchase the
Mortgage 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 [ ], as indenture trustee (the "Indenture Trustee").
The Trust's principal offices are located in [ ].
THE OWNER TRUSTEE
[ ] will act not in its individual capacity but solely as the Owner
Trustee under the Trust Agreement. [ ] is a [ ] banking corporation and its
principal offices are located at [ ]. The compensation of the Owner Trustee
will be paid by [ ].
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 [to be described as
applicable].
DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Class [ ] Notes (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 [describe as
applicable].
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 Mortgage Loans
is increased or decreased as described under "Description of the Mortgage
Pool" herein.
Payments on the Notes will be made on the [25th] day of each month
or, if the [25th] day is not a Business Day, on the next succeeding Business
Day, commencing in [ ] (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 banks in [New York] 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.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will
be deposited in an account (the "Pre-Funding Account") maintained by [ ].
During the period (the "Pre-Funding Period") from [ ] until [ ], the
Pre-Funding Amount will be maintained in the Pre-Funding Account. The
Pre-Funded Amount will be reduced during the Pre-Funding Period by the amount
of Subsequent Mortgage Loans (as defined herein) purchased by the Trust in
accordance with the [Sale and Servicing Agreement]. During the Pre-Funding
Period, the Pre-Funded Amount will be used only to purchase Subsequent
Mortgage Loans. Immediately following the Pre-Funding Period, any Pre-Funded
Amount remaining will be distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to
be provided as applicable] and all investment earnings on amounts on deposit
in the Pre-Funding Account will be distributed to [to be provided as
applicable] following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Notes (the "Book-Entry Notes") will be issued,
maintained and transferred on the book-entry records of The Depository Trust
Company ("DTC") in the United States [, or through Cedelbank ("Cedel") or the
Euroclear System ("Euroclear") in Europe] and through [its/their]
participating organizations (each, a "Participant"). The Book-Entry Notes will
be issued in minimum denominations in principal amount of $25,000 and integral
multiples of $1 in excess thereof.
Each Class of Book-Entry Notes will be represented by one or more
certificates registered in the name of the nominee of DTC. ACE Securities
Corp. (the "Depositor") has been informed by DTC that DTC's nominee will be
Cede & Co. [Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries, which in turn will hold
positions in customers' securities accounts in the depositaries' names on the
books of DTC.] No person acquiring an interest in a Book-Entry Note (each, a
"Beneficial Owner") will be entitled to receive a certificate representing an
interest (a "Definitive Note"), except as set forth below under "-- Definitive
Notes" and in the prospectus under "Description of the Securities --
Book-Entry Registration and Definitive Securities -- Definitive Securities."
Unless and until Definitive Notes are issued, it is anticipated that:
o the only "Noteholder" of the Notes will be Cede & Co., as nominee
of DTC, and Beneficial Owners will not be Noteholders as that
term is used in the Indenture.
o Beneficial Owners will receive all distributions of principal of,
and interest on, the Offered Notes from the Indenture Trustee
through DTC [, Cedel or Euroclear, as applicable,] and
[its/their] Participants.
o while the Notes are outstanding, under the rules, regulations and
procedures creating and affecting DTC [Cedel and Euroclear] and
[its/their] operations, DTC [Cedel and Euroclear] [is/are]
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 distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess
certificates, DTC [Cedel and Euroclear] [has/have] in place a
mechanism by which Beneficial Owners will receive distributions
and will be able to transfer their interest.
None of the Depositor, GACC, the Servicer , the Owner Trustee or the
Indenture Trustee [or additional parties] (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.
For a more complete description of book-entry registration and
clearance and the rules and regulations governing DTC [,Cedel and Euroclear],
see "Description of the Securities -- Book-Entry Registration and Definitive
Securities" in the prospectus".
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 set forth in the prospectus under "
Description of the Securities --Book-Entry Registration and Definitive
Securities -- Definitive Securities." Upon the occurrence of an event
described in that section, the 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 Trustee will re-issue the Book-Entry Notes as Definitive
Notes in the respective principal amounts owned by individual Beneficial
Owners, and thereafter the Trustee will recognize the holders of the
Definitive Notes as Noteholders under the Indenture and the Sale and Servicing
Agreement.
PAYMENTS
Payments on the Notes on each Distribution Date will be made from the
Available Collection Amount. The Available Collection Amount will be
determined as [to be provided as applicable.]
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 [ ]. [If
the Residual Certificateholder does not exercise its option to purchase the
Mortgage 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 be
provided as applicable.]] 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 [to be provided
as applicable].
PAYMENTS OF PRINCIPAL. Principal payments will be made to Noteholders
on each Distribution Date in an amount generally equal to [to be provided as
applicable].
o The "Principal Distribution Amount" for any Distribution Date
will be equal to the sum of [to be provided as applicable].
PAYMENT PRIORITIES
On each Distribution Date, the Available Funds will be applied in the
following order of priority:
[to be provided as applicable.]
OVERCOLLATERALIZATION
On the Closing Date the Cut-off Date Balance is expected to exceed
the Original Class Principal Amount of the Notes by approximately $[ ]. The
weighted average Net Mortgage Loan Rate (as defined below) of the Mortgage
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 [to be
provided as applicable].
o The "Net Mortgage Loan Rate" for any Mortgage Loan equals [to be
provided as applicable].
MATURITY DATE
The Class Principal Amount of the Notes and all interest accrued and
unpaid on the Notes will be payable in full on [ ] (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 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 the Servicing Fees 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 Mortgage 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 [ ]% of the Cut-off Date Balance, [ ] will (subject to
the terms of the Sale and Servicing Agreement) have the option to purchase the
Mortgage Loans, any REO Property and any other assets of the Trust for the
Termination Price. If [ ] does not exercise that option, [ ] 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, the holders of Notes
evidencing more than [ ]% of the Class Principal Amount of the Notes then
outstanding may exercise their remedies under the Indenture. These remedies
include [to be provided as applicable]. See "Description of the Agreements --
Material Terms of the Indenture" in the prospectus.
THE INDENTURE TRUSTEE
[ ], a [ ], will be the Indenture Trustee under the Indenture. The
Indenture Trustee will be entitled to [describe applicable fees of the
indenture trustee]. The Indenture Trustee's "Corporate Trust Office" is
located at [ ], or such address as the Indenture Trustee may designate from
time to time by notice to the Noteholders, the Depositor and the Servicer.
[THE INSURANCE POLICY
The following information has been provided by [ ] (the "Insurer")
for inclusion in this prospectus supplement. Neither the Depositor nor the
Underwriter makes any representation as to the accuracy or completeness of
this information.
The Insurer 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
"Insurance Policy") and the Insurer set forth below under this heading "The
Insurance Policy." Additionally, the Insurer makes no representation regarding
the Notes or the advisability of investing in the Notes.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
YEAR 2000 READINESS DISCLOSURE
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] Mortgage 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 $[ ] (the
"Cut-off Date Balance"). The Mortgage Loans are secured by [to be provided as
applicable] ("Mortgages"). All of the Mortgage Loans will be [description of
Mortgage Loans.]
Generally, the Mortgage Loans were originated or acquired by the
Originator (as defined herein) in one of the following ways:
o [to be provided as applicable].
For a description of the underwriting criteria applicable to the
Mortgage Loans, see "The Originator -- Underwriting Criteria" herein.
The Servicer will be required to service the Mortgage 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 MORTGAGE LOANS
[To be provided as applicable.]
CHARACTERISTICS OF THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate
total characteristics as of the Cut-off Date. Prior to the issuance of the
Notes, Mortgage Loans may be removed from the Mortgage 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 Mortgage Pool prior to the issuance of the Notes.
Wherever reference is made herein to a percentage of some or all of
the Mortgage Loans, the percentage is determined (unless otherwise specified)
on the basis of the total principal balance of the related Mortgage Loans as
of the Cut-off Date.
Approximately [ ] of the Mortgage 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 [to be provided as applicable].
The Mortgage Loan Rates of the Mortgage Loans range from
approximately [ ]% annually to [ ]% annually. The weighted average Mortgage
Loan Rate of the Mortgage Loans is approximately [ ]% annually.
The Principal Balances of the Mortgage Loans range from approximately
$[ ] to $[ ]. The Mortgage Loans have an average Principal Balance
of approximately $[ ].
The weighted average Combined Loan-to-Value Ratio at origination of
the Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number,
total Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may
not equal the totals due to rounding.)
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The average Cut-off Date Principal Balance is approximately $ .
</TABLE>
<TABLE>
<CAPTION>
LOAN-TO-VALUE RATIOS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF ORIGINAL NUMBER OF TOTAL BY TOTAL
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately %.
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE RATES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
- -------------
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately % per annum.
</TABLE>
<TABLE>
<CAPTION>
LOAN TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF MATURITIES NUMBER OF TOTAL BY TOTAL
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average original term to maturity is approximately months.
</TABLE>
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
REMAINING TERM TO NUMBER OF TOTAL BY TOTAL
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
The weighted average remaining term to maturity of the fully
amortizing Mortgage Loans is approximately months.
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
LOAN PURPOSES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
DOCUMENTATION TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
CREDIT GRADES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT PENALTIES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PREPAYMENT PENALTY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ %
----- ---------------- ------
Total....................... $ 100.00%
</TABLE>
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase additional Mortgage Loans
(the "Subsequent Mortgage Loans") on [any] date, as specified in the [Sale and
Servicing Agreement] (each, a "Subsequent Transfer Date") will be subject to
the Subsequent Mortgage Loans meeting the following criteria: [to be provided
as applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary
significantly from time to time, subject to the requirements described above,
and may bear no particular relationship to the characteristics of the initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the Mortgage Pool
and the Mortgaged Properties is based upon the Mortgage 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 Mortgage Loans are removed
from or added to the Mortgage Pool as described herein under "Description of
the Mortgage Pool," the removal or addition, to the extent material, will be
noted in the Current Report on Form 8-K.
THE ORIGINATOR
GENERAL
[Describe the Originator.]
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 Mortgage Loans and not from the Originator
directly. As a result, there can be no assurance that the Mortgage 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 Mortgage Loans were originated.
[Describe Originator's underwriting guidelines.]
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
[ ] (the "Servicer") will service the Mortgage Loans pursuant to the
terms of the Sale and Servicing Agreement.
[Description of the servicer.]
YEAR 2000 COMPLIANCE
[To be provided as applicable.]
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 MORTGAGE LOANS
On the Closing Date, GACC will sell the Mortgage Loans (other than
the right to receive certain charges payable by borrowers) to the Depositor,
and the Depositor will sell the Mortgage 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 Mortgage
Loans to the Indenture Trustee in exchange for the Notes. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the Sale and
Servicing Agreement (the "Mortgage Loan Schedule").
[In addition, the Depositor will, as to each Mortgage Loan, deliver
to a custodian appointed by the Indenture Trustee (the "Custodian") the
following documents (together, with respect to each Mortgage Loan, a "Mortgage
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 Mortgage Loans against the claims of creditors of
GACC or subsequent purchasers. In the event that, with respect to any Mortgage
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 Mortgage Loan
File within ninety days after the conveyance of the related Mortgage Loan to
the Trust to ascertain that all required documents have been executed and
received.
Under the terms of the agreement (the "Mortgage Loan Sale Agreement")
pursuant to which the Depositor will purchase the Mortgage Loans from GACC,
and of the Sale and Servicing Agreement, the Custodian will conduct an initial
review of the Mortgage Loan documents and will notify the Depositor and GACC
as to each Mortgage 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 Mortgage Loan on the Mortgage Loan
schedule or otherwise defective. If any Mortgage Loan document is not
delivered or any material defect in a document is not cured within the time
period specified in the Mortgage Loan Sale Agreement, GACC will be required to
repurchase the affected Mortgage 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 Mortgage Loan that
satisfies the requirements specified in the Sale and Servicing Agreement.
GACC will make to the Depositor under the Mortgage 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. In the event of a breach of any of these representations or
warranties that materially and adversely affects the value of any Mortgage
Loan or the interests of the Noteholders, 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 Mortgage Loan from the Trust for the
Repurchase Price or, in certain circumstances, to substitute another Mortgage
Loan.
No assurance can be given that, at any particular time, GACC will be
capable, financially or otherwise, of repurchasing defective Mortgage Loans or
substituting additional Mortgage Loans for defective Mortgage 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 [ ].
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.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance
with the provisions of the Sale and Servicing Agreement.
[Describe servicing provisions as applicable.]
NO DELINQUENCY ADVANCES
In the event of a delinquency or default with respect to a Mortgage
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 Mortgage Loan.
SERVICING ADVANCES
The Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Mortgage 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 Mortgage Loan, or with respect to any
Liquidated Mortgage 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
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 Mortgage Loan calculated at [ ]% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Mortgage Loan. No
Servicing Fee will be payable on a Liquidated Mortgage Loan unless the
Servicer determines that additional collection efforts are warranted with
respect to that Mortgage Loan. The Servicer will be entitled to reimbursement
from collections on the Mortgage Loans for certain expenses before any amounts
are paid to Noteholders.
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage 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 [ ], unless the Servicer delivers to [ ] 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,
the Indenture Trustee or Noteholders having a majority of voting rights may
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 Mortgage 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
another Servicer is appointed pursuant to the Sale and Servicing Agreement.
The Indenture Trustee may continue to service the Mortgage Loans if it is
legally qualified to do so or may appoint a successor Servicer as provided in
the Sale and Servicing Agreement].
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to deposit in a segregated account (the
"Collection Account") within [ ] Business Days of receipt all payments
received on or after the Cut-off Date on account of principal and interest on
the Mortgage Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Mortgage 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 [ ]. Any net losses on these investments will be paid by [ ].
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 [ ] day of each month, or if the [ ] 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. 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.
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 Mortgage 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 Mortgage 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 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 Mortgage 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 Mortgage 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 [ ]% 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. 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 Mortgage Loans (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Mortgage Loans. Yields will
also be affected by the extent to which Mortgage Loans bearing higher Mortgage
Loan Rates prepay at a more rapid rate than Mortgage Loans with lower Mortgage
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
Mortgage 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 Mortgage 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 Mortgage Loan, or may simply release its lien on
the existing collateral, leaving the related Mortgage 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 Mortgage 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 [ ] of the Mortgage 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 Mortgage Loans. A prepayment premium may be waived by the
Servicer under certain circumstances. The remaining Mortgage 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 Mortgage Loans, the Mortgage Loans are likely to be subject to
higher prepayments than if prevailing rates remain at or above the interest
rates on the Mortgage Loans. Conversely, if prevailing interest rates rise
above the interest rates on the Mortgage Loans, the rate of prepayment would
be expected to decrease.
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage
Loans and repurchases of Mortgage 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 Mortgage 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 Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the prospectus under
"Yield Considerations") no assurance can be given as to the rate or the timing
of principal payments on the Notes. In general, the earlier a prepayment of
principal of the related Mortgage 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 Mortgage Loans in whole or in
part. Any repurchases or repayments of the Mortgage 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 Mortgage Loans.
The Depositor and GACC make no representations as to the particular
factors that will affect the prepayment of the Mortgage Loans, as to the
relative importance of these factors, or as to the percentage of the principal
balance of the Mortgage 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 Mortgage Loans and of
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties will
affect the rate and timing of principal payments on the Mortgage 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 Mortgage 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 Mortgage Loans with
high loan-to-value ratios, or on Mortgage 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 Mortgage 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 Mortgage 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.
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 [ ] of its right to purchase the Mortgage Loans, as described under
"Description of the Notes -- Optional Redemption" herein, or the failure of [
] 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 Mortgage 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 Mortgage 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 [ ] day (or later) of the month
following the Accrual Period.
OVERCOLLATERALIZATION
[Describe as applicable.]
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 [to be provided as applicable]. 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 Mortgage 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 Mortgage 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 Mortgage 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) and [to be provided as applicable].
Prepayments on loans such as the Mortgage Loans are commonly measured
relative to a prepayment standard or model. The model used in this prospectus
supplement for the Mortgage Loans represents [to be provided as applicable]. [
] 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 Mortgage Loans. Neither the
Depositor nor the Underwriter makes any representation about the
appropriateness of the [ ] 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 Mortgage
Loan is timely received on the last day of each month starting in
[ ];
o principal prepayments are received in full on the last day of
each month starting in [ ], and each prepayment includes 30 days
of interest on the Mortgage Loan;
o prepayments are received on the Mortgage Loans at the applicable
constant rates indicated;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ] day of each month, starting
in [ ];
o there are no re-purchases or substitutions of the Mortgage Loans;
o the Notes are issued on [ ]; and
o the Mortgage Loans were aggregated into assumed Mortgage Loans
having the following characteristics:]
HOME NET HOME REMAINING
HOME LOAN LOAN TERM TO
LOAN PRINCIPAL INTEREST INTEREST MATURITY
NUMBER BALANCE RATE RATE (IN MONTHS)
------ ------- ---- ---- -----------
The actual characteristics of the Mortgage Loans may, and the
performance of the Mortgage 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
Mortgage Loans will prepay at a constant rate until maturity, that all of the
Mortgage Loans will prepay at the same rate or that there will be no defaults
or delinquencies on the Mortgage Loans. Moreover, the diverse remaining terms
to maturity of the Mortgage Loans could produce slower or faster principal
payments than indicated in the table in the [assumed prepayment rate]
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between those assumptions and the
actual characteristics and performance of the Mortgage 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 [assumed prepayment rate].
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
[assumed prepayment rate].
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 [PREPAYMENT RATES]
Class [ ]
--------------------------------------------------------------------------
Distribution Date [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- ----------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Redemption.................
Without Optional Redemption..............
- ----------
* Based upon the assumption that [ ] does not exercise its option to
repurchase the Mortgage Loans as described under "Description of the Notes
-- Optional Redemption" herein.
</TABLE>
<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
[To be provided as applicable.]
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 Mortgage Loans.
The Mortgage 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 $[ ].
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.
[ ] 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
[To be provided as applicable].
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 "[
]" by [Rating Agency] and "[ ]" by [Rating Agency]. [Rating Agency] and
[Rating Agency] 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 Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage 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 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
[To be provided.]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered ACE
Securities Corp. [ ] Asset Backed Notes (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Cedel or Euroclear. The Global
Securities will be tradable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
mortgage loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
interest payment date to and excluding the settlement date, on the basis of
either the actual number of days in the accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Securities. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (that would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedel or
Euroclear cash debt will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one-day period may substantially reduce
or offset the amount of overdraft charges, although this result will depend on
each Cedel Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last interest payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months
as applicable to the related class of Global Securities. For transactions
settling on the 31st of the month, payment will include interest accrued to
and excluding the first day of the following month. The payment will then be
reflected in the account of the Cedel Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one day period. If settlement is not completed on
the intended value date (that is, the trade fails), receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
o borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's
customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected
in their Cedel or Euroclear account in order to settle the sale
side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Cedel or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (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
Global Securities that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of 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 Beneficial Owners 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
Certificate Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (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 United States
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 United States
persons prior to that date 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 foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
<PAGE>
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
----------------------
PROSPECTUS SUPPLEMENT
----------------------
DEUTSCHE BANC ALEX. BROWN
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, SEPTEMBER [ ], 1999
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by
Ace Securities Corp. The assets in each trust fund will generally consist of
one or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o mortgage loans secured by multi-family residential properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginnie
Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities
backed by mortgage loans secured by residential properties or
participations in those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
Ace Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each
having is own distinct designation. Each series will be issued in one or more
classes and will evidence beneficial ownership of, or be secured by, the
assets in the trust fund that the series relates to. A prospectus supplement
for a series will specify all of the terms of the series and of each of the
classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is September , 1999.
<PAGE>
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o single family and/or multifamily mortgage loans, which may
include Home Equity Loans, Home Improvement Contracts and Land
Sale Contracts (each as defined herein);
o home improvement installment sales contracts or installment
loans that are unsecured ("Unsecured Home Improvement Loans");
o manufactured housing installment sale contracts or installment
loan agreements (the "Contracts");
o any combination of "fully modified pass-through"
mortgage-backed certificates guaranteed by the Government
National Mortgage Association ("Ginnie Mae"), guaranteed
mortgage pass-through securities issued by Fannie Mae ("Fannie
Mae") and mortgage participation certificates issued by the
Federal Home Loan Mortgage Corporation ("Freddie Mac")
(collectively, "Agency Securities");
o 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
o 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 ACE Securities
Corp. 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 prospectus supplement. The
depositor will select each Asset to include in a trust fund from among those
it has purchased, either directly or indirectly, from a prior holder (an
"Asset Seller"), which may be an affiliate of the depositor and which prior
holder may or may not be the originator of that mortgage loan, Unsecured Home
Improvement Loan or Contract.
The Assets included in the trust fund for your series may be subject
to various types of payment provisions:
o "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;
o "Adjustable Rate Assets," which may provide for periodic
adjustments to their rates of interest to equal the sum of a
fixed margin and an index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce
the borrowers' monthly payments during the early period after
origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable thereon;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to
pay interest due thereon, and (2) an increase in those monthly
payments in later years at a predetermined rate resulting in
full repayment over a shorter term than the initial
amortization terms of those Assets;
o "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 their unpaid principal balances, and this
unpaid interest will be added to the principal balances of
those Assets and will be paid, together with interest on the
unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that
increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject
to provisions pursuant to which, subject to certain
limitations, the related borrowers may exercise an option to
convert the adjustable interest rate to a fixed interest rate;
and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers 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
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 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 for 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 borrower'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 borrower'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 that Increasing
Payment Asset. The borrower'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 the Increasing Payment Asset at the
related interest rate, without negative amortization. A borrower's monthly
payments on an Increasing Payment Asset may, however, not be sufficient to
result in any reduction of the principal balance of that Asset until after the
period when those payments may be increased.
The Securities (as defined herein) will be entitled to payment only from
the assets of the related trust fund and will not be entitled to payments from
the assets of any other trust fund established by the depositor. The assets of
a trust fund may consist of certificates representing beneficial ownership
interests in, or indebtedness of, another trust fund that contains the Assets,
if specified in the prospectus supplement.
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on (1) 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") or (2) a primarily residential property that consists of
five or more residential dwelling units, and which may include limited retail,
office or other commercial space (a "Multifamily Property"). Single Family
Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." 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 also include:
o Apartments owned by cooperative housing corporations
"Cooperatives"); and
o Leasehold interests in properties, the title to which is held
by third party lessors. The term of these leaseholds will
exceed the term of the related mortgage note by at least five
years or some other time period specified in the prospectus
supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans");
o Secured home improvement installment sales contracts and
secured installment loan agreements ("Home Improvement
Contracts"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts")
for the sale of properties pursuant to which the borrower
promises to pay the amount due thereon to the holder thereof
with fee title to the related property held by that holder
until the borrower has made all of the payments required
pursuant to that Land Sale Contract, at which time fee title is
conveyed to the borrower.
The originator of each mortgage loan will have been a person other than
the depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by 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
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below. LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular 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 for Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of that loan and (b) the sales price
for that property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise specified in the 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 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 THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
mortgage loans as of, unless otherwise specified in that
prospectus supplement, the close of business on the first day
of the month of formation of the related trust fund (the
"Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties
are located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for 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;
o information regarding the payment characteristics of the
mortgage loans, including balloon payment and other
amortization provisions;
o the number of mortgage loans that are delinquent and the number
of days or ranges of the number of days those mortgage loans
are delinquent; and
o the material underwriting standards used for the mortgage
loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the 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 that 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 (the "Commission") within fifteen
days after that initial issuance. The characteristics of the mortgage loans
included in a trust fund will not vary by more than five percent (by total
principal balance as of the Cut-off Date) from the characteristics thereof
that are described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
(1) Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property and/or (2) 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
prospectus supplement will specify whether the Home Improvement Contracts are
FHA loans and, if so, the limitations on any FHA insurance. In addition, the
prospectus supplement will specify whether the mortgage loans contain some
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 some other interval as is specified in the prospectus supplement or for
payments in another manner described in the 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 in the related mortgage note, in each case as described
in the 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
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 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 prospectus supplement. If the holders of any class or
classes of Offered Securities are entitled to all or a portion of any
Prepayment Premiums collected from the mortgage loans, the prospectus
supplement will specify the method or methods by which any of these amounts
will be allocated. See "--Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the 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 that loan. From time to time before the
expiration of the related draw period specified in a Revolving Credit Line
Loan, principal amounts on that Revolving Credit Line Loan may be drawn down
(up to a maximum amount as set forth in the prospectus supplement) or repaid.
If specified in the prospectus supplement, new draws by borrowers under the
Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total 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
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some 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 that 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 that 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 described in the 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 the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any Unsecured Home
Improvement Loans, including:
o the total 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;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Unsecured Home Improvement
Loans;
o the earliest and latest origination date and maturity date of
the Unsecured Home Improvements Loans;
o the interest rates or range of interest rates and the weighted
average interest rates borne by the Unsecured Home Improvement
Loans;
o the state or states in which most of the Unsecured Home
Improvement Loans were originated;
o information regarding the prepayment provisions, if any, of the
Unsecured Home Improvement Loans;
o 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;
o information regarding the payment characteristics of the
Unsecured Home Improvement Loans;
o the number of Unsecured Home Improvement Loans that are
delinquent and the number of days or ranges of the number of
days that Unsecured Home Improvement Loans are delinquent; and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
If specific information respecting the Unsecured Home Improvement Loans
is unknown 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
that 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 Commission within fifteen days after the related initial
issuance. The characteristics of the Unsecured Home Improvement Loans included
in a trust fund will not vary by more than five percent (by total principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the prospectus supplement, each Contract will
be secured by a security interest in a new or used manufactured home (each, a
"Manufactured Home"). The Contracts may include Contracts that 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." The method
of computing the "Loan-to-Value Ratio" of a Contract will be described in the
prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement relating to a trust fund whose Assets include
a substantial proportion of Contracts will contain certain information, as of
the dates specified in that prospectus supplement and to the extent then
applicable and specifically known to the depositor, with respect to any
Contracts, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date;
o whether the Manufactured Homes were new or used as of the
origination of the related Contracts;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Contracts;
o the range of maturity dates of the Contracts;
o the range of the Loan-to-Value Ratios at origination of the
Contracts;
o the annual percentage rate on each Contract (a "Contract Rate") or
range of Contract Rates and the weighted average Contract Rate borne
by the Contracts;
o the state or states in which most of the Manufactured Homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
Contracts;
o for 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;
o the number of Contracts that are delinquent and the number of days
or ranges of the number of days those Contracts are delinquent;
o information regarding the payment characteristics of the Contracts;
and
o the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is unknown to the
depositor at the time the 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 that 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 Commission within fifteen days after the related initial issuance.
The characteristics of the Contracts included in a trust fund will not vary by
more than five percent (by total principal balance as of the Cut-off Date)
from the characteristics thereof that are described in the prospectus
supplement.
The information described above regarding the Contracts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
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 some other interval as is
specified in the 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 a Contract Rate that
is fixed over its term or that adjusts from time to time, or as otherwise
specified in the 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
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 that may
be required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section
306(d) of the National Housing Act of 1934 (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 regarding 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
prospectus supplement. If the trust fund includes Ginnie Mae certificates,
your prospectus supplement will include any material additional information
regarding the Ginnie Mae guaranty program, the characteristics of the pool
underlying those Ginnie Mae certificates, the servicing of the related pool,
the payment of principal and interest on Ginnie Mae certificates and other
relevant matters regarding the Ginnie Mae certificates.
Except as otherwise specified in the 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 that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
total amount of the monthly principal and interest payments on each related
FHA loan or VA loan, minus servicing and guaranty fees totaling the excess of
the interest on that FHA loan or VA loan over the Ginnie Mae certificates'
interest rate. In addition, each payment to a holder of a Ginnie Mae
certificate will include proportionate pass-through payments to that 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 related 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 (for
example, 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 the Ginnie Mae certificates.
Pursuant to that agreement, that 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 those
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 to make timely payments of all amounts due on the
Ginnie Mae certificate, even if the payments received by that 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 that payment. Upon that notification and request, Ginnie Mae will make
those 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 that payment, the registered
holder of the Ginnie Mae certificate has recourse against only Ginnie Mae to
obtain that 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 the Ginnie Mae certificates for any amounts that are
unpaid 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 the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the 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 that 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. If the
trust fund includes Fannie Mae certificates, your prospectus supplement will
include any material additional information regarding the Fannie Mae program,
the characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about 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 that holder's proportionate share
of scheduled principal and interest at the applicable interest rate provided
for by that Fannie Mae certificate on the underlying mortgage loans, whether
or not received, and that holder's proportionate share of the full principal
amount of any prepayment or foreclosed or other finally liquidated mortgage
loan, whether or not the related 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 those
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 those 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. For a Fannie Mae certificate issued in
book-entry form, distributions thereon will be made by wire, and for 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, as long as
the Fannie Mae certificates and underlying mortgage loans meet the criteria of
the rating agency or agencies rating the Certificates. The Fannie Mae
certificates and underlying mortgage loans will be described in the 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 those 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 the 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 of
these mortgage loans 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. If the
trust fund includes Freddie Mac certificates, your prospectus supplement will
include any material additional information regarding the Freddie Mac guaranty
program, the characteristics of the pool underlying that Freddie Mac
certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac certificate and any other relevant matters about
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 interest 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 that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share thereof, but does not, except if and to the
extent specified in the 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
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no later
than one year after demand has been made upon the borrower 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 for the mortgage loans in the same manner as for mortgage
loans that 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 borrower, 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 those 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 those 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
the Freddie Mac certificates and underlying mortgage loans meet the criteria
of the rating agency or agencies rating the Securities. The Freddie Mac
certificates and underlying mortgage loans will be described in the 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") that 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 those
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 that entity guarantees the
underlying securities backing the Stripped Agency Securities or to the extent
described above for a Stripped Agency Security backed by a pool of mortgage
loans, unless otherwise specified in the prospectus supplement. If the trust
fund includes Stripped Agency Securities, your prospectus supplement will
include any material additional information regarding the characteristics of
the assets underlying the Stripped Agency Securities, the payments of
principal and interest on the Stripped Agency Securities and other relevant
matters about 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 will have been
(1) issued by an entity other than the depositor or its affiliates;
(2) acquired in bona fide secondary market transactions from persons
other than the issuer thereof or its affiliates; and
(3) (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
those 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 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 the 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 of that series. As used in this prospectus, the terms "mortgage
loans," "Unsecured Home Improvement Loans" and "Contracts" include the
mortgage loans, Unsecured Home Improvement Loans or Contracts, as applicable,
underlying the Mortgage Securities in your trust fund. References in this
prospectus to advances to be made and other actions to be taken by the master
servicer in connection with the Assets may include any advances made and other
actions taken pursuant to the terms of the applicable 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. The 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 that FHA loan.
Mortgage loans, Unsecured Home Improvement Loans and Contracts that are
FHA loans are insured by the FHA (as described in the 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 those loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of this type of 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 some 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
that VA loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
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 that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and 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
the Securities having a total principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for
that series on the date of its issuance. The Pre-Funded Amount for a series
will be specified in the prospectus supplement, and will not in any case
exceed 50% of the total initial Security Balance of the related Securities.
Any Subsequent Assets will be required to satisfy certain eligibility criteria
more fully set forth in the prospectus supplement, which criteria will be
consistent with the eligibility criteria of the Assets initially included in
the trust fund, subject to those exceptions that are expressly stated in the
prospectus supplement. In addition, certain conditions must be satisfied
before the Subsequent Assets are transferred into the trust fund, for example,
the delivery to the rating agencies and to the trustee of any required
opinions of counsel. See "ERISA Considerations--Pre-Funding Accounts" for
additional information regarding Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. 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 prospectus supplement. In addition, if
specified in the 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 on 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 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 prospectus supplement will, to the extent described herein
and in the prospectus supplement deposit all payments and collections received
or advanced with respect to the Assets and other assets in the trust fund.
This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as
cash or invested in certain short-term, investment grade obligations, in each
case as described in the 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 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 that
series or by one or more other types of credit support, for example, a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any of these types of coverage for the
Securities of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series
of Securities. See "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the 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, for example,
interest rate swap agreements, interest rate cap or floor agreements, currency
swap 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 swap agreements might be included in
the trust fund if some or all of the Assets were denominated in a non-United
States currency.) The principal terms of any related guaranteed investment
contract or other agreement (any of these types of agreement, a "Cash Flow
Agreement"), including 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 prospectus supplement will provide certain information with respect to the
borrower under any 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 that purchase, and to pay for certain expenses incurred
in connection with that 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 Interest 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).
INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable 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
for any series will specify the Interest Rate for each class of Securities or,
in the case of a variable or adjustable Interest Rate, the method of
determining the Interest Rate; the effect, if any, of the prepayment of any
Asset on the 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 borrower under a
Cash Flow Agreement.
If specified in the 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 Interest Rate and purchase
price of that Security because, while interest may accrue on each Asset during
a certain period (each, an "Accrual Period"), the distribution of that
interest will be made on a day that may be several days, weeks or months
following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities entitled to distributions of
interest (or addition to the Security Balance of a class of Accrual
Securities) will be made by or on behalf of the trustee each month on the date
specified in the related prospectus supplement (each date, a "Distribution
Date"), and will include interest accrued during the Accrual Period for that
Distribution Date. As indicated above under "--Interest Rate," if the 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 those Securities may be
lower than the yield that would result if the Accrual Period ended on the 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 principal prepayments occur will
be affected by a variety of factors, including 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), those assets are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by those assets. However, you should note that some 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 those Assets, and by the extent to
which the servicer of any of these mortgage loans is able to enforce these
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 those 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 some 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 that 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 those classes.
When a full prepayment is made on a mortgage loan or a Contract, the
borrower 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 some other period specified in the 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 its due date in the month in which the partial
prepayment is received or some other date as is specified in the 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 that 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 particular period may not be offset by a
similar decrease (or increase) in the rate of principal payments at a later
time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that 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
that 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 before which the Security Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to that series. 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 that 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 that 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 these Securities may be fully
paid before 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 those 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. 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 those
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 those 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. Starting 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 for each series of Securities may contain
tables, if applicable, setting forth the projected weighted average life of
each class of Offered Securities of that series and the percentage of the
initial Security Balance of each class that would be outstanding on specified
Distribution Dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the mortgage loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or some other standard specified in the
prospectus supplement. These 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 prospectus
supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because
the ability of a borrower to make a balloon payment typically will depend on
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 real
estate values, the borrower's financial situation, prevailing mortgage loan
interest rates, the borrower'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 prospectus supplement. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. 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.
For some 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. For some Contracts, the Contract
Rate may be "stepped up" during its term or may otherwise vary or be adjusted.
Under the applicable underwriting standards, the borrower 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 of these
mortgage loans or Contracts may therefore be dependent on the ability of the
borrower to make larger level monthly payments following the adjustment of the
mortgage rate or Contract Rate. In addition, some mortgage loans may be
subject to temporary buydown plans ("Buydown Mortgage Loans") pursuant to
which the monthly payments made by the borrower 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 borrower of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the borrower, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default for the related mortgage loan.
The mortgage rates on some 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 that index at
which interest accrues), the amount of interest accruing on the principal
balance of those 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 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 on the price at which
those Securities were purchased. In addition, for some ARM Loans subject to
negative amortization, during a period of declining interest rates, it might
be expected that each minimum scheduled monthly payment on this type of
mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since that excess will be
applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of those Securities will be reduced and
may adversely affect yield to holders thereof, depending on the price at which
those Securities were purchased.
As may be described in the 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 that 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 of these interest-only or revolving periods may, upon
the occurrence of certain events to be described in the prospectus supplement,
terminate before 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 prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in certain temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this 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 the Securities are issued. Any
similar feature applicable to any Securities may end on the occurrence of
events to be described in the prospectus supplement, resulting in the current
funding of principal payments to the related securityholders and an
acceleration of the amortization of these Securities.
TERMINATION
If specified in the 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 total Security Balance of the Securities of that series declines to a
percentage specified in the 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 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 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. 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 borrower, 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 that refinancing, the new loan would not be included in the related
trust fund and, therefore, that 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. These
programs may include 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 those 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.
For any mortgage loans, except as set forth in the 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 that 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 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 some cases, the transfer may be made by a delinquent
borrower 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 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. 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 that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
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 Asset-backed certificates (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 Asset-backed notes (the
"Notes," and together with the Certificates, the "Securities"), the 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:
o provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
o 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;
o 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");
o provide for distributions of accrued interest thereon which begin
only following the occurrence of certain events, that as the
retirement of one or more other classes of Securities of that series
(collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o 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 specified in the 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 portion of
the Assets, an "Asset Group"). Any of these classes may include classes of
Offered Securities.
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") 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 prospectus supplement. The transfer of any Offered Securities
may be registered and those Securities may be exchanged without the payment of
any service charge payable in connection with that 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 in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the prospectus supplement. See "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 similar total Security Balance, notional amount or percentage
interest but of different authorized denominations.
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 prospectus
supplement from the Available Distribution Amount for that series and that
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 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 prospectus supplement (the "Determination Date"). All
distributions for each class of Securities on each Distribution Date will be
allocated pro rata among the outstanding securityholders in that class or by
random selection or as described in the 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 that securityholder has so notified the trustee or other person
required to make those payments no later than the date specified in the
prospectus supplement (and, if so provided in the 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 that 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,
subject to the terms described in the prospectus supplement. Generally, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(1) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive,
unless otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest collected but
due on a date after the related Due Period (unless a different
period is specified in the prospectus supplement, a "Due
Period" for any Distribution Date will begin on the second day
of the month in which the immediately preceding Distribution
Date occurs, or 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 for each Asset (to the extent that 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 after the related Due
Period, or other period specified in the prospectus supplement,
(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 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 after the related Due
Period, or other period specified in the prospectus supplement;
(2) if the 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;
(3) all advances made by a servicer or the master servicer or any other
entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides, amounts
paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting
from prepayments during the related Prepayment Period; and
(5) 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 for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, 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 prospectus supplement for a series of Securities will describe any
variation in the calculation or distribution of the Available Distribution
Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities which
have no Interest Rate) may have a different Interest Rate, which will be a
fixed, variable or adjustable rate at which interest will accrue on that class
or a component thereof (the "Interest Rate" in the case of Certificates). The
prospectus supplement will specify the Interest Rate for each class or
component or, in the case of a variable or adjustable Interest Rate, the
method for determining the 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 prospectus supplement specifies a different basis.
Distributions of interest on 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 starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that
class and that Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to that class on that Distribution
Date. Before any interest is distributed on any class of Accrual Securities,
the amount of Accrued Security Interest otherwise distributable on that class
will instead be added to the Security Balance of that class on each
Distribution Date.
For 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 Accrual Period on the outstanding
Security Balance thereof immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security
Interest on certain classes of Strip Securities will be equal to interest
accrued during the related Accrual Period on the outstanding notional amount
thereof immediately before each Distribution Date, at the applicable Interest
Rate, reduced as described below, or interest accrual in the manner described
in the prospectus supplement. The method of determining the notional amount
for a particular class of Strip Securities will be described in the 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 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 before the due
date in that accrual period on the mortgage loans or Contracts comprising or
underlying the Assets in the trust fund for that series. The particular manner
in which these shortfalls are to be allocated among some or all of the classes
of Securities of that series will be specified in the prospectus supplement.
The prospectus supplement will also describe the extent to which the amount of
Accrued Security 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 the
mortgage loans or Contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable
on a class of Securities by reason of the allocation to that 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 that class. See "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 on 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:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class
thereof will be specified in the 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 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 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 that 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 the component class of Securities. References in those sections
to Security Balance may refer to the principal balance, if any, of these
components and reference to the Interest Rate may refer to the Interest Rate,
if any, on these components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the 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 as described in the 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 those 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 the 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 that 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 that 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, that
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 that
class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the 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 that Distribution Date, in an amount equal
to the total of payments of (1) principal (other than any balloon payments)
and (2) interest (net of related servicing fees and Retained Interest) that
were due on the Assets in that trust fund during the related Due Period and
were delinquent on the related Determination Date, subject to a good faith
determination that the 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 prospectus
supplement, the servicer's (or another entity's) advance obligation may be
limited only to the portion of those delinquencies necessary to make the
required distributions on one or more classes of Senior Securities and/or may
be subject to a good faith determination that advances will be reimbursable
not only from Related Proceeds but also from collections on other Assets
otherwise distributable on one or more classes of those 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 those advances were made (as to any Assets,
"Related Proceeds") and from any other amounts specified in the prospectus
supplement, including out of any amounts otherwise distributable on one or
more classes of Subordinate Securities of that series; provided, however, that
any advance will be reimbursable from any amounts in the related Collection
Account before any distributions being made on the Securities to the extent
that the servicer (or some other entity) determines in good faith that that
advance (a "Nonrecoverable Advance") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets otherwise
distributable on the Subordinate Securities. If advances have been made by the
servicer from excess funds in the related Collection Account, the servicer is
required to replace these funds in that Collection Account on any future
Distribution Date to the extent that funds in that Collection Account on that
Distribution Date are less than payments required to be made to
securityholders on that date. If specified in the 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 borrower on any surety bond will be
set forth in the prospectus supplement.
If and to the extent so provided in the 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 this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the 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
prospectus supplement, will forward or cause to be forwarded to each holder,
to the depositor and to any other parties as may be specified in the related
Agreement, a statement generally setting forth, in each case to the extent
applicable and available:
(1) the amount of that distribution to holders of Securities of
that class applied to reduce the Security Balance thereof;
(2) the amount of that distribution to holders of Securities of
that class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders
to prepare their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of
business on that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total 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 begun;
(8) for any mortgage loan or Contract liquidated during the related
Due Period, (a) the portion of the related liquidation proceeds
payable or reimbursable to a servicer (or any other entity) in
respect of that mortgage loan and (b) the amount of any loss to
securityholders;
(9) 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;
(10) for 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 that
Distribution Date (calculated as if that mortgage loan or
Contract were still outstanding taking into account certain
limited modifications to the terms thereof specified in the
Agreement), (c) the total amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof and (d)
if applicable, the total amount of interest accrued and payable
on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period (a) the
total amount of sale proceeds, (b) the portion of those sales
proceeds payable or reimbursable to the master servicer in
respect of that 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;
(12) the total 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 that
Distribution Date, separately identifying any reduction in that
Security Balance due to the allocation of any loss and increase
in the Security Balance of a class of Accrual Securities if any
Accrued Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the
close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on that
Distribution Date;
(17) in the case of Securities with a variable Interest Rate, the
Interest Rate applicable to that Distribution Date, and, if
available, the immediately succeeding Distribution Date, as
calculated in accordance with the method specified in the
prospectus supplement;
(18) in the case of Securities with an adjustable Interest Rate, for
statements to be distributed in any month in which an
adjustment date occurs, the adjustable Interest Rate applicable
to that Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with
the method specified in the prospectus supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included therein
as of the close of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire
Subsequent Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers 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
prospectus supplement, will furnish to each securityholder of record at any
time during the calendar year the 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
that Agreement following the earlier of (1) 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 (2) the purchase of all of the assets of the trust fund by the
party entitled to effect that termination, under the circumstances and in the
manner set forth in the prospectus supplement. In no event, however, will the
trust fund continue beyond the date specified in the 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 specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the purchase 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 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 those assets to retire that class or classes or purchase
that class or classes at a price set forth in the prospectus supplement, in
each case, under the circumstances and in the manner set forth therein. That
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 purchase or
solicitation of bids may be made only when the total Security Balance of that
class or classes declines to a percentage of the Initial Security Balance of
those Securities (not to exceed 10%) specified in the prospectus supplement.
In addition, if so provided in the 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 any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any 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 prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of the
Offered Securities of any series will be issued as Book-Entry Securities, and
each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Cedelbank ("Cedel") or the Euroclear System ("Euroclear"). Each class
of Book-Entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the initial principal amount of the related
class of Offered Securities and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except
as set forth below under "--Definitive Securities." Unless and until
Definitive Securities are issued for the Book-Entry Securities under the
limited circumstances described in the applicable prospectus supplement or
this prospectus, all references to actions by securityholders with respect to
the Book-Entry Securities will refer to actions taken by DTC, Cedel or
Euroclear upon instructions from their Participants (as defined below), and
all references herein to distributions, notices, reports and statements to
securityholders with respect to the Book-Entry Securities will refer to
distributions, notices, reports and statements to DTC, Cedel or Euroclear, as
applicable, for distribution to Beneficial Owners by DTC in accordance with
the procedures of DTC and if applicable, Cedel and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in
the United States, or, if the Offered Securities are offered for sale
globally, through Cedel or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Cedel and Euroclear systems 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").
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 (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement
of securities. In accordance with its normal procedures, DTC is expected to
record the positions held by each of its Participants in the Book-Entry
Securities, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Securities will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
CEDEL
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between its Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars.
Cedel provides to its Participants, among other things, services for
safekeeping, administration, clearance and settlement of
internationally-traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Cedel is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant of Cedel, either directly or indirectly.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of securities and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 32
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative Corporation"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative Corporation. The Cooperative
Corporation establishes policy for Euroclear on behalf of its Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Participant of Euroclear, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific securities to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of its Participants, and has no record of or
relationship with persons holding through Participants of Euroclear.
Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold
positions in customers' securities accounts in the depositaries names on the
books of DTC. Citibank will act as depositary for Cedel and Chase will act as
depositary for Euroclear (individually the "Relevant Depositary" and
collectively, the "European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note
representing a Note. Unless and until Definitive Securities are issued, it is
anticipated that the only "securityholder" of the Offered Securities will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be
"Certificateholders" as that term is used in any Agreement, nor "Noteholders"
as that term is used in any indenture. Beneficial Owners are only permitted to
exercise their rights indirectly through Participants, DTC, Cedel or
Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of 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 Participant of DTC
and on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have
accounts with respect to Offered Securities are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer
their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Beneficial Owners who are not Participants
may transfer ownership of Offered Securities only through Participants and
Indirect Participants by instructing the Participants and Indirect
Participants to transfer Offered Securities, by book-entry transfer, through
DTC for the account of the purchasers of the Offered Securities, 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
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Participants of Cedel or Euroclear on that business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a
Participant of Cedel or Euroclear to a Participant of DTC will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation
procedures relating to the Securities, see "Material Federal Income Tax
Considerations -- Tax Treatment of Foreign Investors" herein and, if the
Book-Entry Securities are globally offered and the prospectus supplement so
provides, see "Global Clearance, Settlement and Tax Documentation Procedures
- -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to
the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Cedel or Euroclear will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants
of Cedel or Euroclear, on the other, will be effected in DTC in accordance
with the DTC Rules on behalf of the relevant European international clearing
system by the Relevant Depositary; however, cross-market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary
to take action to effect final settlement on its behalf by delivering or
receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Participants of Cedel or Euroclear may not deliver instructions directly to
the European Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC
will be responsible for disbursing the distribution to the Beneficial Owners
of the Book-Entry Securities 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
Securities that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Cedel or Euroclear will be credited to the cash
accounts of Participants of Cedel or Euroclear in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Federal
Income Tax Considerations -- REMICs -- Taxation of Certain Foreign Investors"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Beneficial Owner to pledge Book-Entry Securities to persons or
entities that do not participate in the depository system, or otherwise take
actions in respect of Book-Entry Securities, may be limited due to the lack of
physical securities for the Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
securities.
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 Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Securities are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the Agreement or
indenture, as applicable, only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Securities are credited,
to the extent that actions are taken on behalf of Financial Intermediaries
whose holdings include the Book-Entry Securities. If the Book-Entry Securities
are globally offered, Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a securityholder under the
Agreement or indenture, as applicable, on behalf of a Participant of Cedel or
Euroclear only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect those actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Securities that conflict with
actions taken with respect to other Offered Securities.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Book-Entry Securities among Participants
of DTC, Cedel and Euroclear, 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, any master servicer, any servicer, the trustee,
any securities registrar or paying agent 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 those
beneficial ownership interests.
DEFINITIVE SECURITIES
Securities initially issued in book-entry form will be issued as
Definitive Securities to Beneficial Owners or their nominees, rather than to
DTC or its nominee only (1) if the depositor advises the trustee in writing
that DTC is no longer willing or able to properly discharge its
responsibilities as depository for the Securities and the depositor is unable
to locate a qualified successor, (2) if the depositor, at its option, elects
to end the book-entry system through DTC or (3) in accordance with any other
provisions described in the prospectus supplement.
Upon the occurrence of any 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 Beneficial Owners.
Upon surrender by DTC of the security or securities representing the
Book-Entry Securities, together with instructions for registration, the
trustee will issue (or cause to be issued) to the Beneficial Owners identified
in those instructions the Definitive Securities to which they are entitled,
and thereafter the trustee will recognize the holders of those Definitive
Securities as securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT 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"), FASIT Securities (as defined herein), or Grantor Trust
Securities (as defined herein) will be issued, and the related trust fund will
be created, pursuant to a pooling and servicing agreement or trust agreement
(in either case, generally referred to in this prospectus as the "pooling and
servicing agreement") among the depositor, the trustee and the sole servicer
or master servicer, as applicable. The Assets of that 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 that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant
to a related underlying 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 the pooling
and servicing agreement or trust 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
prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on
the Notes will be serviced in accordance with a sale and servicing agreement
or 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, sale and servicing agreement or
servicing agreement (each, an "Agreement"). The prospectus supplement for a
series of Securities will describe any provision of the Agreement relating to
that 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 those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued thereunder and the nature of the related trust
fund. As used herein for any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the 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 that
series addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the 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 for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a 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 specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the
pooling and servicing agreement for any trust fund to administer that 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 those 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 that
assignment, deliver the Securities to the depositor in exchange for the Assets
and the other assets comprising the trust fund for that series. Each Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. That schedule will include detailed information to the extent
available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged
Property and type of that 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;
(2) in respect of each Contract included in the related trust fund,
including the outstanding principal amount and the Contract
Rate; and
(3) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the
interest rate thereon.
For each mortgage loan, except as otherwise specified in the 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. However, 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. For those
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 prospectus supplement will be required to agree to
repurchase, or substitute for, each of these mortgage loans 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 prospectus supplement to promptly cause each of these
assignments 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, 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 the mortgage loan documents
within a specified period of days after receipt thereof, and the trustee (or a
custodian) will hold those documents in trust for the benefit of the
securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be
obligated, within a specified number of days of receipt of that notice, to
either (1) 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 that 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 another price as specified in the prospectus supplement (the
"Purchase Price") or (2) substitute a new 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 that 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 prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for 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 prospectus supplement. Generally these 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 prospectus supplement.
For 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. 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 prospectus supplement. Therefore, if, through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical
possession of the Contracts without notice of that 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 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
prospectus supplement. If the Asset Seller or some other entity cannot cure
the omission or defect within a specified number of days after receipt of this
notice, then the Asset Seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
Contract from the trustee at the Purchase Price or substitute for that
Contract. There can be no assurance that an Asset Seller or any other entity
will fulfill this repurchase or substitution obligation, and neither the
servicer nor the depositor will be obligated to repurchase or substitute for
that Contract if the Asset Seller or any 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
prospectus supplement, in lieu of curing any omission or defect in the Asset
or repurchasing or substituting for that Asset, the Asset Seller may agree to
cover any losses suffered by the trust fund as a result of that 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
those certificates, and distributions on those 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 prospectus supplement the depositor will,
for each Asset, assign certain representations and warranties, as of a
specified date (the person making those representations and warranties, the
"Warranting Party") covering, by way of example, the following types of
matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related
Agreement;
o 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;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o 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
o 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
any other person acceptable to the depositor and will be identified in the
prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of
the related series of Securities evidencing an interest in that Asset. In the
event of a breach of any of these representations or warranties, the
Warranting Party will be obligated to reimburse the trust fund for losses
caused by that breach or either cure that 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 that representation and
warranty only if the relevant event that causes that breach occurs before that
date. That party would have no obligations if the relevant event that causes
that breach occurs after that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the 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 that Asset or the interests therein of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the
Warranting Party was notified of that 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 that series of
Securities, to cause the removal of that 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 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 that 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 the Warranting Parties will carry out those
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 representation of the servicer that
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 that 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
other percentage specified in the prospectus supplement, will constitute an
Event of Default under that 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 an account or accounts
that either:
o 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 so
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 those 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
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class
of Securities of that series.
Investment of 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 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 that 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 any
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 after the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest),
except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) 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;
(3) 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;
(4) 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;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) 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;"
(8) 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;"
(9) to the extent that any of these items do 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;
(10) 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;"
(11) 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
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in
the 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, except as otherwise provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in
Respect of Delinquencies," which reimbursement is to be made
out of amounts received that 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 for which the advances were made or out of
amounts drawn under any form of credit support with respect to
those Assets;
(3) 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, which
reimbursement is 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, which fees were earned or expenses
were incurred or out of amounts drawn under any form of credit
support for those Assets and properties;
(4) to reimburse a servicer for any advances described in clause
(2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not be
recoverable from the amounts described in those clauses, which
reimbursement is 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 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;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in
clause (2) above and the servicing expenses described in clause
(3) above while those advances and servicing expenses remain
outstanding and unreimbursed;
(6) 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;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the trustee's fees;
(8) 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;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts
held in the Collection Account;
(10) 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;
(11) 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, which payments are
to be made out of income received on that property;
(12) 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 prospectus supplement,
respectively;
(13) 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 that mortgage
loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related Agreement if that
recordation materially and beneficially affects the interests
of securityholders, provided that the 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;
(16) 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;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
OTHER COLLECTION ACCOUNTS. If specified in the 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 any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more
series of Securities. Any amounts on deposit in any of these collection
accounts will be withdrawn therefrom and deposited into the appropriate
Collection Account by a time specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection
accounts, including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts 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 those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided that those procedures are consistent with (1) 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," (2) applicable law
and (3) the general servicing standard specified in the prospectus supplement
or, if no 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 prospectus supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower 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 some circumstances; and maintaining accounting records relating to
the Assets. The servicer or any other entity specified in the 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 (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) 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 (1) in its judgment, a material default
on the Asset has occurred or a payment default is reasonably foreseeable and
(2) in its judgment, that 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 borrower'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 borrower 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 borrower if cure is likely,
inspect the related Multifamily Property and take those 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 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 borrower, 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 Asset that is in
default, initiate corrective action in cooperation with the borrower if cure
is likely, inspect the Asset and take any 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 that 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 some
classes of Securities a right of first refusal to purchase from the trust fund
at a predetermined purchase price any mortgage loan or Contract as to which a
specified number of scheduled payments thereunder are delinquent. Any right of
first refusal granted to the holder of an Offered Security will be described
in the prospectus supplement. The prospectus supplement will also describe any
similar right granted to any person if the predetermined purchase price is
less than the Purchase Price described above under "--Representations and
Warranties; Repurchases."
If specified in the 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 to that defaulted mortgage loan or Contract, if and when the servicer
determines, consistent with the Servicing Standard, so that 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 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 that defaulted
mortgage loan or Contract. If there is no bid that is determined to be fair,
the servicer will proceed with respect to that 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 that
action is consistent with the Servicing Standard and a default on that
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 three years of
acquisition, unless (1) the Internal Revenue Service grants an extension of
time to sell that property or (2) the trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
trust fund longer than three 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 (A)
solicit bids for any Mortgaged Property so acquired in that manner as will be
reasonably likely to realize a fair price for that property and (B) 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 for 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 those 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 total
amount of expenses incurred by the servicer in connection with those
proceedings and which are reimbursable under the Agreement, the trust fund
will realize a loss in the amount of that 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, before the
distribution of those 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 (1) that restoration will increase the proceeds to securityholders
on liquidation of the Asset after reimbursement of the servicer for its
expenses and (2) that its 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 for any Mortgage Security or Agency Security by
the fifth business day after the date on which that distribution was due and
payable pursuant to the terms of that Agency Security, to request the issuer
or guarantor, if any, of that Mortgage Security or Agency Security to make
that payment as promptly as possible and legally permitted to take legal
action against that 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 this legal action will be reimbursable to
the trustee out of the proceeds of that action and will be retained by the
trustee before the deposit of any remaining proceeds in the Collection Account
pending distribution thereof to securityholders of the related series. If the
proceeds of any legal action are 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 its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee
and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery thereunder for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution thereof to securityholders, amounts representing
its normal servicing compensation on that Asset, unreimbursed servicing
expenses incurred for 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 composed of
mortgage loans will require the servicer to cause the borrower on each
mortgage loan to maintain a hazard insurance policy providing for the level of
coverage that is required under the related Mortgage or, if any Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage
to be maintained on the related Mortgaged Property, then the level of coverage
that is consistent with the Servicing Standard. That coverage will be in
general in an amount equal to the lesser of the principal balance owing on
that 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 any
other amount specified in the 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
borrowers. All amounts collected by the servicer under any of these policies
(except for amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with the
servicer's normal servicing procedures, 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 borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the 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 that 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 of these 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 to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the coinsurance clause
generally provides that the insurer's liability in the event of partial loss
does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of those improvements.
Each Agreement for a trust fund composed of mortgage loans will require
the servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for 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 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 that cost
will not be taken into account for purposes of calculating the distribution to
be made to securityholders. Those 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, borrowers 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 those claims is dependent upon
the extent to which information in this regard is furnished to the servicer by
borrowers.
CONTRACTS. Generally, the terms of the Agreement for a trust fund
composed of Contracts will require the servicer to maintain for each Contract
one or more hazard insurance policies that 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
those policies in the state in which the Manufactured Home is located, and in
an amount that is not less than the maximum insurable value of that
Manufactured Home or the principal balance due from the borrower on the
related Contract, whichever is less; provided, however, that the amount of
coverage provided by each hazard insurance policy must 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 must cause flood insurance to be maintained, which coverage must be
at least equal to the minimum amount specified in the preceding sentence or
any lesser amount as may be available under the federal flood insurance
program. Each hazard insurance policy caused to be maintained by the servicer
must contain a standard loss payee clause in favor of the servicer and its
successors and assigns. If any borrower is in default in the payment of
premiums on its hazard insurance policy or policies, the servicer must pay
those premiums out of its own funds, and may add separately the premiums to
the borrower's obligation as provided by the Contract, but may not add the
premiums to the remaining principal balance of the Contract.
The servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained for each Manufactured Home, and must maintain, to
the extent that the related Contract does not require the borrower to maintain
a hazard insurance policy for the related Manufactured Home, one or more
blanket insurance policies covering losses on the borrower's interest in the
Contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy
on the basis described therein and must pay any deductible amount for claims
under that 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 prospectus supplement, the following describes FHA insurance programs
and regulations as generally in effect for 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. For 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 borrower'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 borrower. Those plans may
involve the reduction or suspension of regular mortgage payments for a
specified period, with those payments to be made on 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 those 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 borrower to HUD) or by
accepting assignment of the loan from the servicer. With some 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 borrower
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 prospectus
supplement, the servicer of each single family FHA loan will be obligated to
purchase any debenture issued in satisfaction of that FHA loan upon default
for an amount equal to the principal amount of that 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 before
that 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"). For 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 that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those 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 that 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 clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses. The servicer will generally permit that transfer so long
as the transferee satisfies the servicer's then applicable underwriting
standards. The purpose of those transfers is often to avoid a default by the
transferring borrower. 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
borrower payments as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Securities
will come from the periodic payment to it of a portion of the interest payment
on each Asset or any other amount specified in the prospectus supplement.
Since any Retained Interest and a servicer's primary compensation are
percentages of the principal balance of each Asset, those amounts will
decrease in accordance with the amortization of the Assets. The prospectus
supplement for 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
borrowers and any interest or other income that 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 prospectus supplement,
pay from its servicing compensation certain expenses incurred in connection
with its servicing and managing of the Assets, including 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 prospectus
supplement. Some other expenses, including certain expenses relating to
defaults and liquidations on the Assets and, to the extent so provided in the
prospectus supplement, interest thereon at the rate specified therein may be
borne by the trust fund.
If and to the extent provided in the 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 that period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans or
Contracts, unless otherwise provided in the prospectus supplement, will
provide that on or before a specified date in each year, beginning with the
first of these dates 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 that 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 any 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 those agreements or that 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 any other program,
requires it to report.
Each 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.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE
DEPOSITOR
The servicer or master servicer under each Agreement will be named in the
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. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o 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 that conflict being of a type and nature
carried on by the servicer at the date of the Agreement. No
resignation will become effective until the trustee or a
successor servicer has assumed the servicer's obligations and
duties under the Agreement.
o 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 other
person will be protected against any breach of a
representation, warranty or covenant made in the related
Agreement, or against any liability specifically imposed
thereby, or against any liability that 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.
o 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 that indemnification
will not extend to any loss, liability or expense (1)
specifically imposed by that 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 loss,
liability or expense will be otherwise reimbursable pursuant to
that Agreement); (2) incurred in connection with any breach of
a representation, warranty or covenant made in that Agreement;
(3) 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 those
obligations or duties; (4) incurred in connection with any
violation of any state or federal securities law; or (5)
imposed by any taxing authority if that loss, liability or
expense is not specifically reimbursable pursuant to the terms
of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any
expense or liability. Any servicer or the depositor may,
however, in its discretion undertake any 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 that event, the legal
expenses and costs of that 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 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 prospectus supplement, and the
servicer will be liable for the performance of a Special servicer only if, and
to the extent, set forth in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o 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;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations
under the Agreement that continues unremedied for 30 days after
written notice of that 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 for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for
30 days after written notice of that 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
for that series; and
o 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 prospectus supplement. The trustee will, not later than the later of 60
days or any other period specified in the prospectus supplement after the
occurrence of any event that 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 that event, transmit
by mail to the depositor and all securityholders of the applicable series
notice of that occurrence, unless that default has been cured or waived.
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 any other percentage specified in the
Agreement) of the voting rights for that series, the trustee will 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 prospectus supplement so
specifies, then the trustee will not be obligated to make those advances) and
will be entitled to similar compensation arrangements. If 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 any other percentage
specified in the Agreement) of the voting rights for that series, it must
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 that appointment of at least $15,000,000 (or any other amount
specified in the Agreement) to act as successor to the servicer under the
Agreement. Pending that appointment, the trustee is obligated to act in that
capacity. The trustee and any successor servicer 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 any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to
securityholders described in clause (1) under "Events of Default under the
Agreements" may be waived only by all of the securityholders. Upon any waiver
of an event of default, that event of default will cease to exist and will 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 that holder previously has given to
the trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or any other percentage specified in the
Agreement) of the voting rights have made written request upon the trustee to
institute that proceeding in its own name as trustee thereunder and have
offered to the trustee reasonable indemnity, and the trustee for 60 days (or
any other number of days specified in the Agreement) has neglected or refused
to institute any 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 that Agreement, unless
those securityholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties thereto, without
the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision therein that may be
inconsistent with any other provision therein or with the
prospectus supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially
inconsistent with the provisions thereof; or
(4) comply with any requirements imposed by the Code; provided
that, in the case of clause (3), that 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 that 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
that amendment or supplement will not cause that rating agency
to lower or withdraw the then current rating assigned to those
Securities.
In general, 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 any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for 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 has first
have received an opinion of counsel to the effect that that amendment will not
result in the imposition of a tax on the related trust fund or, if applicable,
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 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. To the extent
consistent with its fiduciary obligations as trustee, the trustee may delegate
its duties to one or more agents as provided in the Agreement.
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 those 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
will 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 (1) enforcing its rights
and remedies and protecting the interests of the securityholders during the
continuance of an Event of Default, (2) defending or prosecuting any legal
action in respect of the related Agreement or series of Securities, (3) being
the mortgagee of record for the mortgage loans in a trust fund and the owner
of record for any Mortgaged Property acquired in respect thereof for the
benefit of securityholders, or (4) 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 any other percentage as is specified in the
related Agreement for any particular matter) of the voting rights for that
series; provided, however, that this 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 those 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 that notice of resignation,
the depositor is required promptly to appoint a successor trustee acceptable
to the servicer, if any. If no successor trustee has been so appointed and has
accepted appointment within 30 days after the giving of that 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 ceases to be eligible to continue as a trustee
under the related Agreement, or if at any time the trustee becomes incapable
of acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee
or of its property is appointed, or any public officer takes 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 any other
percentage specified in the prospectus supplement) of the voting rights for
that 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 will 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 that 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 that series
addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days
specified in the prospectus supplement) or more in the payment
of any principal of or interest on a Note of that series, to
the extent specified in the prospectus supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of
sixty days (or any other number of days specified in the
prospectus supplement) after notice thereof is given in
accordance with the procedures described in the prospectus
supplement;
o 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 that series having been incorrect
in a material respect as of the time made, and that breach is
not cured within sixty days (or any other number of days
specified in the prospectus supplement) after notice thereof is
given in accordance with the procedures described in the
prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o 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
holders of a majority of the then total outstanding amount of the Notes of
that series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, that portion of the principal amount as may be
specified in the terms of that series, as provided in the indenture) of all
the Notes of that series to be due and payable immediately. That declaration
may, under certain circumstances, be rescinded and annulled by the
securityholders of a majority in total outstanding amount of the Notes of that
series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the
indenture trustee may, in its discretion, notwithstanding that acceleration,
elect to maintain possession of the collateral securing the Notes of that
series and to continue to apply distributions on that collateral as if there
had been no declaration of acceleration if that collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of that series as they would have become due if there had not been that
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 that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of
that series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of that series at the date of that
sale; or
(3) the indenture trustee determines that that collateral would not
be sufficient on an ongoing basis to make all payments on the
Notes as those payments would have become due if the Notes had
not been declared due and payable, and the indenture trustee
obtains the consent of the holders of 66 2/3% (or any other
percentage specified in the indenture) of the then total
outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of certain
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) 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 liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that 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 that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled
to receive no more than an amount equal to the unpaid principal amount thereof
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will 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 that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
the then total outstanding amount of the Notes of that series will 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 that series,
and the holders of a majority of the then total outstanding amount of the
Notes of that series may, in some 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 holders of the outstanding Notes of
that series affected thereby.
DISCHARGE OF INDENTURE
The indenture will be discharged for a series of Notes (except for
certain continuing rights specified in the indenture) upon the delivery to the
indenture trustee for cancellation of all the Notes of that 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 that series.
With certain limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from
any and all obligations in respect of the Notes of that series (except for
certain obligations relating to temporary Notes and exchange of Notes, to
register the transfer of or exchange Notes of that series, to replace stolen,
lost or mutilated Notes of that 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 that series on the maturity date for those Notes and
any installment of interest on those Notes in accordance with the terms of the
indenture and the Notes of that series. In the event of any defeasance and
discharge of Notes of that series, holders of Notes of that series would be
able to look only to that money and/or those 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, as provided in the
indenture, 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 that Trust to the applicable indenture trustee in its
individual capacity, the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
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 that series. The depositor may also remove any indenture trustee
if that indenture trustee ceases to be eligible to continue as the indenture
trustee under the related indenture or if that indenture trustee becomes
insolvent. In those 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 that 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. To the extent
consistent with its fiduciary obligations as indenture trustee, the indenture
trustee may delegate its duties to one or more agents as provided in the
indenture and the Agreement.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, credit support may be provided for one or
more classes thereof or the related Assets. Credit support may be in the form
of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that 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 (each, a "Covered Trust"), securityholders evidencing
interests in any of those Covered Trusts will be subject to the risk that the
credit support will be exhausted by the claims of other Covered Trusts before
that Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities of a
series, or the related Assets, the prospectus supplement will include a
description of (a) the nature and amount of coverage under that credit
support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
that credit support may be reduced and under which that credit support may be
terminated or replaced and (d) the material provisions relating to that credit
support. Additionally, the prospectus supplement will set forth certain
information with respect to the obligor under any financial guaranty insurance
policy, letter of credit, guarantee or similar instrument of credit support,
including (1) a brief description of its principal business activities, (2)
its principal place of business, place of incorporation and the jurisdiction
under which it is chartered or licensed to do business, (3) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (4) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Securities of a series may be Subordinate
Securities if specified in the 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 those rights of the holders of Senior Securities. The
subordination of a class may apply only in the event of (or may be limited to)
certain types of losses or shortfalls. The 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 that
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 before 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 those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for 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
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named therein, if
specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Securities may be provided by
the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series
of Securities will be set forth in the prospectus supplement relating to that
series.
POOL INSURANCE POLICIES
If specified in the 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 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 pool
insurance coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
therein. The special hazard insurance policy will, subject to the limitations
described in the 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 special hazard insurance coverage will be set forth in the prospectus
supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will,
if specified in the prospectus supplement, be covered under a borrower
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 agencies
that rate that series). Any borrower bankruptcy bond or any other instrument
will provide for coverage in an amount meeting the criteria of the rating
agency or agencies rating the Securities of the related series, which amount
will be set forth in the prospectus supplement. The amount and principal terms
of any borrower bankruptcy 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 those 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 the 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 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 prospectus supplement. A reserve
fund may be provided to increase the likelihood of timely distributions of
principal of and interest on the Securities. If specified in the 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 prospectus supplement and will
not be available for further application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any reinvestment income or
other gain from those investments will be credited to the related reserve fund
for that series, and any loss resulting from those investments will be charged
to the reserve fund. However, that income may be payable to any related
servicer or another service provider or other entity. To the extent specified
in the 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 prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the
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 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, for the Assets or groups
thereof, overcollateralization, which is the excess of the total principal
balance of the related Assets, or a group thereof, over the principal balance
of the related class or classes of Securities. This 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 prospectus
supplement, the 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 these 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
for 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 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
on 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 that 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 borrower (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 borrower), 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, "borrower" 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 borrower 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 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 borrower 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 borrower. At origination
of a mortgage loan involving a land trust, the borrower 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 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 borrower assigns to the
lender the borrower'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 borrower
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, that 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 that lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating that interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
that 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 prospectus supplement will make certain representations and warranties
in the Agreement or certain representations and warranties will be assigned to
the trustee for any mortgage loans secured by an interest in a leasehold
estate. Those representation and warranties, if applicable, will be set forth
in the prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, 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 that 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.
That 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 borrower, 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 (1) 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 (2) 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 that 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 that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that 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 on 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 that situation does not have to
foreclose 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 those 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 particular 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 borrower 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 for 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 some 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. Those 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
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those 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 borrower's default and the likelihood that the borrower will
be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers 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 borrower failed to
maintain the mortgaged property adequately or the borrower 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 borrower 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 borrower.
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 borrower 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, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
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 borrower 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
borrower 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 that
property at the time of sale, due to, among other things, redemption rights
that 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 that may be recovered by a lender. Thereafter, subject to the
borrower'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 those 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 on 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, if 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, for 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 borrower is in default. Any additional
proceeds are generally payable to the borrower. 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 those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that 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 that 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 begun, the redeeming party must pay certain costs of that 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 that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before 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 borrower 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 borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed 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 three years. For 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 three years if the Internal Revenue Service grants an
extension of time within which to sell the property or independent counsel
renders an opinion to the effect that holding the property for that 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 that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement that 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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that 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 that
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 that 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 that apply to certain
tenants who elected to remain in a building so converted.
YEAR 2000 LEGISLATION
In July 1999, a new federal law was passed to limit liability for losses
due to year 2000 computer-related errors. This law will, 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 law is not intended to extinguish or otherwise affect a borrower's
payment obligations but will instead delay the enforcement of obligations on
an otherwise defaulted mortgage loan. Borrowers seeking foreclosure protection
under this law 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 law will
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
law will 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.
This law 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, that 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
borrower, 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 borrower 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 these sums,
these 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 borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower 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 borrower. In some other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting that security; however, in some of these states, the
lender, following judgment on the 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 that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower 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
borrower 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. 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) before
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 affected 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 that mortgage
loan to be modified. These 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 these
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 some 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 a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These 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 these laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of some 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 that property are subordinated to the
environmentally-related lien and, in some states, even prior recorded liens
are subordinated to these liens ("Superliens"). In the latter states, the
security interest of the trustee in a property that is subject to a Superlien
could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that 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 cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These 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 total assets
of the property owner.
Although certain provisions of the Asset Conservation Act (as defined
herein) apply to trusts and fiduciaries, the law is somewhat 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 that
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 that 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 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 that 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 these 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 before 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
that 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 before the origination of the mortgage loan
or before 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 the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the 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
representation, warranty or assumption of liability relative to any 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 borrower 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, for 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 those 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 some 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 those loans are
paid before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the
mortgage loans. The absence of a restraint on prepayment, particularly for
fixed rate mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower
(as junior loans often do) and the senior loan does not, a
borrower may be more likely to repay sums due on the junior
loan than those on the senior loan.
o 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
borrower 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 borrower is
additionally burdened.
o If the borrower 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 will 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 for 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. Some 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 before origination of
those mortgage loans, any limitation under that state's usury law would not
apply to those 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 that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or
(2) the mortgage loan provides that the terms thereof will be construed in
accordance with the laws of another state under which the interest rate,
discount points and charges would not be usurious and the borrower's counsel
has rendered an opinion that the 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 borrower 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 borrower 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.
Those 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, before October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of those provisions. Some states have taken that
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 borrower who enters military service after
the origination of the borrower's mortgage loan (including a borrower 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 the borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to borrowers 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
borrowers 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 some 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. These shortfalls will be
covered by the credit support provided in connection with the Securities only
to the extent provided in the 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 borrower's period of active
duty status, and, under some circumstances, during an additional three month
period thereafter. Thus, if an affected 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, those 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: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) 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 these 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 borrower to repay the loan
evidenced thereby, and (b) the grant of a security interest in the
Manufactured Home to secure repayment of the loan. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC 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 prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of the assignment, the
trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. The Asset Seller may effect
that 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 that 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 some
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.
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 that is prior to the security
interest originally retained by the Asset Seller and transferred to the
depositor. For a series of Securities and if so described in the prospectus
supplement, the servicer may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws. The 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 for 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 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, that assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to 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), the assignment of
the security interest in the Manufactured Home may not be held effective or
the security interests may not be perfected and in the absence of that
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 any other originator of the Contracts) or a trustee in bankruptcy
of the Asset Seller (or any 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, that security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests. There
also exists a risk in not identifying the trustee as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the trustee could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which the 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 that relocation and thereafter only if and
after the owner re-registers the Manufactured Home in that state. If the owner
were to relocate a Manufactured Home to another state and not re-register the
Manufactured Home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured
Home; accordingly, the servicer must surrender possession if it holds the
certificate of title to the Manufactured Home or, in the case of Manufactured
Homes registered in states that 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 that
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
re-perfection upon receipt of notice of re-registration or information from
the borrower as to relocation.
Similarly, when a borrower 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 those 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 of these liens for any Manufactured
Home securing payment on any Contract. However, these liens could arise at any
time during the term of a Contract. No notice will be given to the trustee or
securityholders if 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 those 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, before beginning 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 that sale. The law in most states also requires
that the debtor be given notice of any sale before resale of the unit so that
the debtor may redeem at or before that resale. In the event of repossession
and resale of a Manufactured Home, the trustee would be entitled to be paid
out of the sale proceeds before the 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 the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
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 a borrower on a Contract as
described for a borrower 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 that is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of the contract to all claims and defenses that the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the borrower 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 the borrower. 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 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 some cases, the transfer may be made by
a delinquent borrower to avoid a repossession proceeding for 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 some Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations will not apply to any loan that 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 before instituting any action leading to repossession of
or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest rates
and finance charges by adopting before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. Fifteen
states adopted a similar law before 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 consequences 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 (the "Code"), 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
and Other 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 five general types:
o REMIC 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 ("REMIC") under
Sections 860A through 860G (the "REMIC Provisions") of the
Code;
o securities ("FASIT Securities") representing interests in a
trust fund, or a portion thereof, that the trustee will elect
to have treated as a financial asset securitization investment
trust ("FASIT") under Sections 860H through 860L (the "FASIT
Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests
in a trust fund (a "Grantor Trust Fund") as to which no
election will be made;
o securities ("Partnership Securities") representing interests in
a trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("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 that 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 or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion, (1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security, (2) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (3) to
the extent specified in the prospectus supplement, references to "mortgage
loans" include Contracts. Except to the extent specified in the prospectus
supplement, no REMIC election will be made for 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"), in part upon the REMIC Provisions and the Treasury regulations
issued thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance
have been issued with respect to those provisions. Accordingly, definitive
guidance cannot be provided with respect to many aspects of the tax treatment
of the holders of FASIT Securities. In addition, 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 (as defined herein)
will be considered a Taxable Mortgage Pool if (1) substantially all of the
assets of the entity consist of debt obligations and more than 50% of those
obligations consist of "real estate mortgages," (2) that entity is the
borrower under debt obligations with two or more maturities, and (3) under the
terms of the debt obligations on which the entity is the borrower, payments on
those 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
For 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 interests" ("Regular
Securities") or "residual interests" ("Residual Securities") in the 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 total adjusted basis of the nonqualified assets is less than 1% of
the total 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 for 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 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:
(1) in exchange for any qualified mortgage within a three-month
period thereafter; or
(2) in exchange for a "defective obligation" within a two-year
period thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90
days of discovery).
A mortgage loan that is "defective" as described in clause (4) 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 that 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 that 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: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions,
if any, are made pro rata.
o 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. That 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.
o 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 for that 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 for that series will constitute a
single class of residual interests for 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 that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that 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,
none of these regulations have been issued. Any relief provided, 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 that status are not satisfied. The pooling and servicing
agreement for 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 these 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 those 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 those Buydown Funds because the law is
unclear as to whether the Buydown Funds represent an account held by the
lender that reduces the lender's investment in the mortgage loan. This
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 the
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
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that 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 these 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 those 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 those 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 some 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 of
these 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
respective REMIC Securities issued by each Tiered REMIC 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 those 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
(1) 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
that Regular Securityholder.
(2) 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 that income.
The following discussion is based in part on the OID Regulations 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 that those issues are not addressed in
the 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 because 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 for the Regular Securities.
Each Regular Security (except to the extent described below for 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
ineludible 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 that 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 before the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude that 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 those 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 the 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 for 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 prospectus supplement, because the
underlying mortgage loans provide for remedies in the event of default, it is
anticipated that the trustee will treat interest for the Regular Securities as
qualified stated interest. Distributions of interest on an Accrual Security,
or on other Regular Securities for which deferred interest will accrue, will
not constitute qualified stated interest, in which case the stated redemption
price at maturity of those 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 the 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 those 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 for a
series of Regular Securities will be set forth in the prospectus supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and that 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. For 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:
(1) 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
(2) 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:
(1) the yield to maturity of the Regular Security at the issue
date;
(2) events (including actual prepayments) that have occurred before
the end of the accrual period; and
(3) 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 total amount of original issue discount for 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 those 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. For 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 for a series of Regular
Securities can result in both a change in the priority of principal payments
for certain Classes of Regular Securities and either an increase or decrease
in the daily portions of original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
trustee will determine the yield to maturity of that 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 for 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 the unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to the Security (or to
that portion) will accrue at the time of the distribution, and (b) the accrual
of original issue discount allocable to each remaining Security of that Class
will be adjusted by reducing the present value of the remaining payments on
that Class and the adjusted issue price of that 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.
(3) 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 the 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, a subsequent purchaser may elect to treat all that
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method"
below.
(4) 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, (1) the issue price does not exceed the original principal
balance by more than a specified amount and (2) 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. That 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 the information is
not (1) within the control of the issuer or a related party or (2) 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 that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that 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 for Regular Securities apply the
same principles as the OID Regulations, those regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of those 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 (1) 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 that 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 a rate that is subject to one or more caps or
floors, or (2) bearing one or more 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 for 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
that 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 that 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.
(5) 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 (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified
stated interest payments due on a Regular Security, or (2) in the case of a
Regular Security having original issue discount, is exceeded by the adjusted
issue price of that Regular Security at the time of purchase. The purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on that Regular Security as distributions includible
in the stated redemption price at maturity thereof are received, in an amount
not exceeding that distribution. The 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 these regulations are issued, the market discount would
accrue either (1) on the basis of a constant interest rate, or (2) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for that period plus the remaining interest as of the end of that
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 that period plus
the remaining original issue discount as of the end of that period. The
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. The 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 the interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Security for that year. Any 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 the 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 that 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 for a Regular Security will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular
Security having original issue discount, the adjusted issue price of that
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 the
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 particular 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.
(6) 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 that Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize the premium under
a constant yield method that reflects compounding based on the interval
between payments on the Regular Security. The 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 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 (1) the original principal amount and maturity date or (2) the price and
date of any succeeding optional redemption, under the principles described
above.
(7) 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 this election, (1) "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 (2) 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 this election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes this election for a debt instrument with amortizable bond
premium, the holder is deemed to have made elections to amortize bond premium
currently as it accrues under the constant yield method for all premium bonds
held by the holder in the same taxable year or thereafter. Alternatively, if
the holder makes this election for a debt instrument with market discount, the
holder is deemed to have made elections to report market discount income
currently as it accrues under the constant yield method for all 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 this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for 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 the 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 that loss
with respect to principal sustained during the taxable year on account of any
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 Regular Securities becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Securityholders should be allowed a bad debt deduction at the time the
principal balance of the 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 those losses only after all the mortgage loans
remaining in the trust fund 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 those 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 that
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
for their 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. These taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Regular Securities.
(9) 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 for 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 regarding 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). That gain will be
treated as ordinary income
(1) 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 for any prior
disposition of property that was held as part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
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
(3) to the extent that the 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 that 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 the holder for that 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 those taxpayers (39.6%) for property held for more
than one year. Currently, the maximum tax rate for corporations is the same
for both ordinary income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) 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
that quarter and by allocating that daily portion among the Residual Holders
in proportion to their respective holdings of Residual Securities in the REMIC
Pool on that 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
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) 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 for 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. If an interest in the mortgage loans is acquired by the REMIC Pool
at a discount, and one or more of these 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 (2) the discount on the mortgage
loans that is includible in income may exceed the deduction allowed upon those
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 those Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to that
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 that 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
for any particular 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 that mismatching or
unrelated deductions against which to offset that income, subject to the
discussion of "excess inclusions" below under "--Limitations on Offset or
Exemption of REMIC Income." The timing of mismatching of income and deductions
described in this paragraph, if present for 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 Holder may be treated unfavorably
in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the
30% withholding tax otherwise available to a foreign Residual
Holder.
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 those Residual Holders for those periods in accordance
with generally accepted accounting principles. Investors should consult their
own accountants concerning the accounting treatment of their investment in
Residual Securities.
(2) 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 that Residual Security. The 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 the loss was disallowed and may be
used by the 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 some respects, the 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 the 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 the residual
interest as zero rather than the 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 the 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 the basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by the 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.
(3) 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 for 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 those
mortgage loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in those 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 the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of the 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 those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage
loans is the fair market value of the mortgage loans, based on the total 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 borrowers on the mortgage
loans are expected to be individuals, Code Section 171 will not be available
for premium on mortgage loans originated on or before September 27, 1985.
Premium for those mortgage loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
that premium pro rata among principal payments should be considered a
reasonable method; however, the Internal Revenue Service may argue that the
premium should be allocated in a different manner, such as allocating the
premium entirely to the final payment of principal.
(4) 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 that quarterly period of
(1) 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 (2) the adjusted issue price of the
Residual Security at the beginning of the 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 those daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to the Residual Security
before the beginning of that 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 that 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 the 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 the Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income is subject to 30% withholding tax for 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 for 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 those rules
apply only to taxable years beginning after August 20, 1996.
(5) 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 (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) 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. That
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.
That tax generally would be imposed on the transferor of the Residual
Security, except that where the transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on the agent. However, a transferor of a Residual
Security would in no event be liable for the tax for 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 the 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 for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the
Disqualified Organization, and (2) the highest marginal federal corporate
income tax rate. That 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 the tax if it has received an affidavit from the record
holder that it is not a Disqualified Organization or stating the holder's
taxpayer identification number and, during the period that person is the
record holder of the Residual Security, the Pass-Through Entity does not have
actual knowledge that the 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 those affidavits are false, is not available
to an electing large partnership.
o "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 the 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
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 the organization is subject to the tax on unrelated
business income imposed by Code Section 511.
o "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 that
interest, be treated as a Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (2) the transferor provides a statement in writing
to the trustee that it has no actual knowledge that the 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 for a series will bear a legend referring to those 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 that 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, (1) 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 (2) 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 (1) 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 (2) 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 for 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
the 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, (1) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (2) 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 before 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 the transfer may be made. The term "U.S.
Person" means a citizen 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 the trust and one or more U.S. Persons have the authority to
control all substantial decisions of the 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).
(6) 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 the Residual Holder in
the 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 that adjusted basis on that Distribution Date. That 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 the Residual Security as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of the
remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) 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 for any prior disposition of property
that was held as a part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the 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 the 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.
(7) 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
(1) Prohibited Transactions
Income from certain transactions 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:
(1) 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;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to
hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) 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 borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) 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 (1) during
the three months following the Startup Day, (2) made to a qualified reserve
fund by a Residual Holder, (3) in the nature of a guarantee, (4) made to
facilitate a qualified liquidation or clean-up call, and (5) 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.
(3) 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 that 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.
(4) 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 that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that 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.
(5) 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 the 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,
for 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 the Residual Holder, the Residual Holder or
any 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 those proceedings in appropriate
circumstances.
(6) 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 those itemized deductions, in total, 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 (1) 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 (2) 80% of the amount of itemized deductions otherwise
allowable for that year. In the case of a REMIC Pool, those 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 for a regular interest it holds in
another REMIC. Those investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and
may cause those 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. For 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 those 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 prospectus supplement will indicate if all those
expenses will not be allocable to the Residual Securities.
In general, the 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 for 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 Interest 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
(1) 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 (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the 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 (3) that Non-U.S.
Person provides the trustee, or the person who would otherwise be required to
withhold tax from those 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 that 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 that Non-U.S. Person. In the latter case,
the 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") that 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.
(2) 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 (1) the mortgage loans were issued after July 18, 1984, and (2) the trust
fund 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 those Non-U.S. Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to those 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, those 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.
(3) 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 some 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 that 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.
(4) 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 that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal
Revenue Service Publication 938 for a particular series of Regular Securities.
Holders through nominees must request the 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 those
holders. Furthermore, under these 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 that person and other specified information.
FASITS
CLASSIFICATION OF FASITS
For each series of FASIT 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 FASIT. The trust fund will qualify under the Code as a FASIT
in which FASIT regular securities (the "FASIT Regular Securities") and the
ownership interest security (the "FASIT Ownership Security") will constitute
the "regular interests" and the "ownership interest," respectively, if
(1) a FASIT election is in effect;
(2) certain tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT
are met on a continuing basis; and
(3) the trust fund is not a regulated investment company as defined
in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date
and at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of
the Code (generally, instruments that provide for interest at a
fixed rate, a qualifying variable rate, or a qualifying
interest-only type rate);
(3) foreclosure property;
(4) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are
reasonably required to guarantee or hedge against the FASIT's
risks associated with being the obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to such holder. A
debt instrument is a permitted asset only if the instrument is indebtedness
for federal income tax purposes, including regular interests in a REMIC or
regular interests issued by another FASIT and it bears (1) fixed interest or
(2) variable interest of a type that relates to qualified variable rate debt
(as defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
Permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees of
payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT.
Foreclosure property is real property acquired by the FASIT in connection with
the default or imminent default of a qualified mortgage, provided the
depositor had no knowledge or reason to know as of the date such asset was
acquired by the FASIT that such a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined herein).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of securities will indicate
which securities of such Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, such interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to such principal
amount.
Permissible variable rates for FASIT regular interests are the same as those
for REMIC regular interests (i.e., certain qualified floating rates and
weighted average rates). Interest will be considered to be based on a
permissible variable rate if generally:
(1) such interest is unconditionally payable at least annually;
(2) the issue price of the debt instrument does not exceed the
total noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating
rate," or a combination of "qualified floating rates" that do
not operate in a manner that significantly accelerates or
defers interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (3), (4), or (5) in the immediately preceding paragraph,
but otherwise meets all requirements to be treated as a FASIT, it may still
qualify as a type of regular interest known as a "high-yield interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause
(6), but the interest payable on the interest consists of a specified portion
of the interest payments on permitted assets and that portion does not vary
over the life of the security, the interest will also qualify as a high-yield
interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests therein for U.S. federal
income tax purposes is uncertain. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the FASIT's income for the period of time
in which the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must
report income from such Securities under an accrual method of accounting, even
if they otherwise would have used the cash receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount, interest paid or accrued on a FASIT Regular Security generally will
be treated as ordinary income to the Holder and a principal payment on such
security will be treated as a return of capital to the extent that the
securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "--REMICs - Taxation of Owners of Regular Securities"
above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return
continues to have a corporate level tax. High-yield interests are subject to
special rules regarding the eligibility of holders of such interest, and the
ability of such holders to offset income derived from their FASIT Security
with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a real
estate investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an
Eligible Corporation, or (2) a dealer who acquires FASIT debt
for resale to customers in the ordinary course of business.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income
from the high-yield interest multiplied by the highest corporate income tax
rate. In addition, transfers of high-yield interests to Disqualified Holders
will be disregarded for federal income tax purposes, and the transferor will
continue to be treated as the holder of the high-yield interest.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the high-yield interest, for either regular federal income tax purposes
or for alternative minimum tax purposes. In addition, the FASIT Provisions
contain an anti-abuse rule that imposes corporate income tax on income derived
from a FASIT Regular Interest that is held by a pass-through entity (other
than another FASIT) that issues debt or equity securities backed by the FASIT
Regular Interest and that have the same features as high-yield interests.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. In general, the
character of the income to the holder of a FASIT Ownership Security will be
the same as the character of such income to the FASIT, except that any
tax-exempt interest income taken into account by the holder of a FASIT
Ownership Security is treated as ordinary income. In determining that taxable
income, the holder of a FASIT Ownership Security must determine the amount of
interest, original issue discount, market discount, and premium recognized
with respect to the FASIT's assets and the FASIT Regular Securities issued by
the FASIT according to a constant yield methodology and under an accrual
method of accounting. In addition, a holder of a FASIT Ownership Security is
subject to the same limitations on their ability to use losses to offset
income from their FASIT Regular Securities as are holders of high-yield
interest. See "--Taxation of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by such
holder, then Section 475 of the Code will continue to apply to such
securities, except that the amount realized under the mark-to-market rules or
the securities' value after applying special valuation rules contained in the
FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably
expected payments under the instrument using a discount rate of 120% of the
applicable federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition;
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired
through foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest (i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default) on
an asset of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of
the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another such
instrument; or
(7) in order to reduce over-collateralization where a principal
purposes of the disposition was not to avoid recognition of
gain arising from an increase in its market value after its
acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
See "--REMICs" above.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
For 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 for the
mortgage loans underlying the Securities of a series, and where these
Securities are not designated as "Stripped Securities," the holder of each
Security of that 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 those mortgage loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
servicer, in accordance with that 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 fund in accordance with
its method of accounting, provided that those amounts are reasonable
compensation for services rendered to the 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 for certain itemized deductions
described in Code Section 67, including deductions under Code Section 212 for
the Servicing Fee and all administrative and other expenses of the Grantor
Trust Fund, to the extent that those deductions, in total, 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 (1) 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 (2) 80% of the amount of itemized deductions otherwise
allowable for that year. As a result, those investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
total taxable income in excess of the total amount of cash received on the
Standard Securities with respect to interest at the Interest Rate or as
discount income on the Standard Securities. In addition, those expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause those investors to be subject to significant additional tax
liability. Moreover, where there is Retained Interest for the mortgage loans
underlying a series of Securities the transaction will be subject to the
application of the "stripped bond" rules of the Code as described below under
"--Stripped Securities." Where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped coupon" rules of the Code, as described below under
"--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series that
are Subordinate Securities, may incur losses of interest or principal with
respect to the mortgage loans. Those 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.
(1) Tax Status
For a series, in the opinion of Brown & Wood LLP, except for that portion
of a trust fund consisting of Unsecured Home Improvement Loans, a Standard
Security owned by a:
o "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 that section of the Code.
o 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 those assets will be considered "interest on
obligations secured by mortgages on real property" to that
extent within the meaning of Code Section 856(c)(3)(B).
o 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 that
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 those arrangements on the characterization of the securityholder's
investment for federal income tax purposes.
(2) 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 for
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 some 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 that
income. No prepayment assumption will be assumed for purposes of that accrual
except as set forth in the 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 those mortgage loans acquired by a
securityholder are purchased at a price equal to the then unpaid principal
amount of those mortgage loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of those
mortgage loans (i.e., points) will be includible by that 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 that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed reasonable
servicing compensation, the amount of that 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 the 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. That guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of those 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 those 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 those
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
the trust could be viewed as excluding the portion of the mortgage loans the
ownership of which is attributed to the servicer, or as including that portion
as a second class of equitable interest. Applicable Treasury regulations treat
that 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, that 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.
(4) 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 total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total 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 for the
Standard Security and decreased by the amount of any losses previously
reported for 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), the 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 (1) 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 for any prior disposition of
property that was held as part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the 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 those taxpayers
(39.6%) for property held for more than one year. The maximum tax rate for
corporations currently is the same for 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" for principal payments and "stripped
coupons" for 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:
o 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;
o 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
o 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" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for 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 those 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 securityholders of Stripped Securities,
the servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those 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 the
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in some respects, particularly
where Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate mortgage loans, in the opinion of Brown & Wood LLP,
(1) 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 (2) 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 for 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 totaled 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 the approach described
in this paragraph, 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 these
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 that 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 that Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (1)
the initial discount for the Stripped Security was treated as zero under the
de minimis rule, or (2) no more than 100 basis points in excess of reasonable
servicing is stripped off the related mortgage loans. That 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 that
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 Stripped Security that
is a Subordinate Security, may deduct losses incurred for 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 for 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
those mortgage loans qualify for that treatment. The application of those 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 for 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 before the receipt of the cash
attributable to that income. Based in part on the issue discount required to
be included in the income of a holder of a Stripped Security 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 total amount of the payments to be made on the
Stripped Security to that 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
that original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each mortgage loan
represented by that 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 the Stripped
Security to recognize a loss (which may be a capital loss) equal to that
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 these 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, these regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of these 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 before 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 that 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, the subsequent purchaser will be required for federal income tax
purposes to accrue and report that 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 those 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
(1) one installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to
principal on each mortgage loan and a second installment
obligation consisting of the Stripped Security's pro rata share
of the payments attributable to interest on each mortgage loan;
(2) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each
mortgage loan; or
(3) 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 a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each 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 these 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 that year,
information (prepared on the basis described above) necessary to enable the
securityholder to prepare its federal income tax returns. This 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 who purchased at the issue price. In particular, in the case of
Stripped Securities, the reporting will be based upon a representative initial
offering price of each Class of Stripped Securities except as set forth in the
prospectus supplement. The trustee will also file the 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 any applicable 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 that 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 these 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
For 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, (1) 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 (2) 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
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,
for 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 those 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 (1)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (2) 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
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the 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 some
features characteristic of debt, the Partnership Securities might be
considered debt of the depositor or the Partnership Trust Fund. This
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.
(2) 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 that 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:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for that Due Period, including
interest accruing at the applicable Interest Rate for that Due
Period and interest on amounts previously due on the
Partnership Securities but not yet distributed;
(2) 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
(3) any other amounts of income payable to the securityholders for
that Due Period.
This 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
Interest Rate plus the other items described above even though the trust fund
might not have sufficient cash to make current cash distributions of that
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 those 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 that 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, those deductions might be disallowed to the
individual in whole or in part and might result in that holder being taxed on
an amount of income that exceeds the amount of cash actually distributed to
that holder over the life of the Partnership Trust Fund.
Discount income or premium amortization for 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 that description, it is intended that the Partnership Trust
Fund will make all tax calculations relating to income and allocations to
securityholders on a total basis for 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 these 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.
(3) 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 a total 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 that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) 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 that 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. Those 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 the 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.
(5) 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 that 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 total
adjusted tax basis in those Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of that
total 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 those 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 a total amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the total cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the Partnership Securities.
(6) 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 that 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 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.
(7) 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 for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that 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.
(8) Section 754 Election
If 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. 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 that 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.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. These 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 these nominees will be required to forward that 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 those 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. This information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and identification number of that person, (b)
whether that 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 (c) certain information on
Partnership Securities that were held, bought or sold on behalf of that 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 that 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.
Unless another designation is made, the depositor will be designated as
the tax matters partner in the pooling and servicing agreement and, as the tax
matters partner, 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.
(10) 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 those
purposes, the Partnership Trust Fund will withhold as if it were so engaged 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 that 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 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 for 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 that those 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 that 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 for the guaranteed payments.
(11) 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.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
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 AND OTHER 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 for the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
GENERAL
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 these 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 for those Plans in connection
with the investment of Plan assets. Some 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. Therefore,
assets of these 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 of these plans that 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 an 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 for those 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 for 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 that
generally exempts from the application of the prohibited transaction
provisions of Sections 406(a) and 407 of ERISA, and the excise taxes imposed
on those 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, that (1) 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 (2) 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" will 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 for
a class of Securities.
The Exemption sets forth six general conditions that must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder:
(1) 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.
(2) 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.
(3) 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").
(4) 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 on Assets constituting more than 5% of
the total unamortized principal balance of the Assets in the
related trust fund as of the date of initial issuance of the
Securities.
(5) 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 those
obligations; and the sum of all payments made to and retained
by the servicer must represent not more than reasonable
compensation for that person's services under the related
Agreement and reimbursement of that person's reasonable
expenses in connection therewith.
(6) The investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
In addition, the trust fund must meet the following requirements: (1) the
assets of the trust fund must consist solely of assets of the type that have
been included in other investment pools; (2) securities evidencing interests
in those 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 before the Plan's acquisition of the securities; and (3) securities
evidencing interests in those other investment pools must have been purchased
by investors other than Plans for at least one year before 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 for that 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 that 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 that 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 for 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 those 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 that 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 those
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 these 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 of these
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 for those 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 that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that 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 that 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 that 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 that 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 for 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 that 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 that 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 for investments by Plans generally or any particular Plan, or
that this investment is appropriate for Plans generally or any particular
Plan.
PRE-FUNDING ACCOUNTS
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption, which extends exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows Assets
supporting payments to securityholders, and having a value equal to no more
than 25% of the total initial Security Balance of the related Securities, to
be transferred to the trust fund within the Pre-Funding Period, instead of
requiring that all the Assets be either identified or transferred on or before
the Closing Date. The relief is available when the following conditions are
met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered (the
"Pre-Funding Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and conditions
for eligibility as the original Assets used to create the trust
fund, which terms and conditions have been approved by at least
one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund during
the Pre-Funding Period must not result in the Securities that
are to be covered by the Exemption receiving a lower credit
rating from a rating agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the
initial issuance of the Securities by the trust fund.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Assets
in the trust fund at the end of the Pre-Funding Period must not
be more than 100 basis points lower than the average interest
rate for the Assets transferred to the trust fund on the
Closing Date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original Assets that
were transferred to the trust fund,
o the characteristics of the Subsequent Assets must be
monitored by an insurer or other credit support provider
that is independent of the depositor; or
o an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided
to each rating agency rating the Securities, the
underwriter and the trustee) stating whether or not the
characteristics of the Subsequent Assets conform to the
characteristics described in the related prospectus
supplement and/or pooling and servicing agreement. In
preparing this letter, the independent accountant must use
the same type of procedures as were applicable to the
Assets transferred to the trust fund as of the Closing
Date.
(6) The Pre-Funding Period must end no later than three months or
90 days after the Closing Date (or earlier in certain
circumstances) if the Pre-Funding Account falls below the
minimum level specified in the pooling and servicing agreement
or an Event of Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or
Capitalized Interest Account used in connection with the
pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest
Account used in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding
Limit for the trust fund; and
o that the amounts remaining in the Pre-Funding Account at
the end of the Pre-Funding Period will be remitted to
securityholders as repayments of principal.
(9) The Agreement must prescribe the Permitted Investments for the
Pre-Funding Account and/or Capitalized Interest Account and, if
not disclosed in the prospectus supplement, the terms and
conditions for eligibility of Subsequent Assets.
LEGAL INVESTMENT
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
prospectus supplement will specify which classes of the Securities, if any,
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"). Generally, only
classes of Offered Securities that (1) are rated in one of the two highest
rating categories by one or more rating agencies and (2) 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 those entities. Pursuant to SMMEA, a number
of states enacted legislation, on or before the October 3, 1991 cut-off for
those 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 these securities, and
national banks may purchase these 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 regulations that
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 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 these 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 those authorities before purchasing any Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under those 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 that may restrict or prohibit investment in securities that are not
"interest bearing" or "income paying," and with regard to any Offered
Securities issued in book-entry form, provisions that may restrict or prohibit
investments in securities that 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 that 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
specified in the 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. ("DBSI") acting as
underwriter with other underwriters, if any, named therein. In that 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
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 that it has previously purchased or agreed to purchase.
If DBSI acts as agent in the sale of Securities, DBSI will receive a selling
commission for each series of Securities, depending on market conditions,
expressed as a percentage of the total 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 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 for any series offered other than through
underwriters will contain information regarding the nature of that offering
and any agreements to be entered into between the depositor and purchasers of
Securities of that 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 those 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 those 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 before any reoffer or sale of
Securities.
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.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement
under the Securities Act of 1933, as amended, with respect to the Securities
(the "Registration Statement"). This prospectus, which forms a part of the
Registration Statement, omits certain information contained in the
Registration Statement pursuant to the rules and regulations of the
Commission. The Registration Statement and the exhibits thereto can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
of its Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system. The Depositor has filed the Registration Statement, including all
exhibits thereto, through the EDGAR system and therefore such materials should
be available by logging onto the Commission's web site. The Commission
maintains computer terminals providing access to the EDGAR system at each of
the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington,
D.C. 20016 (202-752-7115). The Depositor did not participate in the
preparation of Fannie Mae's prospectus or its annual or quarterly reports or
other financial information and, accordingly, makes no representation as to
the accuracy or completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates
as well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac
may be obtained by writing or calling the Investor Inquiry Department of
Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, telephone 800-336-3672; within Washington,
D.C. metropolitan area, telephone 703-759-8160). The Depositor did not
participate in the preparation of Freddie Mac's Offering Circular, Information
Statement or any supplement thereto or any quarterly report thereof and,
accordingly, makes no representation as to the accuracy or completeness of the
information in those documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the 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 that trust fund will 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 those documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein will be deemed to be modified
or superseded for all purposes of this prospectus to the extent that a
statement contained herein (or in the prospectus supplement) or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference modifies or replaces that statement. Any statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any
or all of the documents referred to above that have been or may be
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are
specifically incorporated by reference into the information that this
prospectus incorporates). Requests for information should be directed to the
corporate trust office of the Trustee specified in the prospectus supplement.
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 for each series of Securities and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of Securities.
Accordingly, financial statements for a trust fund will generally not be
included in this prospectus or in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Securities, they
must not be rated lower than investment grade; that is, they must be rated in
one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
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 the securities, the nature of the
underlying assets and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates, mortgage-backed notes and other asset
backed securities do not represent any assessment of the likelihood of
principal prepayments by borrowers or of the degree by which 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>
47063/7 148
INDEX OF DEFINED TERMS
<PAGE>
1986 Act...........................................93
1998 Policy Statement.............................143
Accrual Period.....................................18
Accrual Securities.................................25
Accrued Security Interest..........................28
Adjustable Rate Assets..............................2
Agency Securities...................................2
Agreement..........................................40
ARM Contracts.......................................9
ARM Loans...........................................6
ARM Unsecured Home Improvement Loans................8
Asset Conservation Act.............................79
Asset Group........................................26
Asset Seller........................................2
Assets..............................................2
Available Distribution Amount......................26
Balloon Payment Assets..............................3
Bankruptcy Code....................................76
Beneficial Owner...................................34
Bi-weekly Assets....................................3
Book-Entry Securities..............................26
borrower...........................................68
Buy Down Assets.....................................3
Buydown Funds......................................92
Buydown Mortgage Loans.............................22
Buydown Period.....................................22
Capitalized Interest Account.......................16
Cash Flow Agreement................................17
Cedel..............................................34
CERCLA.............................................78
Certificates.......................................25
Charter Act........................................11
Code...............................................88
Collection Account.................................44
Commission..........................................6
contract borrower..................................70
contract lender....................................70
Contract Rate.......................................9
Contracts...........................................2
Convertible Assets..................................3
Cooperative........................................69
Cooperative Corporation............................35
Cooperative Loans..................................69
Cooperatives........................................4
Covered Trust......................................65
CPR................................................21
credit support.....................................17
Crime Control Act..................................83
Cut-off Date........................................5
DBSI..............................................144
DCR...............................................138
Debt Securities....................................88
Definitive Securities..............................26
Determination Date.................................26
Disqualified Organization.........................107
Distribution Date..................................18
DOL...............................................136
DTC................................................34
Due Period.........................................27
due-on-sale........................................73
due-on-sale clause.................................24
EDGAR.............................................145
equity of redemption...............................73
ERISA.............................................136
ERISA Considerations..............................137
Euroclear Operator.................................35
European Depositaries..............................36
excess servicing..................................123
Exchange Act.......................................34
Excluded Plan.....................................138
Exemption.........................................137
Fannie Mae..........................................2
FASIT..............................................88
FASIT Ownership Security..........................115
FASIT Provisions...................................88
FASIT Regular Securities..........................115
FASIT Securities...................................88
FDIC...............................................44
FFIEC.............................................143
FHA.................................................5
Financial Intermediary.............................36
Fitch.............................................138
Freddie Mac.........................................2
Freddie Mac Act....................................13
Freddie Mac Certificate Group......................13
Garn-St. Germain Act...............................80
GEM Assets..........................................3
Ginnie Mae..........................................2
GPM Assets..........................................3
Grantor Trust Fund.................................88
Grantor Trust Securities...........................88
Holder-in-Due-Course...............................86
Home Equity Loans...................................4
Home Improvement Contracts..........................4
Housing Act........................................10
HUD................................................53
Increasing Payment Asset............................3
Increasing Payment Assets...........................3
Indirect Participants..............................34
Insurance Proceeds.................................27
Interest Rate......................................28
Interest Reduction Assets...........................3
land sale contract.................................70
Land Sale Contracts.................................4
Level Payment Assets................................2
Liquidation Proceeds...............................27
Loan-to-Value Ratio.................................5
Lock-out Date.......................................7
Lock-out Period.....................................7
Manufactured Home...................................8
Mark to Market Regulations........................110
Moody's...........................................138
Mortgage Securities.................................2
Mortgaged Properties................................4
Mortgages...........................................5
Multifamily Property................................4
NCUA..............................................142
new partnership...................................132
New Regulations...................................113
Non-Equity Securities.............................139
Non-Pro Rata Security..............................94
Nonrecoverable Advance.............................30
Non-U.S. Person...................................113
Notes..............................................25
OCC...............................................142
Offered Securities.................................26
OID Regulations....................................88
old partnership...................................132
Participants.......................................34
Parties in Interest...............................136
Partnership Securities.............................88
Partnership Trust Fund.............................88
Pass-Through Entity...............................107
PCBs...............................................78
Permitted Investments..............................44
Plans.............................................136
pooling and servicing agreement....................39
Pre-Funded Amount..................................16
Pre-Funding Account................................16
Pre-Funding Limit.................................140
Pre-Funding Period.................................16
prepayment.........................................20
Prepayment Assumption..............................95
Prepayment Premium..................................7
PTCE..............................................140
Purchase Price.....................................41
RCRA...............................................79
Record Date........................................26
Refinance Loans.....................................5
Regular Securities.................................89
Regular Securityholder.............................93
Related Proceeds...................................30
Relevant Depositary................................36
Relief Act.........................................82
REMIC..............................................88
REMIC Pool.........................................88
REMIC Provisions...................................88
REMIC Regulations..................................89
REMIC Securities...................................39
REO Property.......................................31
Residual Holders..................................102
Residual Securities................................89
Restricted Group..................................138
Retained Interest..................................55
Revolving Credit Line Loans.........................7
RICO...............................................83
Rules..............................................36
S&P...............................................138
SBJPA of 1996......................................92
secured-creditor exemption.........................78
Securities.........................................25
Security...........................................40
Security Balance...................................29
Senior Securities..................................25
Servicemen's Readjustment Act......................16
Servicing Standard.................................48
Single Family Property..............................4
SMMEA.............................................142
SPA................................................21
Special servicer...................................57
Standard Securities...............................121
Startup Day........................................89
Step-up Rate Assets.................................3
Strip Securities...................................25
Stripped Agency Securities.........................14
Stripped Securities...............................121
Subordinate Securities.............................25
Subsequent Assets..................................16
Superliens.........................................78
Taxable Mortgage Pools.............................89
Terms and Conditions...............................36
thrift institutions...............................106
Tiered REMICs......................................93
Title V............................................81
Title VIII.........................................82
Type IV securities................................142
U.S. Person.......................................108
UCC................................................34
underwriter.......................................137
Unsecured Home Improvement Loans....................2
UST................................................79
VA................................................. 5
VA Guaranty Policy.................................54
Value...............................................5
Warranting Party...................................42
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, SEPTEMBER [ ], 1999
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by
Ace Securities Corp. The assets in each trust fund will generally consist of
one or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed
by mortgage loans secured by residential properties or
participations in those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
Ace Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each
having is own distinct designation. Each series will be issued in one or more
classes and will evidence beneficial ownership of, or be secured by, the
assets in the trust fund that the series relates to. A prospectus supplement
for a series will specify all of the terms of the series and of each of the
classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is September , 1999.
<PAGE>
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o single family mortgage loans, which may include Home Equity Loans
and Land Sale Contracts (each as defined herein);
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued 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; or
o a combination of mortgage loans, Agency Securities and/or Mortgage
Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. 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 prospectus supplement. The
depositor will select each Asset to include in a trust fund from among those
it has purchased, either directly or indirectly, from a prior holder (an
"Asset Seller"), which may be an affiliate of the depositor and which prior
holder may or may not be the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "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;
o "Adjustable Rate Assets," which may provide for periodic adjustments
to their rates of interest to equal the sum of a fixed margin and an
index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce the
borrowers' monthly payments during the early period after
origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable thereon;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to pay
interest due thereon, and (2) an increase in those monthly payments
in later years at a predetermined rate resulting in full repayment
over a shorter term than the initial amortization terms of those
Assets;
o "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
their unpaid principal balances, and this unpaid interest will be
added to the principal balances of those Assets and will be paid,
together with interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that increase
over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the
related borrowers may exercise an option to convert the adjustable
interest rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers 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
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 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 for 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 borrower'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 borrower'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 that Increasing
Payment Asset. The borrower'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 the Increasing Payment Asset at the
related interest rate, without negative amortization. A borrower's monthly
payments on an Increasing Payment Asset may, however, not be sufficient to
result in any reduction of the principal balance of that Asset until after the
period when those payments may be increased.
The Securities (as defined herein) will be entitled to payment only from
the assets of the related trust fund and will not be entitled to payments from
the assets of any other trust fund established by the depositor. The assets of
a trust fund may consist of certificates representing beneficial ownership
interests in, or indebtedness of, another trust fund that contains the Assets,
if specified in the prospectus supplement.
MORTGAGE LOANS
General
Each mortgage loan will generally be secured by a lien on 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"). Single Family Properties are sometimes referred to herein
as "Mortgaged Properties." 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 also include:
o Apartments owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the
term of the related mortgage note by at least five years or some
other time period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to
pay the amount due thereon to the holder thereof with fee title to
the related property held by that holder until the borrower has made
all of the payments required pursuant to that Land Sale Contract, at
which time fee title is conveyed to the borrower.
The originator of each mortgage loan will have been a person other than
the depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by 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
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a mortgage loan at any particular 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 for Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of that loan and (b) the sales price
for that property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise specified in the 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 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 the Prospectus Supplements
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans as
of, unless otherwise specified in that prospectus supplement, the
close of business on the first day of the month of formation of the
related trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the mortgage
loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for 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;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the 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 that 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 (the "Commission") within fifteen
days after that initial issuance. The characteristics of the mortgage loans
included in a trust fund will not vary by more than five percent (by total
principal balance as of the Cut-off Date) from the characteristics thereof
that are described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
Home Equity Loans, which may be secured by Mortgages that are junior to other
liens on the related Mortgaged Property. In addition, the prospectus
supplement will specify whether the mortgage loans contain some 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 some other interval as is specified in the prospectus supplement or for
payments in another manner described in the 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 in the related mortgage note, in each case as described
in the 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
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 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 prospectus supplement. If the holders of any class or
classes of Offered Securities are entitled to all or a portion of any
Prepayment Premiums collected from the mortgage loans, the prospectus
supplement will specify the method or methods by which any of these amounts
will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the 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 that loan. From time to time before the
expiration of the related draw period specified in a Revolving Credit Line
Loan, principal amounts on that Revolving Credit Line Loan may be drawn down
(up to a maximum amount as set forth in the prospectus supplement) or repaid.
If specified in the prospectus supplement, new draws by borrowers under the
Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total 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
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some 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 that 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.
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 that may
be required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section
306(d) of the National Housing Act of 1934 (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 regarding 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
prospectus supplement. If the trust fund includes Ginnie Mae certificates,
your prospectus supplement will include any material additional information
regarding the Ginnie Mae guaranty program, the characteristics of the pool
underlying those Ginnie Mae certificates, the servicing of the related pool,
the payment of principal and interest on Ginnie Mae certificates and other
relevant matters regarding the Ginnie Mae certificates.
Except as otherwise specified in the 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 that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
total amount of the monthly principal and interest payments on each related
FHA loan or VA loan, minus servicing and guaranty fees totaling the excess of
the interest on that FHA loan or VA loan over the Ginnie Mae certificates'
interest rate. In addition, each payment to a holder of a Ginnie Mae
certificate will include proportionate pass-through payments to that 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 related 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 (for
example, 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 the Ginnie Mae certificates.
Pursuant to that agreement, that 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 those
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 to make timely payments of all amounts due on the
Ginnie Mae certificate, even if the payments received by that 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 that payment. Upon that notification and request, Ginnie Mae will make
those 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 that payment, the registered
holder of the Ginnie Mae certificate has recourse against only Ginnie Mae to
obtain that 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 the Ginnie Mae certificates for any amounts that are
unpaid 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 the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the 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 that 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. If the
trust fund includes Fannie Mae certificates, your prospectus supplement will
include any material additional information regarding the Fannie Mae program,
the characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about 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 that holder's proportionate share
of scheduled principal and interest at the applicable interest rate provided
for by that Fannie Mae certificate on the underlying mortgage loans, whether
or not received, and that holder's proportionate share of the full principal
amount of any prepayment or foreclosed or other finally liquidated mortgage
loan, whether or not the related 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 those
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 those 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. For a Fannie Mae certificate issued in
book-entry form, distributions thereon will be made by wire, and for 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, as long as
the Fannie Mae certificates and underlying mortgage loans meet the criteria of
the rating agency or agencies rating the Certificates. The Fannie Mae
certificates and underlying mortgage loans will be described in the 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 those 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 the 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 of
these mortgage loans 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. If the
trust fund includes Freddie Mac certificates, your prospectus supplement will
include any material additional information regarding the Freddie Mac guaranty
program, the characteristics of the pool underlying that Freddie Mac
certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac certificate and any other relevant matters about
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 interest 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 that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share thereof, but does not, except if and to the
extent specified in the 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
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no
later than one year after demand has been made upon the borrower 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 for the mortgage loans in the same manner as for mortgage
loans that 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 borrower, 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 those 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 those 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
the Freddie Mac certificates and underlying mortgage loans meet the criteria
of the rating agency or agencies rating the Securities. The Freddie Mac
certificates and underlying mortgage loans will be described in the 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") that 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 those
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 that entity guarantees the
underlying securities backing the Stripped Agency Securities or to the extent
described above for a Stripped Agency Security backed by a pool of mortgage
loans, unless otherwise specified in the prospectus supplement. If the trust
fund includes Stripped Agency Securities, your prospectus supplement will
include any material additional information regarding the characteristics of
the assets underlying the Stripped Agency Securities, the payments of
principal and interest on the Stripped Agency Securities and other relevant
matters about 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 or Agency
Securities, or collateralized obligations secured by mortgage loans or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its affiliates;
(2) acquired in bona fide secondary market transactions from persons
other than the issuer thereof or its affiliates; and
(3) (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 those 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 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 the Mortgage Securities and any related credit enhancement, and
the related mortgage loans or Agency Securities will be described together
with any other mortgage loans or Agency Securities included in the trust fund
of that series. As used in this prospectus, the terms "mortgage loans" include
the mortgage loans underlying the Mortgage Securities in your trust fund.
References in this prospectus to advances to be made and other actions to be
taken by the master servicer in connection with the Assets may include any
advances made and other actions taken pursuant to the terms of the applicable
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. The 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 that FHA loan.
Mortgage loans that are FHA loans are insured by the FHA (as described in
the 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.
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 some 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
that VA loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
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 that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and 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
the Securities having a total principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for
that series on the date of its issuance. The Pre-Funded Amount for a series
will be specified in the prospectus supplement, and will not in any case
exceed 50% of the total initial Security Balance of the related Securities.
Any Subsequent Assets will be required to satisfy certain eligibility criteria
more fully set forth in the prospectus supplement, which criteria will be
consistent with the eligibility criteria of the Assets initially included in
the trust fund, subject to those exceptions that are expressly stated in the
prospectus supplement. In addition, certain conditions must be satisfied
before the Subsequent Assets are transferred into the trust fund, for example,
the delivery to the rating agencies and to the trustee of any required
opinions of counsel. See "ERISA Considerations--Pre-Funding Accounts" for
additional information regarding Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. 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 prospectus supplement. In addition, if
specified in the 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 on 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 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 prospectus supplement will, to the extent described herein
and in the prospectus supplement deposit all payments and collections received
or advanced with respect to the Assets and other assets in the trust fund.
This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as
cash or invested in certain short-term, investment grade obligations, in each
case as described in the 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 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 that
series or by one or more other types of credit support, for example, a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any of these types of coverage for the
Securities of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series
of Securities. See "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the 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, for example,
interest rate swap agreements, interest rate cap or floor agreements, currency
swap 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 swap agreements might be included in
the trust fund if some or all of the Assets were denominated in a non-United
States currency.) The principal terms of any related guaranteed investment
contract or other agreement (any of these types of agreement, a "Cash Flow
Agreement"), including 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 prospectus supplement will provide certain information with respect to the
borrower under any 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 that purchase, and to pay for certain expenses incurred
in connection with that 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 Interest 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).
INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable 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
for any series will specify the Interest Rate for each class of Securities or,
in the case of a variable or adjustable Interest Rate, the method of
determining the Interest Rate; the effect, if any, of the prepayment of any
Asset on the 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 borrower under a
Cash Flow Agreement.
If specified in the 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 Interest Rate and purchase
price of that Security because, while interest may accrue on each Asset during
a certain period (each, an "Accrual Period"), the distribution of that
interest will be made on a day that may be several days, weeks or months
following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities entitled to distributions of
interest (or addition to the Security Balance of a class of Accrual
Securities) will be made by or on behalf of the trustee each month on the date
specified in the related prospectus supplement (each date, a "Distribution
Date"), and will include interest accrued during the Accrual Period for that
Distribution Date. As indicated above under "--Interest Rate," if the 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 those Securities may be
lower than the yield that would result if the Accrual Period ended on the 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 principal prepayments occur will
be affected by a variety of factors, including 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), those assets are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by those assets. However, you should note that some 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 those Assets, and by the extent to
which the servicer of any of these mortgage loans is able to enforce these
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 those provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums.
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 that 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 those classes.
When a full prepayment is made on a mortgage loan, the borrower is
charged interest on the principal amount of the mortgage loan so prepaid for
the number of days in the month actually elapsed up to the date of the
prepayment or some other period specified in the 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 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 as of its due date
in the month in which the partial prepayment is received or some other date as
is specified in the 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 that 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 particular period may not be offset by a
similar decrease (or increase) in the rate of principal payments at a later
time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that 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
that series. Prepayments on the mortgage loans 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 before which the Security Balance thereof is
scheduled to be reduced to zero, calculated on the basis of the assumptions
applicable to that series. 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 that 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 that 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 these Securities may be fully
paid before 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 comprising or underlying those
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. 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 those
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 those 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. Starting 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 underlying or comprising the Assets.
The prospectus supplement for each series of Securities may contain
tables, if applicable, setting forth the projected weighted average life of
each class of Offered Securities of that series and the percentage of the
initial Security Balance of each class that would be outstanding on specified
Distribution Dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the mortgage loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or some other standard specified in the
prospectus supplement. These 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 comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because
the ability of a borrower to make a balloon payment typically will depend on
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 real
estate values, the borrower's financial situation, prevailing mortgage loan
interest rates, the borrower'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 prospectus supplement. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. 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.
For some 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. Under the applicable
underwriting standards, the borrower under each mortgage loan generally will
be qualified on the basis of the mortgage rate in effect at origination. The
repayment of any of these mortgage loans may therefore be dependent on the
ability of the borrower to make larger level monthly payments following the
adjustment of the mortgage rate. In addition, some mortgage loans may be
subject to temporary buydown plans ("Buydown Mortgage Loans") pursuant to
which the monthly payments made by the borrower 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 borrower of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the borrower, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default for the related mortgage loan.
The mortgage rates on some 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 that index at
which interest accrues), the amount of interest accruing on the principal
balance of those 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 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 on the price at which
those Securities were purchased. In addition, for some ARM Loans subject to
negative amortization, during a period of declining interest rates, it might
be expected that each minimum scheduled monthly payment on this type of
mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since that excess will be
applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of those Securities will be reduced and
may adversely affect yield to holders thereof, depending on the price at which
those Securities were purchased.
As may be described in the 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 that 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 of these interest-only or revolving periods may, upon
the occurrence of certain events to be described in the prospectus supplement,
terminate before 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 prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in certain temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this 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 the Securities are issued. Any
similar feature applicable to any Securities may end on the occurrence of
events to be described in the prospectus supplement, resulting in the current
funding of principal payments to the related securityholders and an
acceleration of the amortization of these Securities.
Termination
If specified in the 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 total Security Balance of the Securities of that series declines to a
percentage specified in the 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 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 are expected to occur with
greater frequency in their early years. 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. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the mortgage loans will be affected by the general economic
condition of the region of the country in which the related Mortgage
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment
or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the mortgage loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of mortgage loans
that are repaid in accordance with their terms will affect the weighted
average life of the mortgage loans comprising or underlying the Assets and
that of the related series of Securities.
Refinancing
At the request of a borrower, the servicer may allow the refinancing of a
mortgage loan 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 that refinancing, the new loan would not be included in the related trust
fund and, therefore, that refinancing would have the same effect as a
prepayment in full of the related mortgage loan. A servicer may, from time to
time, implement programs designed to encourage refinancing. These programs may
include 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, including defaulted mortgage loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of those
mortgage loans.
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.
For any mortgage loans, except as set forth in the 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 that 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 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 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. 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 that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
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 Asset-backed certificates (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 Asset-backed notes (the
"Notes," and together with the Certificates, the "Securities"), the 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:
o provide for the accrual of interest thereon based on fixed, variable
or adjustable rates;
o 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;
o 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");
o provide for distributions of accrued interest thereon which begin
only following the occurrence of certain events, that as the
retirement of one or more other classes of Securities of that series
(collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o 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 specified in the 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 portion of
the Assets, an "Asset Group"). Any of these classes may include classes of
Offered Securities.
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") 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 prospectus supplement. The transfer of any Offered Securities
may be registered and those Securities may be exchanged without the payment of
any service charge payable in connection with that 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 in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the prospectus supplement. See "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 similar total Security Balance, notional amount or percentage
interest but of different authorized denominations.
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 prospectus
supplement from the Available Distribution Amount for that series and that
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 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 prospectus supplement (the "Determination Date"). All
distributions for each class of Securities on each Distribution Date will be
allocated pro rata among the outstanding securityholders in that class or by
random selection or as described in the 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 that securityholder has so notified the trustee or other person
required to make those payments no later than the date specified in the
prospectus supplement (and, if so provided in the 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 that 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,
subject to the terms described in the prospectus supplement. Generally, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date, exclusive,
unless otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest collected
but due on a date after the related Due Period (unless a different
period is specified in the prospectus supplement, a "Due Period "
for any Distribution Date will begin on the second day of the month
in which the immediately preceding Distribution Date occurs, or 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 for each Asset (to the extent that 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 after the related Due Period, or other period specified in
the prospectus supplement,
(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 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 after the related Due Period, or other period
specified in the prospectus supplement;
(2) if the 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;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(5) 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 for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, 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 prospectus supplement for a series of Securities will describe any
variation in the calculation or distribution of the Available Distribution
Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities which
have no Interest Rate) may have a different Interest Rate, which will be a
fixed, variable or adjustable rate at which interest will accrue on that class
or a component thereof (the "Interest Rate" in the case of Certificates). The
prospectus supplement will specify the Interest Rate for each class or
component or, in the case of a variable or adjustable Interest Rate, the
method for determining the 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 prospectus supplement specifies a different basis.
Distributions of interest on 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 starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that
class and that Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to that class on that Distribution
Date. Before any interest is distributed on any class of Accrual Securities,
the amount of Accrued Security Interest otherwise distributable on that class
will instead be added to the Security Balance of that class on each
Distribution Date.
For 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 Accrual Period on the outstanding
Security Balance thereof immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security
Interest on certain classes of Strip Securities will be equal to interest
accrued during the related Accrual Period on the outstanding notional amount
thereof immediately before each Distribution Date, at the applicable Interest
Rate, reduced as described below, or interest accrual in the manner described
in the prospectus supplement. The method of determining the notional amount
for a particular class of Strip Securities will be described in the 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 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 before the due
date in that accrual period on the mortgage loans comprising or underlying the
Assets in the trust fund for that series. The particular manner in which these
shortfalls are to be allocated among some or all of the classes of Securities
of that series will be specified in the prospectus supplement. The prospectus
supplement will also describe the extent to which the amount of Accrued
Security 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 the
mortgage loans comprising or underlying the Assets in the related trust fund.
Unless otherwise provided in the prospectus supplement, any reduction in the
amount of Accrued Security Interest otherwise distributable on a class of
Securities by reason of the allocation to that class of a portion of any
deferred interest on the mortgage loans comprising or underlying the Assets in
the related trust fund will result in a corresponding increase in the Security
Balance of that class. See "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 on 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:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class
thereof will be specified in the 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 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 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 that 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 the component class of Securities. References in those sections
to Security Balance may refer to the principal balance, if any, of these
components and reference to the Interest Rate may refer to the Interest Rate,
if any, on these components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the 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 as described in the 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 those 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 the 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 that 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 that 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, that
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 that
class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the 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 that Distribution Date, in an amount equal
to the total of payments of (1) principal (other than any balloon payments)
and (2) interest (net of related servicing fees and Retained Interest) that
were due on the Assets in that trust fund during the related Due Period and
were delinquent on the related Determination Date, subject to a good faith
determination that the 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 prospectus
supplement, the servicer's (or another entity's) advance obligation may be
limited only to the portion of those delinquencies necessary to make the
required distributions on one or more classes of Senior Securities and/or may
be subject to a good faith determination that advances will be reimbursable
not only from Related Proceeds but also from collections on other Assets
otherwise distributable on one or more classes of those 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 those advances were made (as to any Assets,
"Related Proceeds") and from any other amounts specified in the prospectus
supplement, including out of any amounts otherwise distributable on one or
more classes of Subordinate Securities of that series; provided, however, that
any advance will be reimbursable from any amounts in the related Collection
Account before any distributions being made on the Securities to the extent
that the servicer (or some other entity) determines in good faith that that
advance (a "Nonrecoverable Advance") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets otherwise
distributable on the Subordinate Securities. If advances have been made by the
servicer from excess funds in the related Collection Account, the servicer is
required to replace these funds in that Collection Account on any future
Distribution Date to the extent that funds in that Collection Account on that
Distribution Date are less than payments required to be made to
securityholders on that date. If specified in the 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 borrower on any surety bond will be
set forth in the prospectus supplement.
If and to the extent so provided in the 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 this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the 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
prospectus supplement, will forward or cause to be forwarded to each holder,
to the depositor and to any other parties as may be specified in the related
Agreement, a statement generally setting forth, in each case to the extent
applicable and available:
(1) the amount of that distribution to holders of Securities of that
class applied to reduce the Security Balance thereof;
(2) the amount of that distribution to holders of Securities of that
class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on
that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans 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 begun;
(8) for any mortgage loan liquidated during the related Due Period,
(a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan
and included in the trust fund as of the end of the related Due Period,
the date of acquisition;
(10) for each REO Property relating to a mortgage loan 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 immediately
following that Distribution Date (calculated as if that mortgage loan
were still outstanding taking into account certain limited modifications
to the terms thereof specified in the Agreement), (c) the total amount of
unreimbursed servicing expenses and unreimbursed advances in respect
thereof and (d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period (a) the
total amount of sale proceeds, (b) the portion of those sales proceeds
payable or reimbursable to the master servicer in respect of that REO
Property or the related mortgage loan and (c) the amount of any loss to
securityholders in respect of the related mortgage loan;
(12) the total 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 that Distribution Date,
separately identifying any reduction in that Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities if any Accrued Security Interest has been added to
that balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the
close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on that Distribution Date;
(17) in the case of Securities with a variable Interest Rate, the
Interest Rate applicable to that Distribution Date, and, if available,
the immediately succeeding Distribution Date, as calculated in accordance
with the method specified in the prospectus supplement;
(18) in the case of Securities with an adjustable Interest Rate, for
statements to be distributed in any month in which an adjustment date
occurs, the adjustable Interest Rate applicable to that Distribution
Date, if available, and the immediately succeeding Distribution Date as
calculated in accordance with the method specified in the prospectus
supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included therein as of the
close of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent
Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers 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
prospectus supplement, will furnish to each securityholder of record at any
time during the calendar year the 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
that Agreement following the earlier of (1) 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 subject thereto and
(2) the purchase of all of the assets of the trust fund by the party entitled
to effect that termination, under the circumstances and in the manner set
forth in the prospectus supplement. In no event, however, will the trust fund
continue beyond the date specified in the 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 specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the purchase 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 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 those assets to retire that class or classes or purchase
that class or classes at a price set forth in the prospectus supplement, in
each case, under the circumstances and in the manner set forth therein. That
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 purchase or
solicitation of bids may be made only when the total Security Balance of that
class or classes declines to a percentage of the Initial Security Balance of
those Securities (not to exceed 10%) specified in the prospectus supplement.
In addition, if so provided in the 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 any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any 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 prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
General
If provided for in the prospectus supplement, one or more classes of the
Offered Securities of any series will be issued as Book-Entry Securities, and
each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Cedelbank ("Cedel") or the Euroclear System ("Euroclear"). Each class
of Book-Entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the initial principal amount of the related
class of Offered Securities and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except
as set forth below under "--Definitive Securities." Unless and until
Definitive Securities are issued for the Book-Entry Securities under the
limited circumstances described in the applicable prospectus supplement or
this prospectus, all references to actions by securityholders with respect to
the Book-Entry Securities will refer to actions taken by DTC, Cedel or
Euroclear upon instructions from their Participants (as defined below), and
all references herein to distributions, notices, reports and statements to
securityholders with respect to the Book-Entry Securities will refer to
distributions, notices, reports and statements to DTC, Cedel or Euroclear, as
applicable, for distribution to Beneficial Owners by DTC in accordance with
the procedures of DTC and if applicable, Cedel and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in
the United States, or, if the Offered Securities are offered for sale
globally, through Cedel or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Cedel and Euroclear systems 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").
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 (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement
of securities. In accordance with its normal procedures, DTC is expected to
record the positions held by each of its Participants in the Book-Entry
Securities, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Securities will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
Cedel
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between its Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars.
Cedel provides to its Participants, among other things, services for
safekeeping, administration, clearance and settlement of
internationally-traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Cedel is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant of Cedel, either directly or indirectly.
Euroclear
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of securities and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 32
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative Corporation"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative Corporation. The Cooperative
Corporation establishes policy for Euroclear on behalf of its Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Participant of Euroclear, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific securities to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of its Participants, and has no record of or
relationship with persons holding through Participants of Euroclear.
Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold
positions in customers' securities accounts in the depositaries names on the
books of DTC. Citibank will act as depositary for Cedel and Chase will act as
depositary for Euroclear (individually the "Relevant Depositary" and
collectively, the "European Depositaries").
Beneficial Ownership of Book-Entry Securities
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note
representing a Note. Unless and until Definitive Securities are issued, it is
anticipated that the only "securityholder" of the Offered Securities will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be
"Certificateholders" as that term is used in any Agreement, nor "Noteholders"
as that term is used in any indenture. Beneficial Owners are only permitted to
exercise their rights indirectly through Participants, DTC, Cedel or
Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of 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 Participant of DTC
and on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have
accounts with respect to Offered Securities are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer
their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Securities,
except under the limited circumstances described below. Unless and until
Definitive Securities are issued, Beneficial Owners who are not Participants
may transfer ownership of Offered Securities only through Participants and
Indirect Participants by instructing the Participants and Indirect
Participants to transfer Offered Securities, by book-entry transfer, through
DTC for the account of the purchasers of the Offered Securities, 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
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Participants of Cedel or Euroclear on that business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a
Participant of Cedel or Euroclear to a Participant of DTC will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation
procedures relating to the Securities, see "Material Federal Income Tax
Considerations -- Tax Treatment of Foreign Investors" herein and, if the
Book-Entry Securities are globally offered and the prospectus supplement so
provides, see "Global Clearance, Settlement and Tax Documentation Procedures
- -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to
the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Cedel or Euroclear will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants
of Cedel or Euroclear, on the other, will be effected in DTC in accordance
with the DTC Rules on behalf of the relevant European international clearing
system by the Relevant Depositary; however, cross-market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary
to take action to effect final settlement on its behalf by delivering or
receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Participants of Cedel or Euroclear may not deliver instructions directly to
the European Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC
will be responsible for disbursing the distribution to the Beneficial Owners
of the Book-Entry Securities 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
Securities that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Cedel or Euroclear will be credited to the cash
accounts of Participants of Cedel or Euroclear in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Federal
Income Tax Considerations -- REMICs -- Taxation of Certain Foreign Investors"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Beneficial Owner to pledge Book-Entry Securities to persons or
entities that do not participate in the depository system, or otherwise take
actions in respect of Book-Entry Securities, may be limited due to the lack of
physical securities for the Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
securities.
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 Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Securities are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the Agreement or
indenture, as applicable, only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Securities are credited,
to the extent that actions are taken on behalf of Financial Intermediaries
whose holdings include the Book-Entry Securities. If the Book-Entry Securities
are globally offered, Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a securityholder under the
Agreement or indenture, as applicable, on behalf of a Participant of Cedel or
Euroclear only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect those actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Securities that conflict with
actions taken with respect to other Offered Securities.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Book-Entry Securities among Participants
of DTC, Cedel and Euroclear, 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, any master servicer, any servicer, the trustee,
any securities registrar or paying agent 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 those
beneficial ownership interests.
Definitive Securities
Securities initially issued in book-entry form will be issued as
Definitive Securities to Beneficial Owners or their nominees, rather than to
DTC or its nominee only (1) if the depositor advises the trustee in writing
that DTC is no longer willing or able to properly discharge its
responsibilities as depository for the Securities and the depositor is unable
to locate a qualified successor, (2) if the depositor, at its option, elects
to end the book-entry system through DTC or (3) in accordance with any other
provisions described in the prospectus supplement.
Upon the occurrence of any 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 Beneficial Owners.
Upon surrender by DTC of the security or securities representing the
Book-Entry Securities, together with instructions for registration, the
trustee will issue (or cause to be issued) to the Beneficial Owners identified
in those instructions the Definitive Securities to which they are entitled,
and thereafter the trustee will recognize the holders of those Definitive
Securities as securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, FASIT 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"), FASIT Securities (as defined herein), or Grantor Trust
Securities (as defined herein) will be issued, and the related trust fund will
be created, pursuant to a pooling and servicing agreement or trust agreement
(in either case, generally referred to in this prospectus as the "pooling and
servicing agreement") among the depositor, the trustee and the sole servicer
or master servicer, as applicable. The Assets of that 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 that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant
to a related underlying 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 the pooling
and servicing agreement or trust 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
prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on
the Notes will be serviced in accordance with a sale and servicing agreement
or 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, sale and servicing agreement or
servicing agreement (each an "Agreement"). The prospectus supplement for a
series of Securities will describe any provision of the Agreement relating to
that 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 those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued thereunder and the nature of the related trust
fund. As used herein for any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the 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 that
series addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the 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 for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a 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 specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the
pooling and servicing agreement for any trust fund to administer that 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 those 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 that
assignment, deliver the Securities to the depositor in exchange for the Assets
and the other assets comprising the trust fund for that series. Each Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. That schedule will include detailed information to the extent
available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and
type of that 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, and
(2) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate
thereon.
For each mortgage loan, except as otherwise specified in the 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. However, 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. For those
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 prospectus supplement will be required to agree to
repurchase, or substitute for, each of these mortgage loans 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 prospectus supplement to promptly cause each of these
assignments 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, 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 the mortgage loan documents
within a specified period of days after receipt thereof, and the trustee (or a
custodian) will hold those documents in trust for the benefit of the
securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be
obligated, within a specified number of days of receipt of that notice, to
either (1) 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 that 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 another price as specified in the prospectus supplement (the
"Purchase Price") or (2) substitute a new 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 that 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 prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans will be delivered to the trustee (or a custodian) only to the
extent specified in the prospectus supplement. Generally these 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 prospectus supplement.
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
those certificates, and distributions on those 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 prospectus supplement the depositor will,
for each Asset, assign certain representations and warranties, as of a
specified date (the person making those representations and warranties, the
"Warranting Party") covering, by way of example, the following types of
matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o 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
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
any other person acceptable to the depositor and will be identified in the
prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of
the related series of Securities evidencing an interest in that Asset. In the
event of a breach of any of these representations or warranties, the
Warranting Party will be obligated to reimburse the trust fund for losses
caused by that breach or either cure that 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 that representation and
warranty only if the relevant event that causes that breach occurs before that
date. That party would have no obligations if the relevant event that causes
that breach occurs after that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the 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 that Asset or the interests therein of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the
Warranting Party was notified of that 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 that series of
Securities, to cause the removal of that 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 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 that 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 the Warranting Parties will carry out those
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 representation of the servicer that
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 that 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
other percentage specified in the prospectus supplement, will constitute an
Event of Default under that 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 an account or accounts
that either:
o 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 so 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 those 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
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Securities of that series.
Investment of 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 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 that 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 any
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 after the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest),
except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) 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;
(3) 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;
(4) 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;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) 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;"
(8) 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;"
(9) to the extent that any of these items do 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;
(10) 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;"
(11) 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
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
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, except as otherwise provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts received
that 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 for which the advances were made or
out of amounts drawn under any form of credit support with respect to
those Assets;
(3) 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, which reimbursement is 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, which fees were earned or
expenses were incurred or out of amounts drawn under any form of credit
support for those Assets and properties;
(4) to reimburse a servicer for any advances described in clause (2)
above and any servicing expenses described in clause (3) above which, in
the servicer's good faith judgment, will not be recoverable from the
amounts described in those clauses, which reimbursement is 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 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;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in clause (2)
above and the servicing expenses described in clause (3) above while
those advances and servicing expenses remain outstanding and
unreimbursed;
(6) 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;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for
the payment of) the trustee's fees;
(8) 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;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(10) 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;
(11) 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, which payments are to be made out of income
received on that property;
(12) 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 prospectus supplement, respectively;
(13) 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 that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if that
recordation materially and beneficially affects the interests of
securityholders, provided that the 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;
(16) 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;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
Other Collection Accounts. If specified in the 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 any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more
series of Securities. Any amounts on deposit in any of these collection
accounts will be withdrawn therefrom and deposited into the appropriate
Collection Account by a time specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection
accounts, including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts 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 those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided that those procedures are consistent with (1) 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," (2) applicable law
and (3) the general servicing standard specified in the prospectus supplement
or, if no 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 prospectus supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower 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 under some
circumstances; and maintaining accounting records relating to the Assets. The
servicer or any other entity specified in the 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 (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) 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 (1) in its judgment, a material default
on the Asset has occurred or a payment default is reasonably foreseeable and
(2) in its judgment, that 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.
Realization Upon Defaulted Assets
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure
is likely, inspect the Asset and take any 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 that corrective action or the need
for additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans may
grant to the servicer and/or the holder or holders of some classes of
Securities a right of first refusal to purchase from the trust fund at a
predetermined purchase price any mortgage loan as to which a specified number
of scheduled payments thereunder are delinquent. Any right of first refusal
granted to the holder of an Offered Security will be described in the
prospectus supplement. The prospectus supplement will also describe any
similar right granted to any person if the predetermined purchase price is
less than the Purchase Price described above under "--Representations and
Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to sell
any defaulted mortgage loan described in the preceding paragraph and not
otherwise purchased by any person having a right of first refusal with respect
to that defaulted mortgage loan, if and when the servicer determines,
consistent with the Servicing Standard, so that 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 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 that defaulted mortgage loan. If there is no
bid that is determined to be fair, the servicer will proceed with respect to
that defaulted mortgage loan 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,
if that action is consistent with the Servicing Standard and a default on that
mortgage loan 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 three years of
acquisition, unless (1) the Internal Revenue Service grants an extension of
time to sell that property or (2) the trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
trust fund longer than three 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 (A)
solicit bids for any Mortgaged Property so acquired in that manner as will be
reasonably likely to realize a fair price for that property and (B) 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 for 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 those 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 total
amount of expenses incurred by the servicer in connection with those
proceedings and which are reimbursable under the Agreement, the trust fund
will realize a loss in the amount of that 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, before the
distribution of those 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 (1) that restoration will increase the proceeds to securityholders
on liquidation of the Asset after reimbursement of the servicer for its
expenses and (2) that its 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 for any Mortgage Security or Agency Security by
the fifth business day after the date on which that distribution was due and
payable pursuant to the terms of that Agency Security, to request the issuer
or guarantor, if any, of that Mortgage Security or Agency Security to make
that payment as promptly as possible and legally permitted to take legal
action against that 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 this legal action will be reimbursable to
the trustee out of the proceeds of that action and will be retained by the
trustee before the deposit of any remaining proceeds in the Collection Account
pending distribution thereof to securityholders of the related series. If the
proceeds of any legal action are 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 its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee
and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery thereunder for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution thereof to securityholders, amounts representing
its normal servicing compensation on that Asset, unreimbursed servicing
expenses incurred for 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 composed of
mortgage loans will require the servicer to cause the borrower on each
mortgage loan to maintain a hazard insurance policy providing for the level of
coverage that is required under the related Mortgage or, if any Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage
to be maintained on the related Mortgaged Property, then the level of coverage
that is consistent with the Servicing Standard. That coverage will be in
general in an amount equal to the lesser of the principal balance owing on
that 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 any
other amount specified in the 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
borrowers. All amounts collected by the servicer under any of these policies
(except for amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with the
servicer's normal servicing procedures, 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 borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the 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 that 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 of these 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 to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the coinsurance clause
generally provides that the insurer's liability in the event of partial loss
does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of those improvements.
Each Agreement for a trust fund composed of mortgage loans will require
the servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for 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 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 that cost
will not be taken into account for purposes of calculating the distribution to
be made to securityholders. Those 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, borrowers 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 those claims is dependent upon
the extent to which information in this regard is furnished to the servicer by
borrowers.
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 prospectus supplement, the following describes FHA insurance programs
and regulations as generally in effect for 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. For 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 borrower'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 borrower. Those plans may
involve the reduction or suspension of regular mortgage payments for a
specified period, with those payments to be made on 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 those 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 borrower to HUD) or by
accepting assignment of the loan from the servicer. With some 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 borrower
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 prospectus
supplement, the servicer of each single family FHA loan will be obligated to
purchase any debenture issued in satisfaction of that FHA loan upon default
for an amount equal to the principal amount of that 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 before
that 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"). For 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 that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those 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 that 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 servicer will generally permit that transfer so long as the
transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
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
borrower payments as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Securities
will come from the periodic payment to it of a portion of the interest payment
on each Asset or any other amount specified in the prospectus supplement.
Since any Retained Interest and a servicer's primary compensation are
percentages of the principal balance of each Asset, those amounts will
decrease in accordance with the amortization of the Assets. The prospectus
supplement for a series of Securities evidencing interests in a trust fund
that includes mortgage loans 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 borrowers and any
interest or other income that 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 prospectus supplement,
pay from its servicing compensation certain expenses incurred in connection
with its servicing and managing of the Assets, including 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 prospectus
supplement. Some other expenses, including certain expenses relating to
defaults and liquidations on the Assets and, to the extent so provided in the
prospectus supplement, interest thereon at the rate specified therein may be
borne by the trust fund.
If and to the extent provided in the 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 that period before their due dates.
Evidence as to Compliance
Each Agreement relating to Assets that include mortgage loans, unless
otherwise provided in the prospectus supplement, will provide that on or
before a specified date in each year, beginning with the first of these dates
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 that 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 any 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 those
agreements or that 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 any other program, requires it to
report.
Each 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.
Certain Matters Regarding Servicers, the Master Servicer and the
Depositor
The servicer or master servicer under each Agreement will be named in the
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. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o 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 that conflict
being of a type and nature carried on by the servicer at the date of
the Agreement. No resignation will become effective until the
trustee or a successor servicer has assumed the servicer's
obligations and duties under the Agreement.
o 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 other person will be
protected against any breach of a representation, warranty or
covenant made in the related Agreement, or against any liability
specifically imposed thereby, or against any liability that 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.
o 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 that indemnification will not extend to any
loss, liability or expense (1) specifically imposed by that
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 (except as any loss, liability or
expense will be otherwise reimbursable pursuant to that Agreement);
(2) incurred in connection with any breach of a representation,
warranty or covenant made in that Agreement; (3) 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 those obligations or duties; (4) incurred in connection with any
violation of any state or federal securities law; or (5) imposed by
any taxing authority if that loss, liability or expense is not
specifically reimbursable pursuant to the terms of the related
Agreement.
o Neither any servicer nor the depositor will be under any obligation
to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Agreement
and which in its opinion may involve it in any expense or liability.
Any servicer or the depositor may, however, in its discretion
undertake any 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 that
event, the legal expenses and costs of that 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 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 prospectus supplement, and the
servicer will be liable for the performance of a Special servicer only if, and
to the extent, set forth in the prospectus supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include:
o 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;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the
Agreement that continues unremedied for 30 days after written notice
of that 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
for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for 30
days after written notice of that 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 for that series; and
o 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 prospectus supplement. The trustee will, not later than the later of 60
days or any other period specified in the prospectus supplement after the
occurrence of any event that 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 that event, transmit
by mail to the depositor and all securityholders of the applicable series
notice of that occurrence, unless that default has been cured or waived.
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 any other percentage specified in the
Agreement) of the voting rights for that series, the trustee will 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 prospectus supplement so
specifies, then the trustee will not be obligated to make those advances) and
will be entitled to similar compensation arrangements. If 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 any other percentage
specified in the Agreement) of the voting rights for that series, it must
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 that appointment of at least $15,000,000 (or any other amount
specified in the Agreement) to act as successor to the servicer under the
Agreement. Pending that appointment, the trustee is obligated to act in that
capacity. The trustee and any successor servicer 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 any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to
securityholders described in clause (1) under "Events of Default under the
Agreements" may be waived only by all of the securityholders. Upon any waiver
of an event of default, that event of default will cease to exist and will 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 that holder previously has given to
the trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or any other percentage specified in the
Agreement) of the voting rights have made written request upon the trustee to
institute that proceeding in its own name as trustee thereunder and have
offered to the trustee reasonable indemnity, and the trustee for 60 days (or
any other number of days specified in the Agreement) has neglected or refused
to institute any 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 that Agreement, unless
those securityholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
Amendment
In general, each Agreement may be amended by the parties thereto, without
the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision therein that may be
inconsistent with any other provision therein or with the prospectus
supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially inconsistent with the
provisions thereof; or
(4) comply with any requirements imposed by the Code; provided that,
in the case of clause (3), that 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 that 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 that
amendment or supplement will not cause that rating agency to lower or
withdraw the then current rating assigned to those Securities.
In general, 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 any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for 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 has first
have received an opinion of counsel to the effect that that amendment will not
result in the imposition of a tax on the related trust fund or, if applicable,
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 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. To the extent
consistent with its fiduciary obligations as trustee, the trustee may delegate
its duties to one or more agents as provided in the Agreement.
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 those 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
will 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 (1) enforcing its rights
and remedies and protecting the interests of the securityholders during the
continuance of an Event of Default, (2) defending or prosecuting any legal
action in respect of the related Agreement or series of Securities, (3) being
the mortgagee of record for the mortgage loans in a trust fund and the owner
of record for any Mortgaged Property acquired in respect thereof for the
benefit of securityholders, or (4) 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 any other percentage as is specified in the
related Agreement for any particular matter) of the voting rights for that
series; provided, however, that this 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 those 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 that notice of resignation,
the depositor is required promptly to appoint a successor trustee acceptable
to the servicer, if any. If no successor trustee has been so appointed and has
accepted appointment within 30 days after the giving of that 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 ceases to be eligible to continue as a trustee
under the related Agreement, or if at any time the trustee becomes incapable
of acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee
or of its property is appointed, or any public officer takes 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 any other
percentage specified in the prospectus supplement) of the voting rights for
that 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 will 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 that 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 that series
addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
Events of Default
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified in
the prospectus supplement) or more in the payment of any principal
of or interest on a Note of that series, to the extent specified in
the prospectus supplement;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture that continues for a period of sixty days (or
any other number of days specified in the prospectus supplement)
after notice thereof is given in accordance with the procedures
described in the prospectus supplement;
o 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 that series having been incorrect in a material
respect as of the time made, and that breach is not cured within
sixty days (or any other number of days specified in the prospectus
supplement) after notice thereof is given in accordance with the
procedures described in the prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o 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
holders of a majority of the then total outstanding amount of the Notes of
that series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, that portion of the principal amount as may be
specified in the terms of that series, as provided in the indenture) of all
the Notes of that series to be due and payable immediately. That declaration
may, under certain circumstances, be rescinded and annulled by the
securityholders of a majority in total outstanding amount of the Notes of that
series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the
indenture trustee may, in its discretion, notwithstanding that acceleration,
elect to maintain possession of the collateral securing the Notes of that
series and to continue to apply distributions on that collateral as if there
had been no declaration of acceleration if that collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of that series as they would have become due if there had not been that
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 that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would not
be sufficient on an ongoing basis to make all payments on the Notes as
those payments would have become due if the Notes had not been declared
due and payable, and the indenture trustee obtains the consent of the
holders of 66 2/3% (or any other percentage specified in the indenture)
of the then total outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of certain
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) 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 liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that 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 that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled
to receive no more than an amount equal to the unpaid principal amount thereof
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will 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 that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
the then total outstanding amount of the Notes of that series will 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 that series,
and the holders of a majority of the then total outstanding amount of the
Notes of that series may, in some 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 holders of the outstanding Notes of
that series affected thereby.
Discharge of Indenture
The indenture will be discharged for a series of Notes (except for
certain continuing rights specified in the indenture) upon the delivery to the
indenture trustee for cancellation of all the Notes of that 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 that series.
With certain limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from
any and all obligations in respect of the Notes of that series (except for
certain obligations relating to temporary Notes and exchange of Notes, to
register the transfer of or exchange Notes of that series, to replace stolen,
lost or mutilated Notes of that 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 that series on the maturity date for those Notes and
any installment of interest on those Notes in accordance with the terms of the
indenture and the Notes of that series. In the event of any defeasance and
discharge of Notes of that series, holders of Notes of that series would be
able to look only to that money and/or those 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, as provided in the
indenture, 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 that Trust to the applicable indenture trustee in its
individual capacity, the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the Notes and that has not been previously reported.
The Indenture Trustee
The indenture trustee for a series of Notes will be specified in the
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 that series. The depositor may also remove any indenture trustee
if that indenture trustee ceases to be eligible to continue as the indenture
trustee under the related indenture or if that indenture trustee becomes
insolvent. In those 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 that 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. To the extent
consistent with its fiduciary obligations as indenture trustee, the indenture
trustee may delegate its duties to one or more agents as provided in the
indenture and the Agreement.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, credit support may be provided for one or
more classes thereof or the related Assets. Credit support may be in the form
of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that 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 (each, a "Covered Trust"), securityholders evidencing
interests in any of those Covered Trusts will be subject to the risk that the
credit support will be exhausted by the claims of other Covered Trusts before
that Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities of a
series, or the related Assets, the prospectus supplement will include a
description of (a) the nature and amount of coverage under that credit
support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
that credit support may be reduced and under which that credit support may be
terminated or replaced and (d) the material provisions relating to that credit
support. Additionally, the prospectus supplement will set forth certain
information with respect to the obligor under any financial guaranty insurance
policy, letter of credit, guarantee or similar instrument of credit support,
including (1) a brief description of its principal business activities, (2)
its principal place of business, place of incorporation and the jurisdiction
under which it is chartered or licensed to do business, (3) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (4) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Securities of a series may be Subordinate
Securities if specified in the 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 those rights of the holders of Senior Securities. The
subordination of a class may apply only in the event of (or may be limited to)
certain types of losses or shortfalls. The 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 that
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 before 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 those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for 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
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named therein, if
specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Securities may be provided by
the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series
of Securities will be set forth in the prospectus supplement relating to that
series.
POOL INSURANCE POLICIES
If specified in the 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 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 pool
insurance coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
therein. The special hazard insurance policy will, subject to the limitations
described in the 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 special hazard insurance coverage will be set forth in the prospectus
supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will,
if specified in the prospectus supplement, be covered under a borrower
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 agencies
that rate that series). Any borrower bankruptcy bond or any other instrument
will provide for coverage in an amount meeting the criteria of the rating
agency or agencies rating the Securities of the related series, which amount
will be set forth in the prospectus supplement. The amount and principal terms
of any borrower bankruptcy 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 those 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 the 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 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 prospectus supplement. A reserve
fund may be provided to increase the likelihood of timely distributions of
principal of and interest on the Securities. If specified in the 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 prospectus supplement and will
not be available for further application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any reinvestment income or
other gain from those investments will be credited to the related reserve fund
for that series, and any loss resulting from those investments will be charged
to the reserve fund. However, that income may be payable to any related
servicer or another service provider or other entity. To the extent specified
in the 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 prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the
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 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, for the Assets or groups
thereof, overcollateralization, which is the excess of the total principal
balance of the related Assets, or a group thereof, over the principal balance
of the related class or classes of Securities. This 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 prospectus
supplement, the 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 residential
properties. Because these 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
for 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 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
on 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 that 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 borrower (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 borrower), 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, "borrower" 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 borrower 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 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 borrower 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 borrower. At origination
of a mortgage loan involving a land trust, the borrower 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 the Soldiers' and Sailors' Civil
Relief Act of 1940) and, in some cases, in deed of trust transactions, the
directions of the beneficiary.
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, that 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 that lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating that interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
that 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 prospectus supplement will make certain representations and warranties
in the Agreement or certain representations and warranties will be assigned to
the trustee for any mortgage loans secured by an interest in a leasehold
estate. Those representation and warranties, if applicable, will be set forth
in the prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, 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 that 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.
That 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 borrower, 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 (1) 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 (2) 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 that 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 that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that 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 on 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 that situation does not have to
foreclose 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 those 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 particular 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 for 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 some 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. Those 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
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those 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 borrower's default and the likelihood that the borrower will
be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers 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 borrower failed to
maintain the mortgaged property adequately or the borrower 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 borrower 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 borrower.
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 borrower 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, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
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 borrower 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
borrower 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 that
property at the time of sale, due to, among other things, redemption rights
that 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 that may be recovered by a lender. Thereafter, subject to the
borrower'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 those 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 on 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, if 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, for 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 borrower is in default. Any additional
proceeds are generally payable to the borrower. 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 those holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that 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 that 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 begun, the redeeming party must pay certain costs of that 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 that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before 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 borrower 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 borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed 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 three years. For 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 three years if the Internal Revenue Service grants an
extension of time within which to sell the property or independent counsel
renders an opinion to the effect that holding the property for that 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 that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement that 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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that 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 that
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 that 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 that apply to certain
tenants who elected to remain in a building so converted.
Year 2000 Legislation
In July 1999, a new federal law was passed to limit liability for losses
due to year 2000 computer-related errors. This law will, 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 law is not intended to extinguish or otherwise affect a borrower's
payment obligations but will instead delay the enforcement of obligations on
an otherwise defaulted mortgage loan. Borrowers seeking foreclosure protection
under this law 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 law will
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
law will 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.
This law 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, that 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
borrower, 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 borrower 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 these sums,
these 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 borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower 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 borrower. In some other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting that security; however, in some of these states, the
lender, following judgment on the 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 that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower 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
borrower 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. 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) before
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 affected 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 that mortgage
loan to be modified. These 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 these
modifications when the mortgage loan is secured both by the debtor's principal
residence and by personal property.
Certain tax liens arising under the Code may in some 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 a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These 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 these laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of some 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 that property are subordinated to the
environmentally-related lien and, in some states, even prior recorded liens
are subordinated to these liens ("Superliens"). In the latter states, the
security interest of the trustee in a property that is subject to a Superlien
could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that 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 cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These 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 total assets
of the property owner.
Although certain provisions of the Asset Conservation Act (as defined
herein) apply to trusts and fiduciaries, the law is somewhat 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 that
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 that 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 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 that 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 these 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 before 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
that 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 before the origination of the mortgage loan
or before 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 the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the 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
representation, warranty or assumption of liability relative to any 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 borrower 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, for 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 those 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 some 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 those loans are
paid before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the
mortgage loans. The absence of a restraint on prepayment, particularly for
fixed rate mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as
junior loans often do) and the senior loan does not, a borrower may
be more likely to repay sums due on the junior loan than those on
the senior loan.
o 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 borrower 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 borrower is additionally burdened.
o If the borrower 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 will 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 for 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. Some 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 before origination of
those mortgage loans, any limitation under that state's usury law would not
apply to those 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 that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or
(2) the mortgage loan provides that the terms thereof will be construed in
accordance with the laws of another state under which the interest rate,
discount points and charges would not be usurious and the borrower's counsel
has rendered an opinion that the 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 borrower 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 borrower 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.
Those 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, before October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of those provisions. Some states have taken that
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 borrower who enters military service after
the origination of the borrower's mortgage loan (including a borrower 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 the borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to borrowers 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
borrowers 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 some 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. These shortfalls will be
covered by the credit support provided in connection with the Securities only
to the extent provided in the 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 borrower's period of active
duty status, and, under some circumstances, during an additional three month
period thereafter. Thus, if an affected 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, those 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: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) 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.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Brown & Wood LLP as to
the material federal income tax consequences 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 (the "Code"), 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
and Other 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 five general types:
o REMIC 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 ("REMIC") under Sections
860A through 860G (the "REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion thereof, that the trustee will elect to have
treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT Provisions")
of the Code;
o securities ("Grantor Trust Securities") representing interests in a
trust fund (a "Grantor Trust Fund") as to which no election will be
made;
o securities ("Partnership Securities") representing interests in a
trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("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 that 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 or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion, (1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security, (2) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (3) to
the extent specified in the prospectus supplement, references to "mortgage
loans" include Contracts. Except to the extent specified in the prospectus
supplement, no REMIC election will be made for 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"), in part upon the REMIC Provisions and the Treasury regulations
issued thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance
have been issued with respect to those provisions. Accordingly, definitive
guidance cannot be provided with respect to many aspects of the tax treatment
of the holders of FASIT Securities. In addition, 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 (as defined herein)
will be considered a Taxable Mortgage Pool if (1) substantially all of the
assets of the entity consist of debt obligations and more than 50% of those
obligations consist of "real estate mortgages," (2) that entity is the
borrower under debt obligations with two or more maturities, and (3) under the
terms of the debt obligations on which the entity is the borrower, payments on
those 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
For 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 interests" ("Regular
Securities") or "residual interests" ("Residual Securities") in the 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 total adjusted basis of the nonqualified assets is less than 1% of
the total 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 for 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 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:
(1) in exchange for any qualified mortgage within a three-month
period thereafter; or
(2) in exchange for a "defective obligation" within a two-year
period thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) 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 that 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 that 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: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions,
if any, are made pro rata.
o 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. That
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.
o 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 for that 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 for that series will constitute a
single class of residual interests for 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 that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that 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,
none of these regulations have been issued. Any relief provided, 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 that status are not satisfied. The pooling and servicing
agreement for 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 these 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 those 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 those Buydown Funds because the law is
unclear as to whether the Buydown Funds represent an account held by the
lender that reduces the lender's investment in the mortgage loan. This
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 the
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
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that 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 these 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 those 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 those 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 some 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 of
these 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
respective REMIC Securities issued by each Tiered REMIC 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 those 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
(1) 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
that Regular Securityholder.
(2) 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 that 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 that those issues are not addressed in
the 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 because 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 for the Regular Securities.
Each Regular Security (except to the extent described below for 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 that 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 before the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude that 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 those 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 the 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 for 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 prospectus supplement, because the
underlying mortgage loans provide for remedies in the event of default, it is
anticipated that the trustee will treat interest for the Regular Securities as
qualified stated interest. Distributions of interest on an Accrual Security,
or on other Regular Securities for which deferred interest will accrue, will
not constitute qualified stated interest, in which case the stated redemption
price at maturity of those 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 the 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 those 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 for a
series of Regular Securities will be set forth in the prospectus supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and that 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. For 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:
(1) 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
(2) 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:
(1) the yield to maturity of the Regular Security at the issue date;
(2) events (including actual prepayments) that have occurred before
the end of the accrual period; and
(3) 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 total amount of original issue discount for 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 those 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. For 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 for a series of Regular
Securities can result in both a change in the priority of principal payments
for certain Classes of Regular Securities and either an increase or decrease
in the daily portions of original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
trustee will determine the yield to maturity of that 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 for 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 the unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to the Security (or to
that portion) will accrue at the time of the distribution, and (b) the accrual
of original issue discount allocable to each remaining Security of that Class
will be adjusted by reducing the present value of the remaining payments on
that Class and the adjusted issue price of that 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.
(3) 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 the 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, a subsequent purchaser may elect to treat all that
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method"
below.
(4) 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, (1) the issue price does not exceed the original principal
balance by more than a specified amount and (2) 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. That 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 the information is
not (1) within the control of the issuer or a related party or (2) 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 that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that 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 for Regular Securities apply the
same principles as the OID Regulations, those regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of those 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 (1) 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 that 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 a rate that is subject to one or more caps or
floors, or (2) bearing one or more 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 for 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
that 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 that 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.
(5) 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 (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified
stated interest payments due on a Regular Security, or (2) in the case of a
Regular Security having original issue discount, is exceeded by the adjusted
issue price of that Regular Security at the time of purchase. The purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on that Regular Security as distributions includible
in the stated redemption price at maturity thereof are received, in an amount
not exceeding that distribution. The 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 these regulations are issued, the market discount would
accrue either (1) on the basis of a constant interest rate, or (2) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for that period plus the remaining interest as of the end of that
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 that period plus
the remaining original issue discount as of the end of that period. The
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. The 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 the interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Security for that year. Any 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 the 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 that 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 for a Regular Security will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular
Security having original issue discount, the adjusted issue price of that
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 the
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 particular 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.
(6) 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 that Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize the premium under
a constant yield method that reflects compounding based on the interval
between payments on the Regular Security. The 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 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 (1) the original principal amount and maturity date or (2) the price and
date of any succeeding optional redemption, under the principles described
above.
(7) 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 this election, (1) "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 (2) 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 this election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes this election for a debt instrument with amortizable bond
premium, the holder is deemed to have made elections to amortize bond premium
currently as it accrues under the constant yield method for all premium bonds
held by the holder in the same taxable year or thereafter. Alternatively, if
the holder makes this election for a debt instrument with market discount, the
holder is deemed to have made elections to report market discount income
currently as it accrues under the constant yield method for all 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 this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for 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 the 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 that loss
with respect to principal sustained during the taxable year on account of any
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 Regular Securities becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Securityholders should be allowed a bad debt deduction at the time the
principal balance of the 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 those losses only after all the mortgage loans
remaining in the trust fund 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 those 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 that
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
for their 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. These taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Regular Securities.
(9) 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 for 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 regarding 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). That gain will be
treated as ordinary income
(1) 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
for any prior disposition of property that was held as part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
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
(3) to the extent that the 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 that 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 the holder for that
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 those taxpayers (39.6%) for property held for more
than one year. Currently, the maximum tax rate for corporations is the same
for both ordinary income and capital gains.
Taxation of Owners of Residual Securities
(1) 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
that quarter and by allocating that daily portion among the Residual Holders
in proportion to their respective holdings of Residual Securities in the REMIC
Pool on that 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
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) 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 for 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. If an interest in the mortgage loans is acquired by the REMIC Pool
at a discount, and one or more of these 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 (2) the discount on the mortgage
loans that is includible in income may exceed the deduction allowed upon those
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 those Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to that
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 that 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
for any particular 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 that mismatching or
unrelated deductions against which to offset that income, subject to the
discussion of "excess inclusions" below under "--Limitations on Offset or
Exemption of REMIC Income." The timing of mismatching of income and deductions
described in this paragraph, if present for 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 Holder may be treated unfavorably
in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the
30% withholding tax otherwise available to a foreign Residual Holder.
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 those Residual Holders for those periods in accordance
with generally accepted accounting principles. Investors should consult their
own accountants concerning the accounting treatment of their investment in
Residual Securities.
(2) 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 that Residual Security. The 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 the loss was disallowed and may be
used by the 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 some respects, the 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 the 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 the residual
interest as zero rather than the 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 the 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 the basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by the 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.
(3) 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 for 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 those
mortgage loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in those 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 the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of the 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 those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage
loans is the fair market value of the mortgage loans, based on the total 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 borrowers on the mortgage
loans are expected to be individuals, Code Section 171 will not be available
for premium on mortgage loans originated on or before September 27, 1985.
Premium for those mortgage loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
that premium pro rata among principal payments should be considered a
reasonable method; however, the Internal Revenue Service may argue that the
premium should be allocated in a different manner, such as allocating the
premium entirely to the final payment of principal.
(4) 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 that quarterly period of
(1) 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 (2) the adjusted issue price of the
Residual Security at the beginning of the 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 those daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to the Residual Security
before the beginning of that 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 that 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 the 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 the Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income is subject to 30% withholding tax for 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 for 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 those rules
apply only to taxable years beginning after August 20, 1996.
(5) 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 (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) 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. That
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.
That tax generally would be imposed on the transferor of the Residual
Security, except that where the transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on the agent. However, a transferor of a Residual
Security would in no event be liable for the tax for 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 the 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 for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the
Disqualified Organization, and (2) the highest marginal federal corporate
income tax rate. That 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 the tax if it has received an affidavit from the record
holder that it is not a Disqualified Organization or stating the holder's
taxpayer identification number and, during the period that person is the
record holder of the Residual Security, the Pass-Through Entity does not have
actual knowledge that the 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 those affidavits are false, is not available
to an electing large partnership.
o "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 the 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
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 the
organization is subject to the tax on unrelated business income
imposed by Code Section 511.
o "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 that interest, be treated as a
Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (2) the transferor provides a statement in writing
to the trustee that it has no actual knowledge that the 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 for a series will bear a legend referring to those 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 that 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, (1) 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 (2) 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 (1) 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 (2) 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 for 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
the 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, (1) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (2) 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 before 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 the transfer may be made. The term "U.S.
Person" means a citizen 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 the trust and one or more U.S. Persons have the authority to
control all substantial decisions of the 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).
(6) 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 the Residual Holder in
the 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 that adjusted basis on that Distribution Date. That 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 the Residual Security as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of the
remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) 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 for any prior disposition of property
that was held as a part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the 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 the 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.
(7) 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
(1) Prohibited Transactions
Income from certain transactions 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:
(1) 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;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) 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 borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) 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 (1) during
the three months following the Startup Day, (2) made to a qualified reserve
fund by a Residual Holder, (3) in the nature of a guarantee, (4) made to
facilitate a qualified liquidation or clean-up call, and (5) 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.
(3) 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 that 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.
(4) 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 that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that 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.
(5) 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 the 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,
for 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 the Residual Holder, the Residual Holder or
any 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 those proceedings in appropriate
circumstances.
(6) 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 those itemized deductions, in total, 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 (1) 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 (2) 80% of the amount of itemized deductions otherwise
allowable for that year. In the case of a REMIC Pool, those 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 for a regular interest it holds in
another REMIC. Those investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and
may cause those 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. For 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 those 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 prospectus supplement will indicate if all those
expenses will not be allocable to the Residual Securities.
In general, the 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 for 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 Interest 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
(1) 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 (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the 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 (3) that Non-U.S.
Person provides the trustee, or the person who would otherwise be required to
withhold tax from those 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 that 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 that Non-U.S. Person. In the latter case,
the 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") that 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.
(2) 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 (1) the mortgage loans were issued after July 18, 1984, and (2) the trust
fund 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 those Non-U.S. Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to those 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, those 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.
(3) 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 some 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 that 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.
(4) 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 that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal
Revenue Service Publication 938 for a particular series of Regular Securities.
Holders through nominees must request the 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 those
holders. Furthermore, under these 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 that person and other specified information.
FASITS
Classification of FASITs
For each series of FASIT 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 FASIT. The trust fund will qualify under the Code as a FASIT
in which FASIT regular securities (the "FASIT Regular Securities") and the
ownership interest security (the "FASIT Ownership Security") will constitute
the "regular interests" and the "ownership interest," respectively, if
(1) a FASIT election is in effect;
(2) certain tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT
are met on a continuing basis; and
(1) the trust fund is not a regulated investment company as defined
in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date
and at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of the Code
(generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to such holder. A
debt instrument is a permitted asset only if the instrument is indebtedness
for federal income tax purposes, including regular interests in a REMIC or
regular interests issued by another FASIT and it bears (1) fixed interest or
(2) variable interest of a type that relates to qualified variable rate debt
(as defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
Permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees of
payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT.
Foreclosure property is real property acquired by the FASIT in connection with
the default or imminent default of a qualified mortgage, provided the
depositor had no knowledge or reason to know as of the date such asset was
acquired by the FASIT that such a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an Eligible
Corporation (as defined herein).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of securities will indicate
which securities of such Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, such interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to such principal
amount.
(a) Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interests (i.e., certain qualified floating rates and
weighted average rates). Interest will be considered to be based on a
permissible variable rate if generally:
(1) such interest is unconditionally payable at least annually;
(2) the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more "qualified
floating rates," one "qualified inverse floating rate," or a combination
of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such FASIT
regular interest.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (3), (4), or (5) in the immediately preceding paragraph,
but otherwise meets all requirements to be treated as a FASIT, it may still
qualify as a type of regular interest known as a "high-yield interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause
(6), but the interest payable on the interest consists of a specified portion
of the interest payments on permitted assets and that portion does not vary
over the life of the security, the interest will also qualify as a high-yield
interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests therein for U.S. federal
income tax purposes is uncertain. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the FASIT's income for the period of time
in which the requirements for FASIT status are not satisfied.
Taxation of Owners of FASIT Regular Securities
(1) General
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must
report income from such Securities under an accrual method of accounting, even
if they otherwise would have used the cash receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount, interest paid or accrued on a FASIT Regular Security generally will
be treated as ordinary income to the Holder and a principal payment on such
security will be treated as a return of capital to the extent that the
securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "--REMICs - Taxation of Owners of Regular Securities"
above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
Taxation of Owners of High-Yield Interests
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return
continues to have a corporate level tax. High-yield interests are subject to
special rules regarding the eligibility of holders of such interest, and the
ability of such holders to offset income derived from their FASIT Security
with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation that
does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an Eligible
Corporation, or (2) a dealer who acquires FASIT debt for resale to
customers in the ordinary course of business.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income
from the high-yield interest multiplied by the highest corporate income tax
rate. In addition, transfers of high-yield interests to Disqualified Holders
will be disregarded for federal income tax purposes, and the transferor will
continue to be treated as the holder of the high-yield interest.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the high-yield interest, for either regular federal income tax purposes
or for alternative minimum tax purposes. In addition, the FASIT Provisions
contain an anti-abuse rule that imposes corporate income tax on income derived
from a FASIT Regular Interest that is held by a pass-through entity (other
than another FASIT) that issues debt or equity securities backed by the FASIT
Regular Interest and that have the same features as high-yield interests.
Taxation of FASIT Ownership Security
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. In general, the
character of the income to the holder of a FASIT Ownership Security will be
the same as the character of such income to the FASIT, except that any
tax-exempt interest income taken into account by the holder of a FASIT
Ownership Security is treated as ordinary income. In determining that taxable
income, the holder of a FASIT Ownership Security must determine the amount of
interest, original issue discount, market discount, and premium recognized
with respect to the FASIT's assets and the FASIT Regular Securities issued by
the FASIT according to a constant yield methodology and under an accrual
method of accounting. In addition, a holder of a FASIT Ownership Security is
subject to the same limitations on their ability to use losses to offset
income from their FASIT Regular Securities as are holders of high-yield
interest. See "--Taxation of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by such
holder, then Section 475 of the Code will continue to apply to such
securities, except that the amount realized under the mark-to-market rules or
the securities' value after applying special valuation rules contained in the
FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably
expected payments under the instrument using a discount rate of 120% of the
applicable federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition;
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular interest
(i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default) on an
asset of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another such
instrument; or
(7) in order to reduce over-collateralization where a principal
purposes of the disposition was not to avoid recognition of gain arising
from an increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
See "--REMICs" above.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
For 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 for the
mortgage loans underlying the Securities of a series, and where these
Securities are not designated as "Stripped Securities," the holder of each
Security of that 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 those mortgage loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
servicer, in accordance with that 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 fund in accordance with
its method of accounting, provided that those amounts are reasonable
compensation for services rendered to the 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 for certain itemized deductions
described in Code Section 67, including deductions under Code Section 212 for
the Servicing Fee and all administrative and other expenses of the Grantor
Trust Fund, to the extent that those deductions, in total, 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 (1) 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 (2) 80% of the amount of itemized deductions otherwise
allowable for that year. As a result, those investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
total taxable income in excess of the total amount of cash received on the
Standard Securities with respect to interest at the Interest Rate or as
discount income on the Standard Securities. In addition, those expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause those investors to be subject to significant additional tax
liability. Moreover, where there is Retained Interest for the mortgage loans
underlying a series of Securities the transaction will be subject to the
application of the "stripped bond" rules of the Code as described below under
"--Stripped Securities." Where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped coupon" rules of the Code, as described below under
"--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series that
are Subordinate Securities, may incur losses of interest or principal with
respect to the mortgage loans. Those 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.
(1) Tax Status
For a series, in the opinion of Brown & Wood LLP, a Standard Security
owned by a:
o "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
that section of the Code.
o 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 those assets will be
considered "interest on obligations secured by mortgages on real
property" to that extent within the meaning of Code Section
856(c)(3)(B).
o 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 that
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 those arrangements on the characterization of the securityholder's
investment for federal income tax purposes.
(2) 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 for
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 some 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 that
income. No prepayment assumption will be assumed for purposes of that accrual
except as set forth in the 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 those mortgage loans acquired by a
securityholder are purchased at a price equal to the then unpaid principal
amount of those mortgage loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of those
mortgage loans (i.e., points) will be includible by that 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 that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed reasonable
servicing compensation, the amount of that 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 the 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. That guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of those 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 those 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 those
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
the trust could be viewed as excluding the portion of the mortgage loans the
ownership of which is attributed to the servicer, or as including that portion
as a second class of equitable interest. Applicable Treasury regulations treat
that 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, that 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.
(4) 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 total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total 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 for the
Standard Security and decreased by the amount of any losses previously
reported for 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), the 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 (1) 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 for any prior disposition of
property that was held as part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the 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 those taxpayers
(39.6%) for property held for more than one year. The maximum tax rate for
corporations currently is the same for 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" for principal payments and "stripped
coupons" for 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:
o 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;
o 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
o 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" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for 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 those 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 securityholders of Stripped Securities,
the servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those 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 the
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in some respects, particularly
where Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate mortgage loans, in the opinion of Brown & Wood LLP,
(1) 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 (2) 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 for 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 totaled 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 the approach described
in this paragraph, 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 these
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 that 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 that Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (1)
the initial discount for the Stripped Security was treated as zero under the
de minimis rule, or (2) no more than 100 basis points in excess of reasonable
servicing is stripped off the related mortgage loans. That 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 that
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 Stripped Security that
is a Subordinate Security, may deduct losses incurred for 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 for 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
those mortgage loans qualify for that treatment. The application of those 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 for 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 before the receipt of the cash
attributable to that income. Based in part on the issue discount required to
be included in the income of a holder of a Stripped Security 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 total amount of the payments to be made on the
Stripped Security to that 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
that original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each mortgage loan
represented by that 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 the Stripped
Security to recognize a loss (which may be a capital loss) equal to that
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 these 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, these regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of these 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 before 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 that 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, the subsequent purchaser will be required for federal income tax
purposes to accrue and report that 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 those 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
(1) one installment obligation consisting of the Stripped Security's
pro rata share of the payments attributable to principal on each mortgage
loan and a second installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to interest on
each mortgage loan;
(2) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each mortgage loan; or
(3) 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 a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each 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 these 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 that year,
information (prepared on the basis described above) necessary to enable the
securityholder to prepare its federal income tax returns. This 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 who purchased at the issue price. In particular, in the case of
Stripped Securities, the reporting will be based upon a representative initial
offering price of each Class of Stripped Securities except as set forth in the
prospectus supplement. The trustee will also file the 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 any applicable 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 that 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 these 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
For 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, (1) 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 (2) 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
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,
for 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 those 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 (1)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (2) 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
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the 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 some
features characteristic of debt, the Partnership Securities might be
considered debt of the depositor or the Partnership Trust Fund. This
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.
(2) 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 that 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:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for that Due Period, including interest
accruing at the applicable Interest Rate for that Due Period and interest
on amounts previously due on the Partnership Securities but not yet
distributed;
(2) 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
(3) any other amounts of income payable to the securityholders for
that Due Period.
This 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
Interest Rate plus the other items described above even though the trust fund
might not have sufficient cash to make current cash distributions of that
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 those 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 that 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, those deductions might be disallowed to the
individual in whole or in part and might result in that holder being taxed on
an amount of income that exceeds the amount of cash actually distributed to
that holder over the life of the Partnership Trust Fund.
Discount income or premium amortization for 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 that description, it is intended that the Partnership Trust
Fund will make all tax calculations relating to income and allocations to
securityholders on a total basis for 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 these 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.
(3) 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 a total 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 that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) 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 that 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. Those 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 the 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.
(5) 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 that 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 total
adjusted tax basis in those Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of that
total 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 those 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 a total amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the total cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the Partnership Securities.
(6) 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 that 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 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.
(7) 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 for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that 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.
(8) Section 754 Election
If 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. 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 that 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.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. These 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 these nominees will be required to forward that 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 those 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. This information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and identification number of that person, (b)
whether that 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 (c) certain information on
Partnership Securities that were held, bought or sold on behalf of that 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 that 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.
Unless another designation is made, the depositor will be designated as
the tax matters partner in the pooling and servicing agreement and, as the tax
matters partner, 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.
(10) 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 those
purposes, the Partnership Trust Fund will withhold as if it were so engaged 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 that 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 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 for 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 that those 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 that 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 for the guaranteed payments.
(11) 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.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
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 AND OTHER 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 for the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
GENERAL
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 these 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 for those Plans in connection
with the investment of Plan assets. Some 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. Therefore,
assets of these 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 of these plans that 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, 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 an 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 for those assets for a fee, is a fiduciary of the investing
Plan. If the mortgage 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 for the investing Plan. In
addition, if the mortgage 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 that
generally exempts from the application of the prohibited transaction
provisions of Sections 406(a) and 407 of ERISA, and the excise taxes imposed
on those 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, that (1) 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 (2) 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" will 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 for
a class of Securities.
The Exemption sets forth six general conditions that must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder:
(1) 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.
(2) 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.
(3) 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").
(4) 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
on Assets constituting more than 5% of the total unamortized principal
balance of the Assets in the related trust fund as of the date of initial
issuance of the Securities.
(5) 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 those
obligations; and the sum of all payments made to and retained by the
servicer must represent not more than reasonable compensation for that
person's services under the related Agreement and reimbursement of that
person's reasonable expenses in connection therewith.
(6) The investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act
of 1933, as amended.
In addition, the trust fund must meet the following requirements: (1) the
assets of the trust fund must consist solely of assets of the type that have
been included in other investment pools; (2) securities evidencing interests
in those 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 before the Plan's acquisition of the securities; and (3) securities
evidencing interests in those other investment pools must have been purchased
by investors other than Plans for at least one year before 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 for that 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
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 that 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 that 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 for 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 those 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 that 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 those
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 these 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 of these
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 for those 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 that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that 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 that 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 that 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 that 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 for 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 that 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 that 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 for investments by Plans generally or any particular Plan, or
that this investment is appropriate for Plans generally or any particular
Plan.
PRE-FUNDING ACCOUNTS
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption, which extends exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows Assets
supporting payments to securityholders, and having a value equal to no more
than 25% of the total initial Security Balance of the related Securities, to
be transferred to the trust fund within the Pre-Funding Period, instead of
requiring that all the Assets be either identified or transferred on or before
the Closing Date. The relief is available when the following conditions are
met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered (the
"Pre-Funding Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and conditions
for eligibility as the original Assets used to create the trust fund,
which terms and conditions have been approved by at least one rating
agency.
(3) The transfer of the Subsequent Assets to the trust fund during
the Pre-Funding Period must not result in the Securities that are to be
covered by the Exemption receiving a lower credit rating from a rating
agency upon termination of the Pre-Funding Period than the rating that
was obtained at the time of the initial issuance of the Securities by the
trust fund.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Assets in the
trust fund at the end of the Pre-Funding Period must not be more than 100
basis points lower than the average interest rate for the Assets
transferred to the trust fund on the Closing Date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original Assets that were
transferred to the trust fund,
o the characteristics of the Subsequent Assets must be monitored
by an insurer or other credit support provider that is
independent of the depositor; or
o an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to
each rating agency rating the Securities, the underwriter and
the trustee) stating whether or not the characteristics of the
Subsequent Assets conform to the characteristics described in
the related prospectus supplement and/or pooling and servicing
agreement. In preparing this letter, the independent accountant
must use the same type of procedures as were applicable to the
Assets transferred to the trust fund as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date (or earlier in certain circumstances) if the
Pre-Funding Account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding may
be invested only in certain permitted investments Permitted Investments.
(8) The prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest Account
used in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding Limit
for the trust fund; and
o that the amounts remaining in the Pre-Funding Account at the
end of the Pre-Funding Period will be remitted to
securityholders as repayments of principal.
(9) The Agreement must prescribe the permitted investments for the
Pre-Funding Account and/or Capitalized Interest Account and, if not
disclosed in the prospectus supplement, the terms and conditions for
eligibility of Subsequent Assets.
LEGAL INVESTMENT
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
prospectus supplement will specify which classes of the Securities, if any,
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"). Generally, only
classes of Offered Securities that (1) are rated in one of the two highest
rating categories by one or more rating agencies and (2) 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 those entities. Pursuant to SMMEA, a number
of states enacted legislation, on or before the October 3, 1991 cut-off for
those 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 these securities, and
national banks may purchase these 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 regulations that
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 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 these 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 those authorities before purchasing any Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under those 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 that may restrict or prohibit investment in securities that are not
"interest bearing" or "income paying," and with regard to any Offered
Securities issued in book-entry form, provisions that may restrict or prohibit
investments in securities that 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 that 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
specified in the 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. ("DBSI") acting as
underwriter with other underwriters, if any, named therein. In that 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
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 that it has previously purchased or agreed to purchase.
If DBSI acts as agent in the sale of Securities, DBSI will receive a selling
commission for each series of Securities, depending on market conditions,
expressed as a percentage of the total 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 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 for any series offered other than through
underwriters will contain information regarding the nature of that offering
and any agreements to be entered into between the depositor and purchasers of
Securities of that 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 those 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 those 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 before any reoffer or sale of
Securities.
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.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement
under the Securities Act of 1933, as amended, with respect to the Securities
(the "Registration Statement"). This prospectus, which forms a part of the
Registration Statement, omits certain information contained in the
Registration Statement pursuant to the rules and regulations of the
Commission. The Registration Statement and the exhibits thereto can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
of its Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system. The Depositor has filed the Registration Statement, including all
exhibits thereto, through the EDGAR system and therefore such materials should
be available by logging onto the Commission's web site. The Commission
maintains computer terminals providing access to the EDGAR system at each of
the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington,
D.C. 20016 (202-752-7115). The Depositor did not participate in the
preparation of Fannie Mae's prospectus or its annual or quarterly reports or
other financial information and, accordingly, makes no representation as to
the accuracy or completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates
as well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac
may be obtained by writing or calling the Investor Inquiry Department of
Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, telephone 800-336-3672; within Washington,
D.C. metropolitan area, telephone 703-759-8160). The Depositor did not
participate in the preparation of Freddie Mac's Offering Circular, Information
Statement or any supplement thereto or any quarterly report thereof and,
accordingly, makes no representation as to the accuracy or completeness of the
information in those documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the 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 that trust fund will 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 those documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein will be deemed to be modified
or superseded for all purposes of this prospectus to the extent that a
statement contained herein (or in the prospectus supplement) or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference modifies or replaces that statement. Any statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any
or all of the documents referred to above that have been or may be
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are
specifically incorporated by reference into the information that this
prospectus incorporates). Requests for information should be directed to the
corporate trust office of the Trustee specified in the prospectus supplement.
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 for each series of Securities and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of Securities.
Accordingly, financial statements for a trust fund will generally not be
included in this prospectus or in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Securities, they
must not be rated lower than investment grade; that is, they must be rated in
one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
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 the Securities, the nature of the
underlying assets and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates, mortgage-backed notes and other asset
backed securities do not represent any assessment of the likelihood of
principal prepayments by borrowers or of the degree by which 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...........................................82
1998 Policy Statement.............................132
Accrual Period.....................................14
Accrual Securities.................................21
Accrued Security Interest..........................24
Adjustable Rate Assets..............................2
Agency Securities...................................2
Agreement..........................................35
ARM Loans...........................................5
Asset Conservation Act.............................73
Asset Group........................................21
Asset Seller........................................2
Assets..............................................2
Available Distribution Amount......................22
Balloon Payment Assets..............................3
Bankruptcy Code....................................70
Beneficial Owner...................................30
Bi-weekly Assets....................................3
Book-Entry Securities..............................21
borrower...........................................62
Buy Down Assets.....................................2
Buydown Funds......................................81
Buydown Mortgage Loans.............................18
Buydown Period.....................................18
Capitalized Interest Account.......................13
Cash Flow Agreement................................14
Cedel..............................................30
CERCLA.............................................71
Certificates.......................................21
Charter Act.........................................8
Code...............................................77
Collection Account.................................39
Commission..........................................5
contract borrower..................................64
contract lender....................................64
Convertible Assets..................................3
Cooperative........................................63
Cooperative Corporation............................31
Cooperative Loans..................................63
Cooperatives........................................4
Covered Trust......................................58
CPR................................................17
credit support.....................................13
Crime Control Act..................................76
Cut-off Date........................................5
DBSI..............................................133
DCR...............................................127
Debt Securities....................................77
defective obligation...............................79
Definitive Securities..............................21
Determination Date.................................22
Disqualified Holder...............................108
Disqualified Organization..........................96
Distribution Date..................................15
DOL...............................................125
DTC................................................30
Due Period.........................................22
EDGAR.............................................134
Eligible Corporation..............................107
ERISA.............................................125
Euroclear..........................................30
Euroclear Operator.................................31
European Depositaries..............................32
excess servicing..................................112
Exchange Act.......................................30
Excluded Plan.....................................127
Exemption.........................................126
Fannie Mae..........................................2
FASIT..............................................77
FASIT Ownership Security..........................104
FASIT Provisions...................................77
FASIT Regular Securities..........................104
FASIT Securities...................................77
FDIC...............................................39
FFIEC.............................................132
FHA.................................................4
Financial Intermediary.............................32
Fitch.............................................127
Freddie Mac.........................................2
Freddie Mac Act.....................................9
Freddie Mac Certificate Group......................10
Garn-St. Germain Act...............................73
GEM Assets..........................................2
Ginnie Mae..........................................2
GPM Assets..........................................3
Grantor Trust Fund.................................77
Grantor Trust Securities...........................77
Home Equity Loans...................................4
Housing Act.........................................7
HUD................................................47
Increasing Payment Asset............................3
Indirect Participants..............................30
Insurance Proceeds.................................22
Interest Rate......................................23
Interest Reduction Assets...........................2
land sale contract.................................64
Land Sale Contracts.................................4
Level Payment Assets................................2
Liquidation Proceeds...............................22
Loan-to-Value Ratio.................................4
Lock-out Date.......................................6
Lock-out Period.....................................6
Mark to Market Regulations.........................99
Mortgage Securities.................................2
Mortgaged Properties................................4
Mortgages...........................................4
NCUA..............................................131
new partnership...................................121
New Regulations...................................102
Non-Equity Securities.............................128
Non-Pro Rata Security..............................83
Nonrecoverable Advance.............................26
Non-U.S. Person...................................102
Notes..............................................21
OCC...............................................131
Offered Securities.................................21
OID Regulations................................78, 82
old partnership...................................121
Participants.......................................30
Parties in Interest...............................125
Partnership Securities.............................77
Partnership Trust Fund.............................77
Pass-Through Entity................................96
PCBs...............................................71
Permitted Investments..............................39
Plans.............................................125
pooling and servicing agreement....................35
Pre-Funded Amount..................................12
Pre-Funding Account................................12
Pre-Funding Limit.................................129
Pre-Funding Period.................................12
prepayment.........................................16
Prepayment Assumption..............................84
PTCE..............................................128
Purchase Price.....................................37
RCRA...............................................72
Record Date........................................22
Refinance Loans.....................................4
Registration Statement............................134
Regular Securities.................................78
Regular Securityholder.............................82
Related Proceeds...................................26
Relevant Depositary................................32
Relief Act.........................................76
REMIC..............................................77
REMIC Pool.........................................78
REMIC Provisions...................................77
REMIC Regulations..................................78
REMIC Securities...................................35
REO Property.......................................27
Residual Holders...................................91
Residual Securities................................78
Restricted Group..................................127
Retained Interest..................................49
Revolving Credit Line Loans.........................6
RICO...............................................76
Rules..............................................32
S&P...............................................127
SBJPA of 1996......................................81
secured-creditor exemption.........................72
Securities.........................................21
Security Balance...................................24
Senior Securities..................................21
Servicemen's Readjustment Act......................12
Servicing Standard.................................43
Single Family Property..............................4
SMMEA.............................................131
SPA................................................17
Special servicer...................................51
Standard Securities...............................110
Startup Day........................................78
Step-up Rate Assets.................................3
Strip Securities...................................21
Stripped Agency Securities.........................11
Stripped Securities...............................110
Subordinate Securities.............................21
Subsequent Assets..................................12
Superliens.........................................71
super-premium......................................83
Taxable Mortgage Pools.............................78
Terms and Conditions...............................31
thrift institutions................................95
Tiered REMICs......................................82
Title V............................................75
Title VIII.........................................75
U.S. Person........................................98
UCC................................................30
UST................................................72
VA .................................................4
VA Guaranty Policy.................................48
Value...............................................4
Warranting Party...................................37
Yield Considerations...............................24
** PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee............................................... $834,000
Trustee's Fees and Expenses (including counsel fees)............... 250,000
Printing and Engraving Costs....................................... 450,000
Rating Agency Fees................................................. 2,000,000
Legal Fees and Expenses............................................ 1,000,000
Blue Sky Fees and Expenses......................................... 100,000
Accounting Fees and Expenses....................................... 350,000
Miscellaneous...................................................... 500,000
-----------
Total........................................................... $5,484,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are made, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person is or was
an officer or director of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually and reasonably
incurred.
The By-laws of the Registrant provide for indemnification of officers
and directors to the full extent permitted by the Delaware General Corporation
Law.
The Pooling and Servicing Agreement or Indenture for each series of
Securities will provide either that the Registrant and the partners, directors,
officers, employees and agents of the Registrant, or that the Servicer or Master
Servicer and the partners, directors, officers, employees and agents of the
Servicer or Master Servicer, will be entitled to indemnification by the Trust
Fund and will be held harmless against any loss, liability or expense incurred
in connection with any legal action relating to the Pooling and Servicing
Agreement, Indenture or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of his or its duties thereunder or by reason of reckless
disregard of his or its obligations and duties thereunder.
The Underwriting Agreement for each series of Securities will generally
provide that each underwriter will indemnify the Registrant, each of its
directors, each of its officers who signs the Registration Statement, and each
person who controls the Registrant within the meaning of either the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
against claims, damages, or liability, to which the Registrant may become
subject, under the Securities Act or the Exchange Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of material fact furnished by the underwriter for the preparation of a
prospectus, or included in any computational materials, term sheets or similar
documents delivered to prospective investors by the underwriter (other than any
such untrue statement that is based on materials previously provided to the
underwriter by the Registrant).
ITEM 16. EXHIBITS.
1.1(1) Form of Underwriting Agreement
4.1 Form of Trust Agreement
4.2(1) Form of Pooling and Servicing Agreement
4.3(1) Form of Indenture
5.1 Opinion of Brown & Wood LLP as to legality (including
consent of such firm)
8.1 Opinion of Brown & Wood LLP as to certain tax matters
(including consent of such firm) (included in Exhibit 5.1)
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4)
- ----------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 (Reg. No. 333-56213), filed with the Commission on
June 5, 1999.
ITEM 17. UNDERTAKINGS
A. Undertaking in respect of Rule 415 offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change of such information in the Registration Statement;
provided, however, that paragraphs (i) and (iii) do not apply if the information
required to be included in the post-effective amendment is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated by reference
in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. Undertaking in respect of filings incorporating subsequent Exchange Act
documents by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
D. Undertakings for registration statement permitted by Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be part of this Registration Statement as of the time it was
declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
E. Undertaking in respect of qualification of Indentures under the Trust
Indenture Act of 1939.
The Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act of 1939 in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act of 1939.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Charlotte, North Carolina on the
30th day of September, 1999.
ACE SECURITIES CORP.
By: /s/ Douglas K. Johnson
-------------------------
Douglas K. Johnson
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-3 has been signed below by the
following persons in the capacities and on the dates indicated. Each person
whose signature appears below constitutes and appoints Douglas K. Johnson,
Elizabeth S. Eldridge and Juliana C. Johnson , and each of them his or her
true and lawful attorney-in-fact and agent, acting together or alone, with
full powers of substitution and resubstitution, for them and in their name,
place and stead, to sign any or all amendments to this Registration Statement
(including any pre-effective or post-effective amendment), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, acting together or alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, acting together or alone, or other
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
/s/ Douglas K. Johnson President and Director September 30, 1999
- -------------------------- (Principal Executive Officer)
Douglas K. Johnson
/s/ Elizabeth S. Eldridge Director September 30, 1999
- --------------------------
Elizabeth S. Eldridge
/s/ Juliana C. Johnson Treasurer and Director September 30, 1999
- -------------------------- (Principal Financial and
Juliana C. Johnson Accounting Officer)
Exhibit 4.1
Form of Trust Agreement
[AMENDED AND RESTATED]
TRUST AGREEMENT
between
ACE SECURITIES CORP.,
as Depositor,
and
[ ]
as Owner Trustee
Dated as of [ ]
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE ONE
DEFINITIONS
Section 1.01. Capitalized Terms.........................................1
Section 1.02. Other Definitional Provisions.............................3
ARTICLE TWO
ORGANIZATION
Section 2.01. Name......................................................4
Section 2.02. Office....................................................4
Section 2.03. Purposes and Powers.......................................4
Section 2.04. Appointment of Owner Trustee..............................5
Section 2.05. Initial Capital Contribution of Trust Estate..............5
Section 2.06. Declaration of Trust......................................5
Section 2.07. Liability of the Owners...................................5
Section 2.08. Title to Trust Property...................................5
Section 2.09. Situs of Trust............................................6
Section 2.10. Representations and Warranties of the Depositor...........6
Section 2.11. Federal Income Tax Allocations............................7
Section 2.12. Investment Company........................................7
ARTICLE THREE
CERTIFICATES AND TRANSFER OF INTERESTS
Section 3.01. Initial Ownership.........................................8
Section 3.02. The Certificates..........................................8
Section 3.03. Authentication of Certificates............................8
Section 3.04. Limitations on Transfer of the Certificates...............8
Section 3.05. Registration of Transfer and Exchange of Certificates....11
Section 3.06. Mutilated, Destroyed, Lost or Stolen Certificates........11
Section 3.07. Persons Deemed Owners....................................12
Section 3.08. Access to List of Certificateholders' Names
and Addresses .........................................12
Section 3.09. Maintenance of Office or Agency..........................12
Section 3.10. Appointment of Paying Agent..............................12
Section 3.11. Book-Entry Certificates..................................13
Section 3.12. Notices to Clearing Agency...............................14
Section 3.13. Definitive Certificates..................................14
ARTICLE FOUR
ACTIONS BY OWNER TRUSTEE
Section 4.01. Prior Notice to Owners with Respect to Certain Matters...14
Section 4.02. Action by Owners with Respect to Certain Matters.........17
Section 4.03. Action with Respect to Bankruptcy........................17
Section 4.04. Restrictions on Owners' Power............................18
Section 4.05. Majority Control.........................................18
ARTICLE FIVE
APPLICATION OF TRUST FUNDS; CERTAIN DUTIES
Section 5.01. Certificate Distribution Account.........................18
Section 5.02. Application of Trust Funds...............................18
Section 5.03. Method of Payment........................................19
Section 5.04. Segregation of Moneys; No Interest.......................19
Section 5.05. Tax Administration.......................................19
ARTICLE SIX
AUTHORITY AND DUTIES OF OWNER TRUSTEE
Section 6.01. General Authority........................................20
Section 6.02. General Duties...........................................20
Section 6.03. Action upon Instruction..................................21
Section 6.04. No Duties Except as Specified in this Agreement
or in Instructions ....................................22
Section 6.05. No Action Except Under Specified Documents
or Instructions .......................................22
Section 6.06. Restrictions.............................................22
ARTICLE SEVEN
CONCERNING THE OWNER TRUSTEE
Section 7.01. Acceptance of Trusts and Duties..........................23
Section 7.02. Furnishing of Documents..................................24
Section 7.03. Representations and Warranties...........................24
Section 7.04. Reliance; Advice of Counsel..............................25
Section 7.05. Not Acting in Individual Capacity........................25
Section 7.06. Owner Trustee Not Liable for Certificates or
Mortgage Loans ........................................26
Section 7.07. Owner Trustee May Own Certificates and Notes.............26
Section 7.08. Doing Business in Other Jurisdictions....................26
Section 7.09. Licenses.................................................26
Section 7.10. Liability of Certificate Registrar and Paying Agent......27
ARTICLE EIGHT
COMPENSATION OF OWNER TRUSTEE
Section 8.01. Owner Trustee's Fees and Expenses........................27
Section 8.02. Indemnification..........................................27
Section 8.03. Payments to the Owner Trustee............................28
ARTICLE NINE
TERMINATION OF TRUST AGREEMENT
Section 9.01. Termination of Trust Agreement...........................28
ARTICLE TEN
SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES
Section 10.01. Eligibility Requirements for Owner Trustee...............29
Section 10.02. Resignation or Removal of Owner Trustee..................29
Section 10.03. Successor Owner Trustee..................................30
Section 10.04. Merger or Consolidation of Owner Trustee.................31
Section 10.05. Appointment of Co-Trustee or Separate Trustee............31
ARTICLE ELEVEN
MISCELLANEOUS
Section 11.01. Supplements and Amendments...............................32
Section 11.02. No Legal Title to Trust Estate in Owners.................33
Section 11.03. Limitations on Rights of Others..........................34
Section 11.04. Notices..................................................34
Section 11.05. Severability.............................................34
Section 11.06. Separate Counterparts....................................34
Section 11.07. Successors and Assigns...................................34
Section 11.08. No Petition..............................................34
Section 11.09. No Recourse..............................................35
Section 11.10. Headings.................................................35
Section 11.11. Governing Law............................................35
Section 11.12. [Grant of Certificateholder Rights to Note Insurer.......35]
Section 11.13. [Third-Party Beneficiary.................................35]
Section 11.14. [Suspension and Termination of Note Insurer's Rights.....36]
Section 11.15. [Fiduciary Obligation to Holders of the Certificates.....36]
<PAGE>
THIS [AMENDED AND RESTATED] TRUST AGREEMENT dated as of [ ] (the "Trust
Agreement"), between ACE SECURITIES CORP., a Delaware corporation, as depositor
(the "Depositor") and [ ], a [ ] banking corporation, as owner trustee (the
"Owner Trustee").
W I T N E S S E T H:
In consideration of the mutual agreements and covenants herein
contained, the Depositor and the Owner Trustee hereby agree for the benefit of
each of them and the holders of the Certificates as follows:
ARTICLE ONE
DEFINITIONS
Section 1.01. Capitalized Terms. For all purposes of this Agreement,
the following terms shall have the meanings set forth below:
Aggregate Voting Interests: The aggregate of the Voting Interests of
all or a specified Class or Classes of Certificates.
Agreement: This Trust Agreement, as the same may be amended and
supplemented from time to time.
Book-Entry Certificates: Beneficial interests in Certificates
designated as "Book-Entry Certificates" in this Agreement, ownership and
transfers of which shall be evidenced or made through book entries by a Clearing
Agency as described in Section 3.11; provided, that after the occurrence of a
condition whereupon Definitive Certificates are to be issued to Certificate
Owners, such Book-Entry Certificates shall no longer be "Book-Entry
Certificates." No Certificate shall be Book-Entry Certificate.
[Business Trust Statute: Chapter 38 of Title 12 of the Delaware Code,
12 Del. Code ss. 3801 et seq., as the same may be amended from time to time.]
Certificate Depository Agreement: Any agreement among the Trust, the
Owner Trustee, the Administrator and The Depository Trust Company, as the
initial Clearing Agency relating to the Certificates pursuant to which a
Certificate is issued in book-entry form.
[Certificate of Trust: The Certificate of Trust substantially in the
form attached hereto as Exhibit B filed for the Trust pursuant to Section
3810(a) of the Business Trust Statute.]
Certificate Owner: With respect to a Book-Entry Certificate, the Person
that is the beneficial owner of such Book-Entry Certificate, as reflected on the
books of the Clearing Agency or on the books of a Person maintaining an account
with such Clearing Agency (directly as a Clearing Agency Participant or as an
indirect participant, in each case in accordance with the rules of such Clearing
Agency).
Certificate Register and Certificate Registrar: The register mentioned
and the registrar appointed pursuant to Section 3.05.
Certificateholder or Holder: A Person in whose name a Certificate is
registered on the Certificate Register.
Corporate Trust Office: With respect to the Owner Trustee, the
principal corporate trust office of the Owner Trustee, located at [ ],
Attention: [ ], or at such other address as the Owner Trustee may designate by
notice to the Owners, [the Note Insurer] and the Depositor, or the principal
corporate trust office of any successor Owner Trustee at the address designated
by such successor Owner Trustee by notice to the Owners and the Depositor.
Definitive Certificate: As defined in Section 3.11.
ERISA-Restricted Certificate: Any Certificate.
Expenses: The meaning assigned to such term in Section 8.02.
Indemnified Parties: The meaning assigned to such term in
Section 8.02.
Non-United States Person: Any person other than a United States
Person.
Owner: Each Holder of a Certificate.
Paying Agent: Any paying agent or co-paying agent appointed pursuant to
Section 3.10; the initial Paying Agent shall be Bankers Trust Company.
Prospective Owner: Each prospective purchaser and any subsequent
transferee of a Certificate.
Residual Interest Certificate: Any residual interest certificate
evidencing the ownership interest in the Trust, substantially in the form
attached hereto as Exhibit A.
Sale and Servicing Agreement: The Sale and Servicing Agreement dated as
of [ ], among the Trust, as issuer, the Depositor, the Servicer, and [ ], as
Indenture Trustee, as such may be amended or supplemented from time to time.
Secretary of State: The Secretary of State of the State of [ ].
Treasury Regulations: Regulations, including proposed or temporary
regulations, promulgated under the Code. References herein to specific
provisions of proposed or temporary regulations shall include analogous
provisions of final Treasury Regulations or other successor Treasury
Regulations.
Trust: The trust established under this Agreement.
Voting Interests: The portion of the voting rights of all the
Certificates that is allocated to any Certificate for purposes of the voting
provisions of this Agreement. At all times during the term of this Agreement,
Voting Interests shall be allocated to the Residual Interest Certificates.
Voting Interests allocated to any Class of Certificates shall be allocated among
the Certificates of such Class in proportion to the Percentage Interests
thereof. Notwithstanding the foregoing, solely for the purposes of the giving of
any consent, waiver, request or demand pursuant to this Agreement, any
Certificate registered in the name of the Seller, the Issuer, the Owner Trustee,
the Indenture Trustee, the Servicer, the Administrator or any of their
respective Affiliates, shall be deemed not to be outstanding and the Voting
Interests allocated thereto shall not be taken into account in determining
whether the requisite Aggregate Voting Interests necessary to take any such
action or effect any such consent, waiver, request or demand have been obtained
(unless such action requires the consent, waiver, request or demand of 100% of
the Aggregate Voting Interests represented by a particular Class and 100% of the
Voting Interests represented by such Class are registered in the name of one or
more of the foregoing entities). The Owner Trustee may obtain and conclusively
rely upon a certificate of the Issuer, the Seller, the Servicer or any
Sub-Servicer to determine whether a Certificate is registered in the name of an
Affiliate of any of them.
Section 1.02. Other Definitional Provisions. (a) Capitalized terms used
and not otherwise defined herein have the meanings assigned to them in the Sale
and Servicing Agreement or, if not defined therein, in the Indenture.
(b) All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.
(c) As used in this Agreement and in any certificate or other document
made or delivered pursuant hereto or thereto, accounting terms not defined in
this Agreement or in any such certificate or other document, and accounting
terms partly defined in this Agreement or in any such certificate or other
document to the extent not defined, shall have the respective meanings given to
them under generally accepted accounting principles. To the extent that the
definitions of accounting terms in this Agreement or in any such certificate or
other document are inconsistent with the meanings of such terms under generally
accepted accounting principles, the definitions contained in this Agreement or
in any such certificate or other document shall control.
(d) The words "hereof," "herein," "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; Section and Exhibit
references contained in this Agreement are references to Sections and Exhibits
in or to this Agreement unless otherwise specified; and the term "including"
shall mean "including without limitation".
(e) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such terms.
(f) Any agreement, instrument or statute defined or referred to herein
or in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; references to a
Person are also to its permitted successors and assigns.
ARTICLE TWO
ORGANIZATION
Section 2.01. Name. The Trust created hereby shall be known as "ACE
Securities Corp. [ ] Trust [ ]," in which name the Owner Trustee may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.
Section 2.02. Office. The office of the Trust shall be in care of the
Owner Trustee at the Corporate Trust Office or at such other address in [ ] as
the Owner Trustee may designate by written notice to the Owners, [the Note
Insurer] and the Depositor.
Section 2.03. Purposes and Powers. (a) The purpose of the Trust is to
engage in the following activities:
(i) to issue the Notes pursuant to the Indenture and the
Certificates pursuant to this Agreement and to sell the Notes and
the Certificates;
(ii) with the proceeds of the sale of the Notes and the
Certificates, to purchase the Mortgage Loans, to pay the
organizational, start-up and transactional expenses of the Trust and to
pay the balance to the Depositor pursuant to the Sale and Servicing
Agreement;
(iii) to assign, grant, transfer, pledge, mortgage and convey
the Trust Estate pursuant to the Indenture and to hold, manage and
distribute to the Owners pursuant to the terms of the Sale and
Servicing Agreement any portion of the Trust Estate released from the
lien of, and remitted to the Trust pursuant to, the Indenture;
(iv) to enter into and perform its obligations under the Basic
Documents to which it is to be a party;
(v) to engage in those activities, including entering into
agreements, that are necessary, suitable or convenient to accomplish
the foregoing or are incidental thereto or connected therewith; and
(vi) subject to compliance with the Basic Documents, to engage
in such other activities as may be required in connection with
conservation of the Trust Estate and the making of distributions to the
Owners and the Noteholders.
The Trust is hereby authorized to engage in the foregoing activities. The Trust
shall not engage in any activity other than in connection with the foregoing or
other than as required or authorized by the terms of this Agreement or the Basic
Documents.
Section 2.04. Appointment of Owner Trustee. The Depositor hereby
appoints the Owner Trustee as trustee of the Trust effective as of the date
hereof, to have all the rights, powers and duties set forth herein.
Section 2.05. Initial Capital Contribution of Trust Estate. The
Depositor hereby sells, assigns, transfers, conveys and sets over to the Owner
Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby
acknowledges receipt in trust from the Depositor, as of the date hereof, of the
foregoing contribution, which shall constitute the initial Trust Estate and
shall be deposited in the Certificate Distribution Account. The Depositor shall
pay organizational expenses of the Trust as they may arise or shall, upon the
request of the Owner Trustee, promptly reimburse the Owner Trustee for any such
expenses paid by the Owner Trustee.
Section 2.06. Declaration of Trust. The Owner Trustee hereby declares
that it will hold the Trust Estate in trust upon and subject to the conditions
set forth herein for the use and benefit of the Owners, subject to the
obligations of the Trust under the Basic Documents. It is the intention of the
parties hereto that the Trust constitute a [business trust under the Business
Trust Statute] [trust under the common law of the State of New York] and that
this Agreement constitute the governing instrument of such [business] trust. It
is the intention of the parties hereto that, solely for federal, state and local
income and franchise tax purposes (i) so long as the sole owners of the Trust
are the Residual Interestholders, (A) the Trust shall be treated as a [grantor
trust], with the assets of the Trust being the Mortgage Loans and other assets
held by the Trust and the Notes being non-recourse debt of the sole owner, and
(B) the arrangement between the Residual Interestholders' interest in the
Mortgage Loans and the Noteholders shall be treated as a security arrangement,
and (ii) if the Residual Interestholders are not the sole owners of the Trust,
the Trust shall be treated as a partnership for income and franchise tax
purposes, with the assets of the partnership being the Mortgage Loans and other
assets held by the Trust, the partners of the partnership being the owners and
notes being debt of the partnership to the extent they have not otherwise been
recharacterized. The Trust shall not elect to be treated as an association under
Treasury Regulation Section 301, 7701-3(a) for federal income tax purposes. The
parties agree that, unless otherwise required by appropriate tax authorities,
the Trust will file or cause to be filed annual or other necessary returns,
reports and other forms consistent with the characterization of the Trust as a
security arrangement for tax purposes. Effective as of the date hereof, the
Owner Trustee shall have all rights, powers and duties set forth herein [and in
the Business Trust Statute] with respect to accomplishing the purposes of the
Trust.
Section 2.07. Liability of the Owners. No Owner shall have any personal
liability for any liability or obligation of the Trust.
Section 2.08. Title to Trust Property.
(a) Subject to the Indenture, legal title to the Trust Estate shall be
vested at all times in the Trust as a separate legal entity except where
applicable law in any jurisdiction requires title to any part of the Trust
Estate to be vested in a trustee or trustees, in which case title shall be
deemed to be vested in the Owner Trustee, a co-trustee and/or a separate
trustee, as the case may be.
(b) The Owners shall not have legal title to any part of the Trust
Estate. No transfer by operation of law or otherwise of any interest of the
Owners shall operate to terminate this Agreement or the trusts hereunder or
entitle any transferee to an accounting or to the transfer to it of any part of
the Trust Estate.
Section 2.09. Situs of Trust. The Trust will be located and
administered in the State of [ ]. All bank accounts maintained by the Owner
Trustee on behalf of the Trust shall be located in the State of [ ] [or the
State of New York], except with respect to accounts maintained by the
Administrator or the Indenture Trustee on behalf of the Owner Trustee. The Trust
shall not have any employees in any state other than [ ]; provided, however,
that nothing herein shall restrict or prohibit the Owner Trustee from having
employees within or without the State of [ ]. Payments will be received by the
Trust only in [ ] [or New York], and payments will be made by the Trust only
from [ ] [or New York]. The only office of the Trust will be at the Corporate
Trust Office in [ ].
Section 2.10. Representations and Warranties of the Depositor. The
Depositor hereby represents and warrants to the Owner Trustee [and the Note
Insurer] that:
(a) The Depositor is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware.
(b) The Depositor has the corporate power and authority to execute and
deliver this Agreement and to perform in accordance herewith; the execution,
delivery and performance of this Agreement (including all instruments of
transfer to be delivered pursuant to this Agreement) by the Depositor and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action of the Depositor.
(c) This Agreement evidences the valid, binding and enforceable
obligation of the Depositor; and all requisite action has been taken by the
Depositor to make this Agreement valid, binding and enforceable upon the
Depositor in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium and other, similar laws relating to or
affecting creditors' rights generally or the application of equitable principles
in any proceeding, whether at law or in equity.
(d) No consent, approval, authorization or order of or registration or
filing with, or notice to, any governmental authority or court is required for
the execution, delivery and performance of or compliance by the Depositor with
this Agreement or the consummation by the Depositor of any of the transactions
contemplated hereby, except as have been made on or prior to the Closing Date.
(e) None of the execution and delivery of this Agreement, the
consummation of the transactions contemplated by this Agreement and the
fulfillment of the terms hereof do not conflict with, result in any breach of
any of the terms and provisions of, or constitute (with or without notice or
lapse of time) a default under, the charter or bylaws of the Depositor, or
conflict with or breach any of the material terms or provisions of, or
constitute (with or without lapse of time) a default under, any indenture,
agreement or other instrument to which the Depositor is a party or by which it
is bound; or result in the creation or imposition of any Lien upon any of its
properties pursuant to the terms of any such indenture, agreement or other
instrument (other than pursuant to the Basic Documents); or violate any law or,
to the best knowledge of the Depositor, any order, rule or regulation applicable
to the Depositor of any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality having jurisdiction
over the Depositor or its properties.
(f) There are no proceedings or investigations pending or, to the best
knowledge of the Depositor, threatened before any court, regulatory body,
administrative agency or other tribunal or governmental instrumentality (A)
asserting the invalidity of this Agreement, (B) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement or (C)
seeking any determination or ruling that, in the reasonable judgment of the
Depositor, would materially and adversely affect the performance by the
Depositor of its obligations under this Agreement.
(g) The Depositor is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or other governmental agency, which default might have consequences that would
materially and adversely affect the condition (financial or otherwise) or
operations of the Depositor or its properties or might have consequences that
would materially and adversely affect its performance hereunder.
(h) The representations and warranties of the Depositor in Section 3.02
of the Sale and Servicing Agreement are true and correct.
(i) The Depositor shall not take any action (i) that is inconsistent
with the purposes of the Trust set forth in Section 2.03 or (ii) that, to the
actual knowledge of the Depositor, would result in the Trust's becoming taxable
as a corporation for federal income tax purposes.
Section 2.11. Federal Income Tax Allocations. Net income of the Trust
as computed for federal income tax purposes (including each item of income,
gain, and deduction, but not including any default loss realized by the Trust
with respect to the Mortgage Loans) for any taxable year shall be allocated as
follows: (a) to the extent that the Certificates are owned (for federal income
tax purposes) by a single owner, 100% to the Certificateholder, and (b) to the
extent that a Holder of a Certificate is different from the Residual
Interestholders, income shall be calculated separately for each Certificate
based on the respective Mortgage Loans and other assets of the Trust treated as
owned by the particular Certificate of the related Class and income shall be
allocated to each Certificateholder accordingly.
Section 2.12. Investment Company. The Depositor hereby agrees, and each
Certificateholder shall be deemed to have agreed by acceptance of such
Certificate, not to take any action that would cause the Trust to become an
"investment company" which would be required to register under the Investment
Company Act of 1940, as amended.
ARTICLE THREE
CERTIFICATES AND TRANSFER OF INTERESTS
Section 3.01. Initial Ownership. Upon the formation of the Trust by the
contribution by the Depositor pursuant to Section 2.05 and until the issuance of
the Certificates, the Depositor shall be the sole beneficiary of the Trust. Upon
such issuance of the Certificates, the Depositor shall cease to be the
beneficial owner of the Trust and its beneficial interest in the Trust shall be
and shall be deemed cancelled, void, and of no further force and effect.
Section 3.02. The Certificates. Each Residual Interest Certificate
shall be issued and maintained in definitive, fully registered form as a single
Certificate evidencing a Percentage Interest of not less than 25%. Each
Certificate shall be executed on behalf of the Trust by manual or facsimile
signature of an authorized officer of the Owner Trustee. Certificates bearing
the manual or facsimile signatures of individuals who were, at the time when
such signatures shall have been affixed, authorized to sign on behalf of the
Trust, shall be validly issued and entitled to the benefit of this Agreement,
notwithstanding that such individuals or any of them shall have ceased to be so
authorized prior to the authentication and delivery of such Certificates or did
not hold such offices at the date of authentication and delivery of such
Certificates.
Upon issuance of the Certificates, the Owner Trustee shall authenticate
the Certificates in accordance with the written instructions of the prospective
transferee thereof. Neither the Certificate Registrar nor the Owner Trustee
shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such instructions.
Upon the issuance of any such Certificate, the Owner Trustee shall recognize the
Holders of the Certificates as Certificateholders. The Certificates shall be
printed, lithographed or engraved or may be produced in any other manner as is
reasonably acceptable to the Owner Trustee, as evidenced by its execution
thereof.
A transferee of a Certificate shall become a Certificateholder and
shall be entitled to the rights and subject to the obligations of a
Certificateholder hereunder upon such transferee's acceptance of a Certificate
duly registered in such transferee's name pursuant to Section 3.04.
Section 3.03. Authentication of Certificates. On the Closing Date, the
Owner Trustee shall cause the Certificates to be executed on behalf of the
Trust, authenticated and delivered to or upon the written order of the
Depositor, without further trust action by the Depositor, in authorized
denominations. No Certificate shall entitle its Holder to any benefit under this
Agreement or be valid for any purpose unless there shall appear on such
Certificate a certificate of authentication substantially in the forms set forth
in Exhibit A, executed by the Owner Trustee or the Owner Trustee's
authenticating agent, by manual signature; such authentication shall constitute
conclusive evidence that such Certificate shall have been duly authenticated and
delivered hereunder. All Certificates shall be dated the date of their
authentication.
Section 3.04. Limitations on Transfer of the Certificates. (a) Each
Prospective Owner of a Book-Entry Certificate other than the Depositor or the
Seller or an affiliate of either of them shall be deemed to have represented and
warranted, and each Prospective Owner of a Definitive Certificate and each
Prospective Owner of a Certificate upon initial issuance shall represent and
warrant in writing, in substantially the form set forth in Exhibit C or Exhibit
D, as applicable, to the Owner Trustee, [the Note Insurer] and the Certificate
Registrar and any of their respective successors that:
(i) Such Person is duly authorized to purchase the
Certificates and its purchase of investments having the characteristics
of the Certificates is authorized under, and not directly or indirectly
in contravention of, any law, charter, trust instrument or other
operative document, investment guidelines or list of permissible or
impermissible investments that is applicable to the investor; and
(ii) Such Person understands that each holder of a
Certificate, by virtue of its acceptance thereof, assents to the terms,
provisions and conditions of the Agreement.
(b) Each Prospective Owner of a Book-Entry Certificate shall be deemed
to have represented and warranted, and each Prospective Owner of a Definitive
Certificate and each Prospective Owner of a Certificate upon initial issuance,
shall represent and warrant in writing, in substantially the form set forth in
Exhibit C or Exhibit D, as applicable, to the Owner Trustee, [the Note Insurer]
and the Certificate Registrar and any of their respective successors that:
(i) Such Person is (A) a qualified institutional buyer (a
"QIB") as defined in Rule 144A under the Securities Act ("Rule 144A")
and is aware that the seller of such Certificate may be relying on the
exemption from the registration requirements of the Securities Act
provided by Rule 144A and is acquiring such Certificate for its own
account or for the account of one or more qualified institutional
buyers for whom it is authorized to act, or (B), in the case of a
Prospective Owner of a Certificate other than the Residual Interest
Certificate, an institutional investor that is an "accredited investor"
(as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act.
(ii) It understands that such Certificates have not been
registered under the Securities Act, and that, if in the future it
decides to offer, resell, pledge or otherwise transfer such
Certificates, such Certificates may be offered, resold, pledged or
otherwise transferred only (A) pursuant to a registration statement
which has been declared effective under the Securities Act, (B) for so
long as such Certificates are eligible for resale pursuant to Rule
144A, to a person whom the seller reasonably believes is a QIB that is
purchasing such Certificates for its own account or for the account of
a QIB to whom notice is given that the transfer is being made in
reliance on Rule 144A, or (C) to an institutional "accredited investor"
within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501
under the Securities Act that is acquiring such Certificates for its
own account or for the account of an institutional "accredited
investor," for investment purposes and not with a view to, or for offer
or sale in connection with, any distribution in violation of the
Securities Act, in each case in compliance with the requirements of the
Trust Agreement.
In the event that a transfer of a Definitive Certificate is to be made
in reliance upon an exemption from the Securities Act and state securities laws,
in order to assure compliance with the Securities Act and such laws, the
prospective transferee shall certify to the Owner Trustee [and the Note Insurer]
in writing the facts surrounding the transfer in substantially the form set
forth in Exhibit C or Exhibit D, as applicable. As a condition to any transfer
pursuant to clause (b)(ii)(C) above, the Owner Trustee, [the Note Insurer] or
the Certificate Registrar may require that the prospective transferee (x)
certify in writing that such transfer is to be made in accordance with Rule 144
under the Securities Act or (y) deliver an Opinion of Counsel satisfactory to
the Owner Trustee, [the Note Insurer] or the Certificate Registrar, as
applicable, to the effect that such transfer will be exempt from registration
under the Securities Act.
The Owner Trustee on behalf of the Depositor (and with the Depositor's
cooperation) shall provide to any Holder of a Certificate and any prospective
transferee designated by any such Holder, information regarding the Certificates
and the Mortgage Loans and such other information as shall be necessary to
satisfy the condition to eligibility set forth in Rule 144A(d)(4) for transfer
of any such Certificate without registration thereof under the Securities Act
pursuant to the registration exemption provided by Rule 144A. Each Holder of a
Definitive Certificate desiring to effect such a transfer shall, and does hereby
agree to, indemnify the Trust, the Owner Trustee, [the Note Insurer] and the
Depositor against any liability that may result if the transfer is not so exempt
or is not made in accordance with federal and state securities laws.
(c) With respect to transfers of ERISA-Restricted Certificates, each
Prospective Owner of a Book-Entry Certificate shall be deemed to have
represented and warranted, and each Prospective Owner of a Definitive
Certificate and each Prospective Owner of a Certificate upon initial issuance
shall represent and warrant in writing, in substantially the form set forth in
Exhibit E, to the Owner Trustee, [the Note Insurer] and the Certificate
Registrar and any of their respective successors that (i) such Prospective Owner
is not, and on the date of transfer of such Certificate will not be, and on such
date will not be investing the funds of, an employee benefit plan subject to
ERISA or a plan subject to Section 4975 of the Code or (ii) such Prospective
Owner is an insurance company investing assets of its general account and the
exemptions provided by Section III(a) of Department of Labor Prohibited
Transaction Class Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) apply to
such Prospective Owner's acquisition and holding of such Certificate. No
transfer of an ERISA-Restricted Certificate that is also a Definitive
Certificate shall be made to any Person unless the Owner Trustee has received a
certificate from the transferee in substantially the form set forth in Exhibit E
to the foregoing effect.
(d) Notwithstanding anything to the contrary herein, no transfer of any
Residual Interest Certificate shall be made to any Person unless the Owner
Trustee has received a certificate (i) from the transferee in substantially the
form set forth in Exhibit D, to the effect that such Person is a QIB and is
aware that the seller of such Certificate may be relying on the exemption from
the registration requirements of the Securities Act provided by Rule 144A and is
acquiring such Certificate for its own account or for the account of one or more
QIBs for whom it is authorized to act or (ii) to the effect that the transferee
is the Depositor or the Seller, or an affiliate (as defined in Rule 405 under
the Securities Act) of the Depositor or the Seller, and in each case stating
that such person understands that such Residual Interest Certificate bears a
legend substantially similar to the legend provided in Exhibit A hereto.
(e) The Owner Trustee shall cause each Certificate to contain a legend,
substantially similar to the applicable legends provided in Exhibit A hereto,
stating that transfer of such Certificate is subject to certain restrictions and
referring prospective purchasers of the Certificates to this Section 3.04 with
respect to such restrictions.
Section 3.05. Registration of Transfer and Exchange of Certificates.
The Certificate Registrar shall keep or cause to be kept, at the office or
agency maintained pursuant to Section 3.09, a Certificate Register in which,
subject to such reasonable regulations as it may prescribe, the Owner Trustee
shall provide for the registration of Certificates and of transfers and
exchanges of Certificates as herein provided. The Administrator is hereby
appointed as the initial Certificate Registrar.
Upon surrender for registration of transfer of any Certificate at the
office or agency maintained pursuant to Section 3.09 and upon satisfaction of
the applicable conditions set forth in Section 3.04, the Owner Trustee shall
execute, authenticate and deliver (or shall cause its authenticating agent to
authenticate and deliver), in the name of the designated transferee or
transferees, one or more new Certificates in authorized denominations of a like
aggregate amount dated the date of authentication by the Owner Trustee or any
authenticating agent. At the option of a Holder, Certificates may be exchanged
for other Certificates of authorized denominations of a like aggregate amount
upon surrender of the Certificates to be exchanged at the office or agency
maintained pursuant to Section 3.09.
Every Certificate presented or surrendered for registration of transfer
or exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Owner Trustee and the Certificate Registrar duly executed by
the Holder or such Holder's attorney duly authorized in writing. Each
Certificate surrendered for registration of transfer or exchange shall be
cancelled and subsequently disposed of by the Owner Trustee in accordance with
its customary practice.
No service charge shall be made for any registration of transfer or
exchange of Certificates, but the Owner Trustee or the Certificate Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer or exchange of Certificates.
Section 3.06. Mutilated, Destroyed, Lost or Stolen Certificates. If (a)
any mutilated Certificate shall be surrendered to the Certificate Registrar, or
if the Certificate Registrar shall receive evidence to its satisfaction of the
destruction, loss or theft of any Certificate and (b) there shall be delivered
to the Certificate Registrar and the Owner Trustee such security or indemnity as
may be required by them to save each of them harmless, then in the absence of
notice that such Certificate has been acquired by a bona fide purchaser , and
upon certification provided by the Holder of such Certificate that the
requirements of Section 8-405 of the Relevant UCC have been met, the Owner
Trustee on behalf of the Trust shall execute and the Owner Trustee or the Owner
Trustee's authenticating agent, shall authenticate and deliver, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new
Certificate of like tenor and denomination. In connection with the issuance of
any new Certificate under this Section, the Owner Trustee or the Certificate
Registrar may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith. Any duplicate
Certificate issued pursuant to this Section shall constitute conclusive evidence
of ownership in the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Certificate shall be found at any time.
Section 3.07. Persons Deemed Owners. Prior to due presentation of a
Certificate for registration of transfer, the Owner Trustee, the Certificate
Registrar or any Paying Agent may treat the Person in whose name any Certificate
is registered in the Certificate Register as the owner of such Certificate for
the purpose of receiving distributions pursuant to Section 5.02 and for all
other purposes whatsoever, and none of the Owner Trustee, the Certificate
Registrar or any Paying Agent shall be bound by any notice to the contrary.
Section 3.08. Access to List of Certificateholders' Names and
Addresses. The Certificate Registrar shall furnish or cause to be furnished to
the Servicer, [the Note Insurer] and the Depositor, within 15 days after receipt
by the Certificate Registrar of a written request therefor from the Servicer,
[the Note Insurer] or the Depositor, a list, in such form as the Servicer or the
Depositor may reasonably require, of the names and addresses of the
Certificateholders as of the most recent Record Date. If three or more
Certificateholders or one or more Holders of Certificates evidencing not less
than 25% of the Voting Interests of the Certificates apply in writing to the
Certificate Registrar, and such application states that the applicants desire to
communicate with other Certificateholders with respect to their rights under
this Agreement or under the Certificates and such application is accompanied by
a copy of the communication that such applicants propose to transmit, then the
Certificate Registrar shall, within five Business Days after the receipt of such
application, afford such applicants access during normal business hours to the
current list of Certificateholders. Each Holder, by receiving and holding a
Certificate, shall be deemed to have agreed not to hold any of the Depositor,
[the Note Insurer] the Certificate Registrar or the Owner Trustee accountable by
reason of the disclosure of its name and address, regardless of the source from
which such information was derived.
Section 3.09. Maintenance of Office or Agency. The Owner Trustee shall
maintain in the Borough of Manhattan, The City of New York, an office or offices
or agency or agencies where Certificates may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Owner Trustee
in respect of the Certificates and the Basic Documents may be served. The Owner
Trustee initially designates the Administrator's office in New York as its
office for such purposes. The Owner Trustee shall give prompt written notice to
the Depositor, [the Note Insurer] and to the Certificateholders of any change in
the location of the Certificate Register or any such office or agency.
Section 3.10. Appointment of Paying Agent. The Paying Agent shall make
distributions to Certificateholders from the Certificate Distribution Account
pursuant to Section 5.02 and shall report the amounts of such distributions to
the Owner Trustee. Any Paying Agent shall have the revocable power to withdraw
funds from the Certificate Distribution Account for the purpose of making the
distributions referred to above. The Owner Trustee may revoke such power and
remove the Paying Agent if the Owner Trustee determines in its sole discretion
that the Paying Agent shall have failed to perform its obligations under this
Agreement in any material respect. The Paying Agent initially shall be the
Administrator (who is hereby appointed as Paying Agent), and any co-paying agent
chosen by the Depositor and acceptable to the Owner Trustee. The Administrator
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Owner Trustee. In the event that the Administrator shall no longer be the Paying
Agent, the Owner Trustee shall promptly appoint a successor to act as Paying
Agent (which shall be a bank or trust company). The Owner Trustee shall cause
such successor Paying Agent or any additional Paying Agent appointed by the
Owner Trustee to execute and deliver to the Owner Trustee an instrument in which
such successor Paying Agent or additional Paying Agent shall agree with the
Owner Trustee that, as Paying Agent, such successor Paying Agent or additional
Paying Agent will hold all sums, if any, held by it for payment to the
Certificateholders in trust for the benefit of the Certificateholders entitled
thereto until such sums shall be paid to such Certificateholders. The Paying
Agent shall return all unclaimed funds to the Owner Trustee and upon removal of
a Paying Agent such Paying Agent shall also return all funds in its possession
to the Owner Trustee. The provisions of Sections 7.01, 7.03, 7.04 and 8.01 shall
apply to the Owner Trustee also in its role as Paying Agent, for so long as the
Owner Trustee shall act as Paying Agent and, to the extent applicable, to any
other paying agent appointed hereunder. Any reference in this Agreement to the
Paying Agent shall include any co-paying agent unless the context requires
otherwise.
Section 3.11. Book-Entry Certificates. Any Book-Entry Certificates
shall be issued in the form of typewritten certificates or global certificates
representing Book-Entry Certificates, to be delivered to, or to the
Administrator as custodian for, The Depository Trust Company, the initial
Clearing Agency, by or on behalf of the Trust. Such Book-Entry Certificate or
Book-Entry Certificates shall initially be registered on the Certificate
Register in the name of Cede & Co., the nominee of the initial Clearing Agency,
and except as provided in Section 3.13, no Certificate Owner will receive a
Definitive Certificate representing such Certificate Owner's interest in such
Book-Entry Certificate. So long as any Book-Entry Certificates are outstanding,
unless and until definitive, fully registered Certificates (the "Definitive
Certificates") have been issued to Certificate Owners pursuant to Section 3.13:
(a) The provisions of this Section shall be in full force and effect;
(b) The Certificate Registrar and the Owner Trustee shall be entitled
to deal with the Clearing Agency for all purposes of this Agreement (including
the payment of principal of and interest on the Book-Entry Certificates and the
giving of instructions or directions hereunder) as the sole Holder of the
Book-Entry Certificates and shall have no obligation to the Certificate Owners;
(c) To the extent that the provisions of this Section conflict with any
other provisions of this Agreement, the provisions of this Section shall
control;
(d) The rights of Certificate Owners shall be exercised only through
the Clearing Agency and shall be limited to those established by law and
agreements between such Certificate Owners and the Clearing Agency and/or the
Clearing Agency Participants. Pursuant to the Certificate Depository Agreement,
unless and until Definitive Certificates are issued pursuant to Section 3.13,
the initial Clearing Agency will make book-entry transfers among the Clearing
Agency Participants and receive and transmit payments of principal of and
interest on the Book-Entry Certificates to such Clearing Agency Participants;
and
(e) Whenever this Agreement requires or permits actions to be taken
based upon instructions or directions of Holders of Book-Entry Certificates
evidencing a specified percentage of the Voting Interests thereof, the Clearing
Agency shall be deemed to represent such percentage only to the extent that it
has received instructions to such effect from Certificate Owners and/or Clearing
Agency Participants owning or representing, respectively, such required
percentage of the beneficial interest in the Book-Entry Certificates and has
delivered such instructions to the Owner Trustee.
Section 3.12. Notices to Clearing Agency. So long as any Book-Entry
Certificates are outstanding, whenever a notice or other communication to a
Certificateholder is required under this Agreement, unless and until Definitive
Certificates shall have been issued to Certificate Owners pursuant to Section
3.13, the Owner Trustee shall give all such notices and communications specified
herein to be given to Certificateholders to the Clearing Agency, and shall have
no obligations to the Certificate Owners.
Section 3.13. Definitive Certificates. So long as any Book-Entry
Certificates are outstanding, if (i) the Clearing Agency is no longer willing or
able to properly discharge its responsibilities with respect to the Book-Entry
Certificates and the Issuer is unable to locate a qualified successor, (ii) the
Issuer at its option advises the Owner Trustee in writing that it elects to
terminate the book-entry system through the Clearing Agency or (iii) after the
occurrence of an Event of Default under the Indenture or an Event of Servicer
Default under the Sale and Servicing Agreement, Certificate Owners representing
beneficial interests aggregating at least a majority of the Voting Rights advise
the Clearing Agency in writing that the continuation of a book-entry system
through the Clearing Agency is no longer in the best interest of the Certificate
Owners, then the Clearing Agency shall notify all Certificate Owners and the
Owner Trustee of the occurrence of any such event and of the availability of the
Definitive Certificates to Certificate Owners requesting the same. Upon
surrender to the Owner Trustee of the typewritten Certificate or Certificates
representing the Book-Entry Certificates by the Clearing Agency, accompanied by
registration instructions, the Owner Trustee shall execute and authenticate the
Definitive Certificates in accordance with the instructions of the Clearing
Agency. Neither the Certificate Registrar nor the Owner Trustee shall be liable
for any delay in delivery of such instructions and may conclusively rely on, and
shall be protected in relying on, such instructions. Upon the issuance of
Definitive Certificates, the Owner Trustee shall recognize the Holders of the
Definitive Certificates as Certificateholders. The Definitive Certificates shall
be issued in definitive, fully registered form and shall be printed,
lithographed or engraved or produced in any other manner as is reasonably
acceptable to the Owner Trustee, as evidenced by its execution thereof.
ARTICLE FOUR
ACTIONS BY OWNER TRUSTEE
Section 4.01. Prior Notice to Owners with Respect to Certain Matters.
(a) With respect to the following matters, the Owner Trustee shall not take
action unless at least 30 days before the taking of such action, the Owner
Trustee shall have notified the Certificateholders [and the Note Insurer] in
writing of the proposed action and [(i) the Note Insurer shall have consented
thereto and (ii)] the Owners shall not have notified the Owner Trustee in
writing prior to the 30th day after such notice is given that such Owners have
withheld consent or, [with the consent of the Note Insurer,] provided
alternative direction:
(i) the initiation of any claim or lawsuit by the Trust
(except claims or lawsuits brought in connection with the collection of
the Mortgage Loans) and the compromise of any action, claim or lawsuit
brought by or against the Trust (except with respect to the
aforementioned claims or lawsuits for collection of the Mortgage
Loans);
(ii) the election by the Trust to file an amendment to the
Certificate of Trust [(unless such amendment is required to be filed
under the Business Trust Statute)];
(iii) the amendment or other change to this Agreement or any
Basic Document;
(iv) the appointment pursuant to the Indenture of a successor
Note Registrar, Paying Agent or Indenture Trustee or pursuant to this
Agreement of a successor Certificate Registrar, or the consent to the
assignment by the Note Registrar, Paying Agent or Indenture Trustee or
Certificate Registrar of its obligations under the Indenture or this
Agreement, as applicable;
(v) the consent to the calling or waiver of any default
of any Basic Document;
(vi) except as provided in Article Nine hereof, the
dissolution, termination or liquidation of the Trust in whole or in
part;
(vii) the merger or consolidation of the Trust with or into
any other entity, or conveyance or transfer of all or substantially all
of the Trust's assets to any other entity;
(viii) causing the Trust to incur, assume or guaranty any
indebtedness other than as set forth in this Agreement;
(ix) doing any act that conflicts with any other Basic
Document;
(x) doing any act which would make it impossible to carry on
the ordinary business of the Trust as described in Section 2.03 hereof;
(xi) the confession of a judgment against the Trust;
(xii) the possession of Trust assets, or assignment of the
Trust's right to property, for other than a Trust purpose;
(xiii) causing the Trust to lend any funds to any entity; or
(xiv) the change of the Trust's purpose and powers from those
set forth in this Trust Agreement.
(b) The Owner Trustee on behalf of the Trust agrees to abide by the
following restrictions:
(i) other than as contemplated by the Basic Documents
and related documentation, the Trust shall not incur any indebtedness;
(ii) other than as contemplated by the Basic Documents and
related documentation, the Trust shall not engage in any dissolution,
liquidation, consolidation, merger or sale of assets;
(iii) the Trust shall not engage in any business activity in
which it is not currently engaged other than as contemplated by the
Basic Documents and related documentation;
(iv) the Trust shall not form, or cause to be formed, any
subsidiaries and shall not own or acquire any asset other than as
contemplated by the Basic Documents and related documentation; and
(v) other than as contemplated by the Basic Documents and
related documentation, the Trust shall not follow the directions or
instructions of the Depositor.
(c) The Owner Trustee on behalf of the Trust shall:
(i) maintain books and records separate from any other
person or entity;
(ii) maintain its office and bank accounts separate from any
other person or entity;
(iii) not commingle its assets with those of any other person
or entity;
(iv) conduct its own business in its own name;
(v) other than as contemplated by the Basic Documents and
related documentation, pay its own liabilities and expenses only out of
its own funds;
(vi) [observe all formalities required under the Business
Trust Statute];
(vii) not guarantee or become obligated for the debts of any
other person or entity;
(viii) not hold out its credit as being available to satisfy
the obligation of any other person or entity;
(ix) not acquire the obligations or securities of its
Affiliates or the Seller;
(x) other than as contemplated by the Basic Documents and
related documentation, not make loans to any other person or entity or
buy or hold evidence of indebtedness issued by any other person or
entity;
(xi) other than as contemplated by the Basic Documents and
related documentation, not pledge its assets for the benefit of any
other person or entity;
(xii) hold itself out as a separate entity from the Depositor
and not conduct any business in the name of the Depositor;
(xiii) correct any known misunderstanding regarding its
separate identity; and
(xiv) not identify itself as a division of any other person or
entity.
So long as the Notes or any other amounts owed under the Indenture
remain outstanding, the Trust shall not amend this Section 4.01 without the
prior written consent of [the Note Insurer and] 100% of the Voting Interests of
the Notes and the consent of each Rating Agency, in addition to the requirements
under Section 11.01.
(d) The Owner Trustee shall not have the power, except upon the
direction of the Owners [and the Note Insurer] and, subject to Section 11.18 of
the Indenture, 100% of the Noteholders, and to the extent otherwise consistent
with the Basic Documents, to (i) remove or replace the Servicer or the Indenture
Trustee.
Section 4.02. Action by Owners with Respect to Certain Matters. The
Owner Trustee shall not have the power, except upon the direction of the Owners
[and the Note Insurer], to (a) remove the Administrator under the Administration
Agreement pursuant to Section 8 thereof, (b) appoint a successor Administrator
pursuant to Section 8 of the Administration Agreement, (c) remove the Servicer
under the Sale and Servicing Agreement pursuant to Section 7.01 thereof, or (d)
except as expressly provided in the Basic Documents, sell the Mortgage Loans
after the termination of the Indenture. The Owner Trustee shall take the actions
referred to in the preceding sentence only upon written instructions signed by
the Owners [and the Note Insurer], but only to the extent expressly permitted in
the Basic Documents.
Section 4.03. Action with Respect to Bankruptcy.
(a) The Trust shall not, without prior written consent of the Owner
Trustee, (i) institute any proceedings to adjudicate the Trust a bankrupt or
insolvent, (ii) consent to the institution of bankruptcy or insolvency
proceedings against the Trust, (iii) file a petition seeking or consenting to
reorganization or relief under any applicable federal or state law relating to
bankruptcy with respect to the Trust, (iv) consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trust or a substantial part of its property, (v) make any
assignment for the benefit of the Trust's creditors; (vi) cause the Trust to
admit in writing its inability to pay its debts generally as they become due; or
(vii) take any action in furtherance of any of the foregoing (any of the above
foregoing actions, a "Bankruptcy Action"). In considering any Bankruptcy Action,
the Owner Trustee, with consent of the Certificateholders (which consent the
Certificateholders believe to be the best interest of Certificateholders and the
Trust), shall at all times consider the interests of creditors of the Trust in
addition to the interests of the Trusts and whether the Trust is insolvent. The
Owner Trustee shall not be liable to any Certificateholder on account of the
Owner Trustee's good faith reliance on the provisions of this Section and no
Certificateholder shall have any claim for breach of fiduciary duty or otherwise
against the Owner Trustee for failing to take any Bankruptcy Action.
(b) No Certificateholder has power to commence any Bankruptcy Action on
the part of the Trust or to direct the Owner Trustee to take any Bankruptcy
Action on the part of the Trust. To the extent permitted by applicable law, the
consent of [the Note Insurer and] the Indenture Trustee shall be obtained prior
to taking any Bankruptcy Action.
(c) The provisions of this Section do not constitute an acknowledgment
or admission by the Owner Trustee, any Certificateholder or any creditor of the
Trust that the Trust is eligible to be a debtor under the United States
Bankruptcy Code, 11 U.S.C. ss.ss. 101 et seq., as amended.
Section 4.04. Restrictions on Owners' Power. The Owners shall not
direct the Owner Trustee to take or to refrain from taking any action if such
action or inaction would be contrary to any obligation of the Trust or the Owner
Trustee under this Agreement or any of the Basic Documents or would be contrary
to Section 2.03, nor shall the Owner Trustee be obligated to follow any such
direction, if given.
Section 4.05. Majority Control. Except as expressly provided herein,
any action that may be taken by the Owners under this Agreement may be taken by
the Holders of Certificates evidencing not less than a majority of the Aggregate
Voting Interests of all of the Certificates. Except as expressly provided
herein, any written notice of the Owners delivered pursuant to this Agreement
shall be effective if signed by Holders of Certificates evidencing not less than
a majority of the Aggregate Voting Interests of all of the Certificates at the
time of the delivery of such notice.
ARTICLE FIVE
APPLICATION OF TRUST FUNDS; CERTAIN DUTIES
Section 5.01. Certificate Distribution Account. All of the right, title
and interest of the Trust in all funds on deposit from time to time in the
Certificate Distribution Account and in all proceeds thereof shall be held for
the benefit of the Owners and such other persons entitled to distributions
therefrom. Except as otherwise expressly provided herein or in the Sale and
Servicing Agreement, the Certificate Distribution Account shall be under the
sole dominion and control of the Trust for the benefit of the Owners.
The Certificate Distribution Account shall be subject to and
established and maintained in accordance with the applicable provisions of the
Sale and Servicing Agreement, including, without limitation, the provisions of
Sections 6.01, 6.02 and 6.05 thereof.
Section 5.02. Application of Trust Funds. (a) On each Distribution
Date, the Paying Agent shall distribute to the Certificateholders from amounts
on deposit in the Certificate Distribution Account the distributions provided in
Section 6.05 of the Sale and Servicing Agreement with respect to such
Distribution Date. All distributions of interest or principal on any Class of
Certificates other than the Residual Interest Certificates, and all
distributions of amounts due on or in respect of the Residual Interest
Certificates, shall be made pro rata to the Certificateholders of such Class
entitled thereto.
(b) On each Distribution Date, the Indenture Trustee shall send or
cause the Trust to send to each Certificateholder the statement or statements
provided to the Trust by the Servicer pursuant to Section 5.19 of the Sale and
Servicing Agreement with respect to such Distribution Date.
(c) In the event that any withholding tax is imposed on the Trust's
payment (or allocations of income) to an Owner, such tax shall reduce the amount
otherwise distributable to the Owner in accordance with this Section. The Trust
is hereby authorized and directed to direct the Paying Agent to retain from
amounts otherwise distributable to the Owners sufficient funds for the payment
of any tax that is legally owed by the Trust (but such authorization shall not
prevent the Trust from contesting any such tax in appropriate proceedings and
withholding payment of such tax, if permitted by law, pending the outcome of
such proceedings). The amount of any withholding tax imposed with respect to an
Owner shall be treated as cash distributed to such Owner at the time it is
withheld by the Trust and remitted to the appropriate taxing authority. If the
amount withheld was not withheld from actual distributions, the Trust may, at
its option, (i) require the Owner to reimburse the Trust for such withholding
(and each Owner agrees to reimburse the Trust promptly following such request)
or (ii) reduce any subsequent distributions by the amount of such withholding.
If there is a possibility that withholding tax is payable with respect to a
distribution (such as a distribution to a non-U.S. Owner), the Trust may in its
sole discretion direct the Paying Agent to withhold such amounts in accordance
with this paragraph (c). In the event that an Owner wishes to apply for a refund
of any such withholding tax, the Trust shall reasonably cooperate with such
Owner in making such claim so long as such Owner agrees to reimburse the Owner
Trustee for any out-of-pocket expenses incurred.
Section 5.03. Method of Payment. Subject to Section 9.01(d),
distributions required to be made to Certificateholders on any Distribution Date
shall be made to each Certificateholder of record on the preceding Record Date
either by wire transfer, in immediately available funds, to the account of such
Holder at a bank or other entity having appropriate facilities therefor, if such
Certificateholder shall have provided to the Certificate Registrar appropriate
written instructions at least five Business Days prior to such Distribution
Date, or, if not, by check mailed to such Certificateholder at the address of
such holder appearing in the Certificate Register; provided, that, a
Certificateholder shall only be entitled to receive distributions by wire
transfer if such Certificateholder is the registered Holder of Certificates
having an initial aggregate principal amount equal to or in excess of $5,000,000
or a Percentage Interest equal to or in excess of 25%, and in all other cases by
check mailed to each such Certificateholder at such Holder's address appearing
in the Certificate Register.
Section 5.04. Segregation of Moneys; No Interest. Subject to Sections
5.01 and 5.02, moneys received by the Owner Trustee hereunder and deposited in
the Certificate Distribution Account will be segregated and shall be invested in
Permitted Investments at the direction of the Depositor. The Owner Trustee shall
not be liable for payment of any interest in respect of such moneys.
Section 5.05. Tax Administration. The Owner Trustee, upon instruction
from the Depositor, shall sign on behalf of the Trust the tax returns of the
Trust, including Internal Revenue Service Form 1041 as required for a grantor
trust, unless applicable law requires an Owner to sign such documents, in which
case such documents shall be signed by the Residual Interestholders. In
addition, the Owner Trustee shall deliver or shall cause to be delivered to the
Residual Interestholders such information, reports or statements as may be
required by the Code and applicable Treasury Regulations and as may be required
to enable the Residual Interestholders to prepare their federal and state income
tax returns. Consistent with the Trust's characterization for tax purposes as a
grantor trust, no federal income tax return shall be filed on behalf of the
Trust unless either (i) the Owner Trustee shall receive an Opinion of Counsel
that, based on a change in applicable law occurring after the date hereof, the
Code requires such a filing or (ii) the Internal Revenue Service shall determine
that the Trust is required to file such a return. In the event that the Trust is
required to file tax returns and applicable law requires an Owner to sign such
documents, the Owner Trustee shall prepare or shall cause to be prepared any tax
returns required to be filed by the Trust and shall remit such returns to the
Residual Interestholders (or if the Residual Interestholders no longer
beneficially own the Trust, the beneficial owner designated for such purpose by
the Residual Interestholders to the Owner Trustee in writing) at least five days
before such returns are due to be filed. The Residual Interestholders (or such
designee beneficial owner, as applicable) shall promptly sign such returns and
deliver such returns after signature to the Owner Trustee and the Owner Trustee
shall file or shall cause to have filed such returns with the appropriate tax
authorities. In no event shall the Owner Trustee or the Residual Interestholders
(or such designee beneficial owner, as applicable) be liable for any
liabilities, costs or expenses of the Trust or the Noteholders arising out of
the application of any tax law, including federal, state, foreign or local
income or excise taxes or any other tax imposed on or measured by income (or any
interest, penalty or addition with respect thereto or arising from a failure to
comply therewith) except for any such liability, cost or expense attributable to
any act or omission by the Owner Trustee or the Residual Interestholders (or
such designee owner, as applicable), as the case may be, in breach of its
obligations under this Agreement.
ARTICLE SIX
AUTHORITY AND DUTIES OF OWNER TRUSTEE
Section 6.01. General Authority. The Owner Trustee is authorized and
directed to execute and deliver or cause to be executed and delivered the Notes,
the Certificates and the Basic Documents to which the Trust is to be a party and
each certificate or other document attached as an exhibit to or contemplated by
the Basic Documents to which the Trust is to be a party and any amendment or
other agreement or instrument described in Article Three, in each case, in such
form as the Depositor shall approve, as evidenced conclusively by the Owner
Trustee's execution thereof, and, on behalf of the Trust, to direct the
Indenture Trustee to authenticate and deliver the Notes. In addition to the
foregoing, the Owner Trustee is authorized, but shall not be obligated, to take
all actions required of the Trust pursuant to the Basic Documents. The Owner
Trustee is further authorized from time to time to take such action as the
Administrator recommends with respect to the Basic Documents, provided that such
activities are consistent with the terms of the Basic Documents.
Section 6.02. General Duties. It shall be the duty of the Owner
Trustee:
(a) to discharge (or cause to be discharged) all of its
responsibilities pursuant to the terms of this Agreement and the Basic Documents
to which the Trust is a party and to administer the Trust in the interest of the
Owners, subject to the Basic Documents and in accordance with the provisions of
this Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed
to have discharged its duties and responsibilities hereunder and under the Basic
Documents to the extent the Administrator has agreed in the Administration
Agreement to perform any act or to discharge any duty of the Owner Trustee or
the Trust hereunder or under any Basic Document, and the Owner Trustee shall not
be held liable for the default or failure of the Administrator to carry out its
obligations under the Administration Agreement; and
(b) to cooperate with the Depositor in obtaining and preserving (or
causing to be obtained and preserved) the Issuer's qualification to do business
in each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of the Indenture, the Notes the
Collateral and each other instrument and agreement included in the Trust Estate;
provided, however, that the Owner Trustee shall have no obligation to determine
whether and to what extent such qualification shall be necessary; and provided,
further, that the Owner Trustee shall only be required to take action under this
Section 6.02(b) if authorized and directed in writing to do so by the Depositor.
Section 6.03. Action upon Instruction. (a) Subject to this Agreement
and in accordance with the terms of the Basic Documents, the Owners may by
written instruction direct the Owner Trustee in the management of the Trust but
only to the extent consistent with the limited purpose of the Trust. Such
direction may be exercised at any time by written instruction of the Owners
pursuant to Article Four.
(b) The Owner Trustee shall not be required to take any action
hereunder or under any Basic Document if the Owner Trustee shall have reasonably
determined, or shall have been advised by counsel, that such action is likely to
result in liability on the part of the Owner Trustee or is contrary to the terms
hereof or of any Basic Document or is otherwise contrary to law.
(c) Whenever the Owner Trustee is unable to decide between alternative
courses of action permitted or required by the terms of this Agreement or under
any Basic Document, the Owner Trustee shall promptly give notice (in such form
as shall be appropriate under the circumstances) to the Owners [and the Note
Insurer] requesting instruction as to the course of action to be adopted, and to
the extent the Owner Trustee acts in good faith in accordance with any written
instruction of the Owners, [with the prior written consent of the Note Insurer,]
the Owner Trustee shall not be liable on account of such action to any Person.
If the Owner Trustee shall not have received appropriate instruction within 10
days of such notice (or within such shorter period of time as reasonably may be
specified in such notice or may be necessary under the circumstances) it may,
but shall be under no duty to, take or refrain from taking such action not
inconsistent with this Agreement or the Basic Documents, as it shall deem to be
in the best interests of the Owners, and, subject to Section 7.01, shall have no
liability to any Person for such action or inaction.
(d) In the event that the Owner Trustee is unsure as to the application
of any provision of this Agreement or any Basic Document or any such provision
is ambiguous as to its application, or is, or appears to be, in conflict with
any other applicable provision, or in the event that this Agreement permits any
determination by the Owner Trustee or is silent or is incomplete as to the
course of action that the Owner Trustee is required to take with respect to a
particular set of facts, the Owner Trustee may give notice (in such form as
shall be appropriate under the circumstances) to the Owners [and the Note
Insurer] requesting instruction and, to the extent that the Owner Trustee acts
or refrains from acting in good faith in accordance with any such instruction
received from [the Note Insurer or, with the prior consent of the Note Insurer,]
the Owners, the Owner Trustee shall not be liable, on account of such action or
inaction, to any Person. If the Owner Trustee shall not have received
appropriate instruction within 10 days of such notice (or within such shorter
period of time as reasonably may be specified in such notice or may be necessary
under the circumstances) it may, but shall be under no duty to, take or refrain
from taking such action not inconsistent with this Agreement or the Basic
Documents, as it shall deem to be in the best interests of the Owners, and,
subject to Section 7.01, shall have no liability to any Person for such action
or inaction.
Section 6.04. No Duties Except as Specified in this Agreement or in
Instructions. The Owner Trustee shall not have any duty or obligation to manage,
make any payment with respect to, register, record, sell, dispose of, or
otherwise deal with the Trust Estate, or to otherwise take or refrain from
taking any action under, or in connection with, any document contemplated hereby
to which the Owner Trustee is a party, except as expressly provided by the terms
of this Agreement, any Basic Document or in any document or written instruction
received by the Owner Trustee pursuant to Section 6.03; and no implied duties or
obligations shall be read into this Agreement or any Basic Document against the
Owner Trustee. The Owner Trustee shall have no responsibility for filing any
financing or continuation statement in any public office at any time or to
otherwise perfect or maintain the perfection of any security interest or lien
granted to it hereunder or to record this Agreement or any Basic Document. The
Owner Trustee nevertheless agrees that it will, at its own cost and expense,
promptly take all action as may be necessary to discharge any liens on any part
of the Trust Estate that result from actions by, or claims against, the Owner
Trustee solely in its individual capacity that are not related to the ownership
or the administration of the Trust Estate.
Section 6.05. No Action Except Under Specified Documents or
Instructions. The Owner Trustee shall not manage, control, use, sell, dispose of
or otherwise deal with any part of the Trust Estate except (i) in accordance
with the powers granted to and the authority conferred upon the Owner Trustee
pursuant to this Agreement, (ii) in accordance with the Basic Documents and
(iii) in accordance with any document or instruction delivered to the Owner
Trustee pursuant to Section 6.03.
Section 6.06. Restrictions. The Owner Trustee shall not take any action
(a) that is inconsistent with the purposes of the Trust set forth in Section
2.03 or (b) that, to the actual knowledge of the Owner Trustee, would result in
the Trust's becoming taxable as a corporation for federal income tax purposes.
The Owners shall not direct the Owner Trustee to take action that would violate
the provisions of this Section.
ARTICLE SEVEN
CONCERNING THE OWNER TRUSTEE
Section 7.01. Acceptance of Trusts and Duties. The Owner Trustee
accepts the trusts hereby created and agrees to perform its duties hereunder
with respect to such trusts, but only upon the terms of this Agreement and the
Basic Documents. The Owner Trustee also agrees to disburse all moneys actually
received by it constituting part of the Trust Estate upon the terms of the Basic
Documents and this Agreement. The Owner Trustee, in its capacity as Owner
Trustee, shall not be answerable or accountable hereunder or under any Basic
Document under any circumstances, except (i) for its own willful misconduct,
negligence or bad faith or (ii) in the case of the inaccuracy of any
representation or warranty contained in Section 7.03 expressly made by the Owner
Trustee in its individual capacity. In particular, but not by way of limitation
(and subject to the exceptions set forth in the preceding sentence):
(a) The Owner Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer of the Owner Trustee;
(b) The Owner Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in accordance with the instructions of the
Administrator or any Owner;
(c) No provision of this Agreement or any Basic Document shall require
the Owner Trustee to expend or risk funds or otherwise incur any financial
liability in the performance of any of its rights or powers hereunder or under
any Basic Document if the Owner Trustee shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured or provided to it;
(d) Under no circumstances shall the Owner Trustee be liable for
indebtedness evidenced by or arising under any of the Basic Documents, including
the principal of and interest on the Notes;
(e) The Owner Trustee shall not be responsible for or in respect of the
validity or sufficiency of this Agreement or for the due execution hereof by the
Depositor, for the form, character, genuineness, sufficiency, value or validity
of any of the Trust Estate, or for or in respect of the validity or sufficiency
of the Basic Documents, other than the certificate of authentication on the
Certificates, and the Owner Trustee shall in no event assume or incur any
liability, duty or obligation to any Noteholder or to any Owner, other than as
expressly provided for herein or expressly agreed to in the Basic Documents;
(f) The Owner Trustee shall not be liable for the default or misconduct
of the Administrator, the Servicer, the Depositor or the Indenture Trustee under
any of the Basic Documents or otherwise, and the Owner Trustee shall have no
obligation or liability to perform the obligations of the Trust under this
Agreement or the Basic Documents that are required to be performed by the
Administrator under the Administration Agreement, the Indenture Trustee under
the Indenture or the Seller, the Depositor, the Servicer or the Indenture
Trustee under the Sale and Servicing Agreement; and
(g) The Owner Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Agreement, or to institute, conduct or
defend any litigation under this Agreement or otherwise or in relation to this
Agreement or any Basic Document, at the request, order or direction of any of
the Owners, unless such Owners have offered to the Owner Trustee reasonable
security or indemnity satisfactory to it against the costs, expenses and
liabilities that may be incurred by the Owner Trustee therein or thereby
(provided, that if an Owner is an institutional investor with a rating of at
least investment grade from a nationally recognized statistical rating
organization (or nominee of such institutional investor), the unsecured
agreement of indemnity of such institutional investor shall be deemed
satisfactory for such purpose). The right of the Owner Trustee to perform any
discretionary act enumerated in this Agreement or in any Basic Document shall
not be construed as a duty, and the Owner Trustee shall not be answerable for
other than its negligence, bad faith or willful misconduct in the performance of
any such act.
Section 7.02. Furnishing of Documents. The Owner Trustee shall furnish
to the Owners [and the Note Insurer] promptly upon receipt of a written request
therefor, duplicates or copies of all reports, notices, requests, demands,
certificates, financial statements and any other instruments furnished to the
Owner Trustee under the Basic Documents.
Section 7.03. Representations and Warranties. (a) The Owner Trustee
hereby represents and warrants to the Depositor and the Note Insurer, for the
benefit of the Owners, that:
(i) The Owner Trustee is a banking corporation duly organized
and validly existing in good standing under the laws of the State of [
] [United States of America]. It has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement.
(ii) The Owner Trustee has taken all corporate action
necessary to authorize the execution and delivery by it of this
Agreement, and this Agreement will be executed and delivered by one of
its officers who is duly authorized to execute and deliver this
Agreement on its behalf.
(iii) Neither the execution or the delivery by it of this
Agreement, nor the consummation by it of the transactions contemplated
hereby, nor compliance by it with any of the terms or provisions hereof
will contravene any federal or [ ] law, governmental rule or regulation
governing the banking or trust powers of the Owner Trustee or any
judgment or order binding on it, or constitute any default under its
charter documents or bylaws or any indenture, mortgage, contract,
agreement or instrument to which it is a party or by which any of its
properties may be bound.
(iv) The execution, delivery, authentication and performance
by it of this Agreement will not require the authorization, consent or
approval of, the giving of notice to, the filing or registration with,
or the taking of any other action with respect to, any governmental
authority or agency.
(v) This Agreement, assuming due authorization, execution and
delivery by the Depositor, constitutes a valid, legal and binding
obligation of the Owner Trustee, enforceable against it in accordance
with the terms hereof subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the enforcement of
creditors' rights generally and to general principles of equity,
regardless of whether such enforcement is considered in a proceeding in
equity or at law.
(vi) The Owner Trustee is not in default with respect to any
order or decree of any court or any order, regulation or demand of any
federal, state, municipal or governmental agency, which default might
have consequences that would materially and adversely affect the
condition (financial or other) or operations of the Owner Trustee or
its properties or might have consequences that would materially
adversely affect its performance hereunder.
(vii) No litigation is pending or, to the best of the Owner
Trustee's knowledge, threatened against the Owner Trustee which would
prohibit its entering into this Agreement or performing its obligations
under this Agreement.
Section 7.04. Reliance; Advice of Counsel. (a) Except as provided in
Section 7.01, the Owner Trustee shall incur no liability to anyone in acting
upon any signature, instrument, notice, resolution, request, consent, order,
certificate, report, opinion, bond, or other document or paper believed by it to
be genuine and believed by it to be signed by the proper party or parties. The
Owner Trustee may accept a certified copy of a resolution of the board of
directors or other governing body of any corporate party as conclusive evidence
that such resolution has been duly adopted by such body and that the same is in
full force and effect. As to any fact or matter the method of determination of
which is not specifically prescribed herein, the Owner Trustee may for all
purposes hereof rely on a certificate, signed by the president or any vice
president or by the treasurer or other authorized officers of the relevant
party, as to such fact or matter, and such certificate shall constitute full
protection to the Owner Trustee for any action taken or omitted to be taken by
it in good faith in reliance thereon.
(b) In the exercise or administration of the trusts hereunder and in
the performance of its duties and obligations under this Agreement or the Basic
Documents, the Owner Trustee (i) may act directly or through its agents or
attorneys pursuant to agreements entered into with any of them, and the Owner
Trustee shall not be liable for the conduct or misconduct of such agents or
attorneys if such agents or attorneys shall have been selected by the Owner
Trustee with reasonable care, and (ii) may consult with counsel, accountants and
other skilled Persons to be selected with reasonable care and employed by it.
Except as provided in Section 7.01, the Owner Trustee shall not be liable for
anything done, suffered or omitted in good faith by it in accordance with the
written opinion or advice of any such counsel, accountants or other such Persons
and not contrary to this Agreement or any Basic Document.
Section 7.05. Not Acting in Individual Capacity. Except as provided in
this Agreement, in accepting the trusts hereby created [ ] acts solely as Owner
Trustee hereunder and not in its individual capacity, and all Persons having any
claim against the Owner Trustee by reason of the transactions contemplated by
this Agreement or any Basic Document shall look only to the Trust Estate for
payment or satisfaction thereof.
Section 7.06. Owner Trustee Not Liable for Certificates or Mortgage
Loans. The recitals contained herein and in the Certificates (other than the
signature and countersignature of the Owner Trustee on the Certificates) shall
be taken as the statement of the Depositor, and the Owner Trustee assumes no
responsibility for the correctness thereof. The Owner Trustee makes no
representations as to the validity or sufficiency of this Agreement, of any
Basic Document or of the Certificates (other than the signature and
countersignature of the Owner Trustee on the Certificates and as specified in
Section 7.03) or the Notes, or of the Mortgage Loans or related documents. The
Owner Trustee shall at no time have any liability for or with respect to the
legality, validity and enforceability of any Collateral or the perfection and
priority of any security interest created by any Collateral or the maintenance
of any such perfection and priority, or for or with respect to the sufficiency
of the Trust Estate or its ability to generate the payments to be distributed to
Certificateholders under this Agreement or the Noteholders under the Indenture,
including, without limitation: the existence, condition and ownership of any
Collateral; the existence and enforceability of any insurance thereon; the
existence and contents of any Collateral on any computer or other record
thereof; the validity of the assignment of any Collateral to the Trust or of any
intervening assignment; the performance or enforcement of any Collateral; the
compliance by the Depositor or the Servicer with any warranty or representation
made under any Basic Document or in any related document or the accuracy of any
such warranty or representation, or any action of the Administrator, the
Indenture Trustee, the Servicer or any subservicer taken in the name of the
Owner Trustee.
Section 7.07. Owner Trustee May Own Certificates and Notes. The Owner
Trustee in its individual or any other capacity may become the owner or pledgee
of Certificates or Notes and may deal with the Depositor, the Administrator, the
Indenture Trustee and the Servicer in banking transactions with the same rights
as it would have if it were not Owner Trustee.
Section 7.08. Doing Business in Other Jurisdictions. Notwithstanding
anything contained herein to the contrary, [ ] shall not be required to take any
action in any jurisdiction other than in the State of [ ] if the taking of such
action will (i) require the consent or approval or authorization or order of or
the giving of notice to, or the registration with or the taking of any other
action in respect of, any state or other governmental authority or agency of any
jurisdiction other than the State of [ ]; (ii) result in any fee, tax or other
governmental charge under the laws of any jurisdiction or any political
subdivisions thereof in existence on the date hereof other than the State of [ ]
becoming payable by [ ]; or (iii) subject [ ] to personal jurisdiction in any
jurisdiction other than the State of [ ] for causes of action arising from acts
unrelated to the consummation of the transactions by [ ] contemplated hereby.
The Owner Trustee shall be entitled to obtain advice of counsel to determine
whether any action required to be taken pursuant to the Agreement results in the
consequences described in clauses (i), (ii) and (iii) of the preceding sentence.
In the event that said counsel advises the Owner Trustee that such action will
result in such consequences, the Owner Trustee will appoint an additional
trustee pursuant to Section 10.05 to proceed with such action.
Section 7.09. Licenses. The Owner Trustee shall cooperate with the
Depositor in causing the Trust to use its best efforts to obtain and maintain
the effectiveness of any licenses required in connection with this Agreement and
the Basic Documents and the transactions contemplated hereby and thereby until
such time as the Trust shall terminate in accordance with the terms hereof;
provided, however, that the Owner Trustee shall have no obligation to determine
whether and to what extent such licensing shall be necessary; and provided,
further, that the Owner Trustee shall only be required to take action under this
Section 7.09 if authorized and directed in writing to do so by the Depositor.
Section 7.10. Liability of Certificate Registrar and Paying Agent. All
provisions affording protection to or limiting the liability of the Owner
Trustee shall inure as well to the Certificate Registrar and Paying Agent.
ARTICLE EIGHT
COMPENSATION OF OWNER TRUSTEE
Section 8.01. Owner Trustee's Fees and Expenses. The Owner Trustee
shall receive as compensation for its services hereunder such fees as are set
forth in the Fee Letter Agreement between the Seller and the Owner Trustee
attached hereto as Exhibit F, and the Owner Trustee shall be entitled to be
reimbursed for such fees and expenses as are set forth in the Fee Letter
Agreement as provided in the Sale and Servicing Agreement.
Section 8.02. Indemnification. The Seller shall be liable as primary
obligor for, and shall indemnify the Owner Trustee and its successors, assigns,
agents and servants (collectively, the "Indemnified Parties") from and against,
any and all liabilities, obligations, losses, damages, taxes, claims, actions
and suits, and any and all reasonable costs, expenses and disbursements
(including reasonable legal fees and expenses) of any kind and nature whatsoever
(collectively, "Expenses") which may at any time be imposed on, incurred by, or
asserted against the Owner Trustee or any Indemnified Party in any way relating
to or arising out of this Agreement, the Basic Documents, the Trust Estate, the
administration of the Trust Estate or the action or inaction of the Owner
Trustee hereunder, except only that the Seller shall not be liable for or
required to indemnify an Indemnified Party from and against Expenses arising or
resulting from any of the matters described in the third sentence of Section
7.01, (ii) with respect to any such claim, the Indemnified Party shall have
given the Seller written notice thereof, (iii) while maintaining control over
its own defense, the Seller shall consult with the Indemnified Party in
preparing such defense, and (iv) notwithstanding anything in this Agreement to
the contrary, the Seller shall not be liable for settlement of any claim by an
Indemnified Party entered into without the prior consent of the Seller which
consent shall not be reasonably withheld. The indemnities contained in this
Section shall survive the resignation or termination of the Owner Trustee or the
termination of this Agreement. In any event of any claim, action or proceeding
for which indemnity will be sought pursuant to this Section, the Owner Trustee's
choice of legal counsel shall be subject to the approval of the Seller, which
approval shall not be unreasonably withheld. In addition, upon written notice to
the Owner Trustee and with the consent of the Owner Trustee, which consent shall
not be unreasonably withheld, the Seller has the right to assume the defense of
any claim, action or proceeding against the Owner Trustee; provided, however,
that the Seller shall not be entitled to assume the defense of any such claim,
action or proceeding if such claim, action or proceeding involves a possible
imposition of criminal liability or penalty or a material civil penalty on the
Owner Trustee, a conflict of interest between the Owner Trustee and the Seller
or another indemnitee or the granting of material injunctive relief against such
indemnitee, and the Owner Trustee informs the Seller that it desires to be
represented by separate counsel, in which case the reasonable fees and expenses
of such separate counsel shall be borne by the Seller.
Section 8.03. Payments to the Owner Trustee. Any amounts paid to the
Owner Trustee pursuant to this Article Eight shall be deemed not to be a part of
the Trust Estate immediately after such payment.
ARTICLE NINE
TERMINATION OF TRUST AGREEMENT
Section 9.01. Termination of Trust Agreement. (a) This Agreement (other
than Article Eight) shall terminate and the Trust shall dissolve, wind up and
terminate and be of no further force or effect upon the earlier of (i) the final
distribution by the Owner Trustee of all moneys or other property or proceeds of
the Trust Estate in accordance with the terms of the Indenture, the Sale and
Servicing Agreement and Article Five and the termination of the Indenture [and
the Insurance Agreement]; and (ii) the expiration of 21 years from the death of
the last survivor of the descendants of Joseph P. Kennedy (the late ambassador
of the United States to the Court of St. James's). The bankruptcy, liquidation,
dissolution, death or incapacity of any Owner shall not (x) operate to terminate
this Agreement or the Trust, (y) entitle such Owner's legal representatives or
heirs to claim an accounting or to take any action or proceeding in any court
for a partition or winding up of all or any part of the Trust or Trust Estate or
(z) otherwise affect the rights, obligations and liabilities of the parties
hereto.
(b) The Certificates shall be subject to early termination at the
option of the Majority Residual Interestholders in the manner and subject to the
provisions of Section 8.01 of the Sale and Servicing Agreement.
(c) Except as provided in Sections 9.01(a) and (b), none of the
Depositor or any Owner shall be entitled to revoke or terminate the Trust.
(d) Notice of any termination of the Trust, specifying the Distribution
Date upon which Certificateholders shall surrender their Certificates to the
Paying Agent for payment of the final distribution and cancellation, shall be
given by the Owner Trustee by letter to Certificateholders [and the Note
Insurer] mailed within five Business Days of receipt of notice of such
termination from the Majority Residual Interestholders, given pursuant to
Section 8.01 of the Sale and Servicing Agreement, stating (i) the Distribution
Date upon or with respect to which final payment of the Certificates shall be
made upon presentation and surrender of the Certificates at the office of the
Paying Agent therein designated, (ii) the amount of any such final payment and
(iii) that the Record Date otherwise applicable to such Distribution Date is not
applicable, payments being made only upon presentation and surrender of the
Certificates at the office of the Paying Agent therein specified. The Owner
Trustee shall give such notice to the Certificate Registrar (if other than the
Owner Trustee) and the Paying Agent at the time such notice is given to
Certificateholders. Upon presentation and surrender of the Certificates, the
Paying Agent shall cause to be distributed to Certificateholders amounts
distributable on such Distribution Date pursuant to Section 6.05 of the Sale and
Servicing Agreement.
In the event that all of the Certificateholders shall not have
surrendered their Certificates for cancellation within six months after the date
specified in the above mentioned written notice, the Owner Trustee shall give a
second written notice to the remaining Certificateholders to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Certificates shall
not have been surrendered for cancellation, the Owner Trustee may take
appropriate steps, or may appoint an agent to take appropriate steps, to contact
the remaining Certificateholders concerning surrender of their Certificates, and
the cost thereof shall be paid out of the funds and other assets that shall
remain subject to this Agreement. Subject to applicable escheat laws, any funds
remaining in the Trust after exhaustion of such remedies shall be distributed by
the Owner Trustee to the Residual Interestholders on a pro rata basis.
(e) Upon the winding up of the Trust and its termination, the Owner
Trustee shall cause the Certificate of Trust to be cancelled by filing a
certificate of cancellation with the Secretary of State [in accordance with the
provisions of Section 3810(d) of the Business Trust Statute].
ARTICLE TEN
SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES
Section 10.01. Eligibility Requirements for Owner Trustee. The Owner
Trustee shall at all times be [a corporation satisfying the provisions of
Section 3807(a) of the Business Trust Statute] [and] [reasonably acceptable to
the Note Insurer]; authorized to exercise corporate trust powers; having a
combined capital and surplus of at least $50,000,000 and subject to supervision
or examination by federal or state authorities; and having (or having a parent
that has) time deposits that are rated at least "F-1" or "P-1" (or the
equivalent) by each Rating Agency or are otherwise acceptable to each Rating
Agency. If such corporation shall publish reports of condition at least annually
pursuant to law or to the requirements of the aforesaid supervising or examining
authority, then for the purpose of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Owner Trustee shall cease to be eligible in accordance with
the provisions of this Section, the Owner Trustee shall resign immediately in
the manner and with the effect specified in Section 10.02.
Section 10.02. Resignation or Removal of Owner Trustee. The Owner
Trustee may at any time resign and be discharged from the trusts hereby created
by giving 30 days' prior written notice thereof to the Administrator, [the Note
Insurer,] and the Indenture Trustee. Upon receiving such notice of resignation,
the Administrator shall promptly appoint a successor Owner Trustee [with the
consent of the Note Insurer] by written instrument, in duplicate, one copy of
which instrument shall be delivered to the resigning Owner Trustee and one copy
to the successor Owner Trustee. If no successor Owner Trustee shall have been so
appointed and have accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Owner Trustee may petition any court of
competent jurisdiction for the appointment of a successor Owner Trustee
[reasonably acceptable to the Note Insurer].
If at any time the Owner Trustee shall cease to be eligible in
accordance with the provisions of Section 10.01 and shall fail to resign after
written request therefor by the Administrator [or the Note Insurer], or if at
any time the Owner Trustee shall be legally unable to act, or shall be adjudged
bankrupt or insolvent, or a receiver of the Owner Trustee or of its property
shall be appointed, or any public officer shall take charge or control of the
Owner Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then the Administrator may remove the Owner
Trustee. If the Administrator shall remove the Owner Trustee under the authority
of the immediately preceding sentence, the Administrator shall promptly appoint
a successor Owner Trustee [reasonably acceptable to the Note Insurer] by written
instrument, in duplicate, one copy of which instrument shall be delivered to the
outgoing Owner Trustee so removed and one copy to the successor Owner Trustee,
and shall pay all fees owed to the outgoing Owner Trustee.
Any resignation or removal of the Owner Trustee and appointment of a
successor Owner Trustee pursuant to any of the provisions of this Section shall
not become effective until acceptance of appointment by the successor Owner
Trustee pursuant to Section 10.03 and payment of all fees and expenses owed to
the outgoing Owner Trustee. The Administrator shall provide notice of such
resignation or removal of the Owner Trustee to each Rating Agency [and the Note
Insurer].
Section 10.03. Successor Owner Trustee. Any successor Owner Trustee
appointed pursuant to Section 10.02 shall execute, acknowledge and deliver to
the Depositor, [the Note Insurer,] the Administrator and to its predecessor
Owner Trustee an instrument accepting such appointment under this Agreement, and
thereupon the resignation or removal of the predecessor Owner Trustee shall
become effective, and such successor Owner Trustee, without any further act,
deed or conveyance, shall become fully vested with all the rights, powers,
duties and obligations of its predecessor under this Agreement, with like effect
as if originally named as Owner Trustee. The predecessor Owner Trustee shall
upon payment of its fees and expenses deliver to the successor Owner Trustee all
documents and statements and monies held by it under this Agreement; and the
Depositor, the Administrator and the predecessor Owner Trustee shall execute and
deliver such instruments and do such other things as may reasonably be required
for fully and certainly vesting and confirming in the successor Owner Trustee
all such rights, powers, duties and obligations.
No successor Owner Trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor Owner Trustee shall
be eligible pursuant to Section 10.01.
Upon acceptance of appointment by a successor Owner Trustee pursuant to
this Section, the Administrator shall mail notice thereof to Certificateholders,
the Indenture Trustee, the Noteholders and each Rating Agency. If the
Administrator shall fail to mail such notice within 10 days after acceptance of
such appointment by the successor Owner Trustee, the successor Owner Trustee
shall cause such notice to be mailed at the expense of the Administrator.
Section 10.04. Merger or Consolidation of Owner Trustee. Any
corporation into which the Owner Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Owner Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Owner Trustee, shall be the successor of the Owner Trustee
hereunder, without the execution or filing of any instrument or any further act
on the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, that such corporation shall be eligible pursuant to
Section 10.01; and, provided, further, that the Owner Trustee shall mail notice
of such merger or consolidation to each Rating Agency [and the Note Insurer].
Section 10.05. Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this Agreement, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any part
of the Trust Estate or any Collateral may at the time be located, the
Administrator and the Owner Trustee acting jointly shall have the power and
shall execute and deliver all instruments to appoint one or more Persons
approved by the Administrator, [the Note Insurer] and Owner Trustee to act as
co-trustee, jointly with the Owner Trustee, or as separate trustee or separate
trustees, of all or any part of the Trust Estate, and to vest in such Person, in
such capacity, such title to the Trust or any part thereof and, subject to the
other provisions of this Section, such powers, duties, obligations, rights and
trusts as the Administrator, [the Note Insurer] and the Owner Trustee may
consider necessary or desirable. If the Administrator shall not have joined in
such appointment within 15 days after the receipt by it of a request so to do,
the Owner Trustee alone shall have the power to make such appointment [with the
consent of the Note Insurer]. No co-trustee or separate trustee under this
Agreement shall be required to meet the terms of eligibility as a successor
Owner Trustee pursuant to Section 10.01 and no notice of the appointment of any
co-trustee or separate trustee shall be required pursuant to Section 10.03.
Each separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(a) All rights, powers, duties and obligations conferred or imposed
upon the Owner Trustee shall be conferred upon and exercised or performed by the
Owner Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Owner Trustee joining in such act), except to the extent
that under any law of any jurisdiction in which any particular act or acts are
to be performed, the Owner Trustee shall be incompetent or unqualified to
perform such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Trust Estate or any portion
thereof in any such jurisdiction) shall be exercised and performed singly by
such separate trustee or co-trustee, but solely at the direction of the Owner
Trustee;
(b) No trustee under this Agreement shall be personally liable by
reason of any act or omission of any other trustee under this Agreement; and
(c) The Administrator and the Owner Trustee acting jointly may at any
time accept the resignation of or remove any separate trustee or co-trustee.
Any notice, request or other writing given to the Owner Trustee shall
be deemed to have been given to each of the then separate trustees and
co-trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Agreement and
the conditions of this Article. Each separate trustee and co-trustee, upon its
acceptance of the trusts conferred, shall be vested with the estates or property
specified in its instrument of appointment, either jointly with the Owner
Trustee or separately, as may be provided therein, subject to all the provisions
of this Agreement, specifically including every provision of this Agreement
relating to the conduct of, affecting the liability of, or affording protection
to, the Owner Trustee. Each such instrument shall be filed with the Owner
Trustee and a copy thereof given to the Administrator.
Any separate trustee or co-trustee may at any time appoint the Owner
Trustee as its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Owner Trustee, to the extent permitted by law, without the appointment of a new
or successor co-trustee or separate trustee.
ARTICLE ELEVEN
MISCELLANEOUS
Section 11.01. Supplements and Amendments. This Agreement may be
amended by the Depositor and the Owner Trustee [with the prior written consent
of the Note Insurer], and with prior written notice to each Rating Agency,
without the consent of any of the Noteholders or the Certificateholders, to cure
any ambiguity, to correct or supplement any provisions in this Agreement or for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions in this Agreement or of modifying in any manner the rights
of the Noteholders or the Certificateholders; provided, however, that such
action shall not, as evidenced by an Opinion of Counsel, adversely affect in any
material respect the interests of any Noteholder or Certificateholder [or the
rights of the Note Insurer] or cause the Trust to be subject to an entity level
tax for federal income tax purposes. An amendment shall not be deemed to
adversely affect in any material respect the interests of any Noteholder or
Certificateholder and no opinion referred to in the preceding proviso shall be
required to be delivered if the Person requesting the amendment obtains a letter
from each Rating Agency stating that the amendment would not result in the
downgrading or withdrawal of the respective ratings then assigned to each Class
of Notes and Certificates. Notwithstanding the preceding sentence, an opinion
shall be required with respect to tax matters as set forth in this paragraph.
This Agreement may also be amended from time to time by the Depositor
and the Owner Trustee, with prior written notice to each Rating Agency, with the
consent of [the Note Insurer and] the Holders (as defined in the Indenture) of
Notes evidencing not less than 66 2/3% of the Aggregate Voting Interests of the
Notes and the consent of the Holders of Certificates evidencing not less than 66
2/3% of the Aggregate Voting Interests of the Certificates, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the rights of the
Noteholders or the Certificateholders; provided, however, that no such amendment
shall (a) reduce in any manner the amount of, or accelerate or delay the timing
of, distributions that shall be required to be made for the benefit of the
Noteholders, [or] the Certificateholders [or the Note Insurer] or (b) reduce the
aforesaid percentage of the Outstanding Amount of the Notes and the Voting
Interests of the Certificates required to consent to any such amendment, without
the consent of the holders of all the outstanding Securities affected thereby
[and the Note Insurer]; and provided, however, that such action shall not, as
evidenced by an Opinion of Counsel, cause the Trust to be subject to an entity
level tax for federal income tax purposes.
Notwithstanding the foregoing, no provision of Sections 2.03 or 4.01
hereof may be amended in any manner unless (i) 100% of the Noteholders have
consented in writing thereto, (ii) the Rating Agencies [and the Note Insurer]
have consent in writing thereto or (iii) the Notes have been paid in full and
the Indenture has been discharged.
Promptly after the execution of any such amendment or consent, the
Owner Trustee shall furnish written notification of the substance of such
amendment or consent to each Certificateholder, the Indenture Trustee, [the Note
Insurer] and each Rating Agency.
It shall not be necessary for the consent of Certificateholders or
Noteholders pursuant to this Section to approve the particular form of any
proposed amendment or consent, but it shall be sufficient if such consent shall
approve the substance thereof. The manner of obtaining such consents (and any
other consents of Certificateholders provided for in this Agreement or in any
other Basic Document) and of evidencing the authorization of the execution
thereof by Certificateholders shall be subject to such reasonable requirements
as the Owner Trustee may prescribe.
Promptly after the execution of any amendment to the Certificate of
Trust, the Owner Trustee shall cause the filing of such amendment with the
Secretary of State.
Prior to the execution of any amendment to this Agreement or the
Certificate of Trust, the Owner Trustee [and the Note Insurer] shall be entitled
to receive and rely upon an Opinion of Counsel stating that the execution of
such amendment is authorized or permitted by this Agreement. The Owner Trustee
may, but shall not be obligated to, enter into any such amendment that affects
the Owner Trustee's own rights, duties or immunities under this Agreement or
otherwise.
In connection with the execution of any amendment to this Trust
Agreement or any amendment of any other agreement to which the Issuer is a
party, the Owner Trustee shall be entitled to receive and conclusively rely upon
an Opinion of Counsel to the effect that such amendment is authorized or
permitted by the Basic Documents and that all conditions precedent in the Basic
Documents for the execution and delivery thereof by the Issuer or the Owner
Trustee, as the case may be, have been satisfied.
Section 11.02. No Legal Title to Trust Estate in Owners. The Owners
shall not have legal title to any part of the Trust Estate. The Owners shall be
entitled to receive distributions with respect to their undivided ownership
interest therein only in accordance with Articles Five and Nine. No transfer, by
operation of law or otherwise, of any right, title or interest of the Owners to
and in their ownership interest in the Trust Estate shall operate to terminate
this Agreement or the trusts hereunder or entitle any transferee to an
accounting or to the transfer to it of legal title to any part of the Trust
Estate.
Section 11.03. Limitations on Rights of Others. The provisions of this
Agreement are solely for the benefit of the Owner Trustee, the Depositor, the
Owners, [the Note Insurer,] the Administrator and, to the extent expressly
provided herein, the Indenture Trustee and the Noteholders, and nothing in this
Agreement, whether express or implied, shall be construed to give to any other
Person any legal or equitable right, remedy or claim in the Trust Estate or
under or in respect of this Agreement or any covenants, conditions or provisions
contained herein.
Section 11.04. Notices. (a) Unless otherwise expressly specified or
permitted by the terms hereof, all notices shall be in writing and shall be
deemed given upon receipt by the intended recipient (except that notice to the
Owner Trustee shall be deemed given only upon actual receipt by the Owner
Trustee), to the applicable address specified for each party [and the Note
Insurer] in the Sale and Servicing Agreement; or, as to each party, at such
other address as shall be designated by such party in a written notice to each
other party.
(b) Any notice required or permitted to be given to a
Certificateholder shall be given by first-class mail, postage prepaid, at the
address of such Holder as shown in the Certificate Register. Any such notice
also shall be given to each Rating Agency in the manner described above. Any
notice so mailed within the time prescribed in this Agreement shall be
conclusively presumed to have been duly given when mailed, whether or not the
Certificateholder and each Rating Agency receives such notice.
Section 11.05. Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
Section 11.06. Separate Counterparts. This Agreement may be executed
by the parties hereto in separate counterparts, each of which when so executed
and delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
Section 11.07. Successors and Assigns. All covenants and agreements
contained herein shall be binding upon, and inure to the benefit of, each of
the Depositor and its permitted assignees, the Owner Trustee and its
successors and each Owner and its successors and permitted assigns, all as
herein provided. Any request, notice, direction, consent, waiver or other
instrument or action by an Owner shall bind the successors and assigns of such
Owner.
Section 11.08. No Petition. (a) The Owner Trustee, by entering into
this Agreement, each Certificateholder, by accepting a Certificate, and the
Indenture Trustee and each Noteholder, by accepting the benefits of this
Agreement, hereby covenant and agree that they will not at any time institute
against the Depositor or the Trust, or join in any institution against the
Depositor or the Trust of, any bankruptcy proceedings under any United States
federal or state bankruptcy or similar law in connection with any obligations
relating to the Certificates, the Notes, this Agreement or any of the Basic
Documents.
(b) The Depositor shall not be liable for the default or misconduct
of the Administrator, the Owner Trustee, the Indenture Trustee, the Paying
Agent or the Servicer under any of the Basic Documents or otherwise and the
Depositor shall have no obligation or liability to perform the obligations of
the Trust under this Agreement or the Basic Documents that are required to be
performed by the Administrator under the Administration Agreement, the
Indenture Trustee under the Indenture or the Servicer under the Sale and
Servicing Agreement.
Section 11.09. No Recourse. Each Certificateholder by accepting a
Certificate acknowledges that such Certificateholder's Certificate represents
beneficial interests in the Trust only and do not represent interests in or
obligations of the Depositor, the Servicer, the Administrator, the Owner
Trustee, the Indenture Trustee or any Affiliate thereof and no recourse may be
had against such parties or their assets, except as may be expressly set forth
or contemplated in this Agreement, the Certificates or the Basic Documents.
Section 11.10. Headings. The headings of the various Articles and
Sections herein are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
Section 11.11. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF [ ], WITHOUT REFERENCE TO ITS CONFLICT
OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 11.12. [Grant of Certificateholder Rights to Note Insurer.
(a) In consideration for the issuance of the Certificates and for the
guarantee of the Notes by the Note Insurer pursuant to the Insurance Policy, the
holders of the Certificates hereby grant to the Note Insurer the right to act as
the holder of 100% of the outstanding Certificates for the purpose of exercising
the rights of the Certificateholders under this Agreement without the consent of
the Certificateholders, including the voting rights of such holders hereunder,
but excluding those rights requiring the consent of all such holders under
Section 11.01 and any rights of such holders to distributions under Section
5.02(a); provided that the preceding grant of rights to the Note Insurer by the
holders of the Trust Interest shall be subject to Section 11.14.
(b) The rights of the Note Insurer to direct certain actions and
consent to certain actions of the Certificateholders hereunder will terminate at
such time as the Class Principal Amount of the Notes has been reduced to zero
and the Note Insurer has been reimbursed for any amounts owed under the
Insurance Policy and the Insurance Agreement and the Note Insurer has no further
obligation under the Insurance Policy.]
Section 11.13. [Third-Party Beneficiary.
The Note Insurer is an intended third-party beneficiary of this
Agreement, and this Agreement shall be binding upon and inure to the benefit of
the Note Insurer; provided that, notwithstanding the foregoing, for so long as a
Note Insurer Default is continuing with respect to its obligations under the
Note Insurance Policy, the Noteholders shall succeed to the Note Insurer's
rights hereunder. Without limiting the generality of the foregoing, all
covenants and agreements in this Agreement that expressly confer rights upon the
Note Insurer shall be for the benefit of and run directly to the Note Insurer,
and the Note Insurer shall be entitled to rely on and enforce such covenants to
the same extent as if it were a party to this Agreement.]
Section 11.14. [Suspension and Termination of Note Insurer's Rights.
During the continuation of a Note Insurer Default, rights granted or
reserved to the Note Insurer hereunder shall vest instead in the Owners;
provided that the Note Insurer shall be entitled to any distributions in
reimbursement of the Reimbursement Amount, and the Note Insurer shall retain
those rights under Section 11.01 to consent to any amendment of this Agreement.
At such time as either (i) the Class Principal Amount of the Notes has
been reduced to zero or (ii) the Insurance Policy has been terminated and in
either case of (i) or (ii) the Note Insurer has been reimbursed for all amounts
owed under the Insurance Policy and the Insurance Agreement (and the Note
Insurer no longer has any obligation under the Insurance Policy, except for
breach thereof by the Note Insurer), then the rights and benefits granted or
reserved to the Note Insurer hereunder (including the rights to direct certain
actions and receive certain notices) shall terminate and the Certificateholders
shall be entitled to the exercise of such rights and to receive such benefits of
the Note Insurer following such termination to the extent that such rights and
benefits are applicable to the Certificateholders.]
Section 11.15. [Fiduciary Obligation to Holders of the Certificates.
Nothing in this Agreement shall be construed or deemed to impair the
fiduciary obligation of the Owner Trustee to the Holders of the Certificates. In
acting in accordance with the direction of the Note Insurer pursuant to this
Agreement, the Owner Trustee shall not be deemed to (i) owe any fiduciary
obligation to the Note Insurer or (ii) to have violated any fiduciary obligation
or responsibility to the Holders of the Certificates.]
* * * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be duly executed by their respective officers hereunto duly authorized, as of
the day and year first above written.
ACE SECURITIES CORP.,
as the Depositor
By:____________________________________
Name:
Title:
[ ],
in its individual capacity and as Owner Trustee
By:____________________________________
Name:
Title:
Accepted and Agreed to:
GERMAN AMERICAN CAPITAL CORPORATION
By:________________________________
Name:
Title:
By:________________________________
Name:
Title:
Exhibit 5.1
Opinion of Brown & Wood LLP as to legality
September 30, 1999
ACE Securities Corp.
6525 Morrison Boulevard, Suite 318
Charlotte, North Carolina 28211
Re: ACE Securities Corp.,
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We will act as counsel for ACE Securities Corp., a Delaware corporation
(the "Company"), in connection with the offering, from time to time, in one or
more Series (each, a "Series") of the Company's Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the "Notes," and together with the
Certificates, the "Securities"). The Securities are being registered pursuant to
the Securities Act of 1933, as amended (the "Act"), by means of a Registration
Statement of the Company on Form S-3. The Securities will be offered pursuant to
a prospectus, as supplemented by a prospectus supplement (the applicable "Base
Prospectus" and "Prospectus Supplement," respectively), which will be filed with
the Commission pursuant to Rule 424 under the Securities Exchange Act. As set
forth in the Registration Statement, each Series of Certificates will be issued
under either (a) a separate pooling and servicing agreement (each, a "Pooling
and Servicing Agreement") among the Company, a trustee to be identified in the
Prospectus Supplement for such Series of Certificates (a "Trustee") and a
Servicer (the "Servicer") to be identified in the Prospectus Supplement for such
Series of Certificates or (b) under a separate trust agreement (each, a "Trust
Agreement") between the Company and an owner trustee to be identified in the
Prospectus Supplement for such Series of Certificates (an "Owner Trustee"),
pursuant to which a trust (the "Trust") will be created. Each Series of Notes
will be issued under a separate indenture (each, an "Indenture") between the
Trust and an indenture trustee to be identified in the Prospectus Supplement for
such Series of Notes (an "Indenture Trustee").
We have examined copies of the Company's Certificate of Incorporation,
Bylaws, the form of Pooling & Servicing Agreement, the form of Trust Agreement,
the form of Indenture (each as incorporated by reference as an exhibit to the
Registration Statement) and such other records, documents and statutes as we
have deemed necessary for purposes of this opinion.
<PAGE>
ACE Securities Corp.
September 30, 1999
Page 2
Based upon the foregoing, we are of the opinion that:
(1) When any Pooling and Servicing Agreement or Trust Agreement
relating to a Series of Certificates has been duly and validly
authorized by all necessary action on the part of the Company and has
been duly executed and delivered by the Company, the Trustee or the
Owner Trustee, as applicable, any Servicer, if applicable, and any
other party thereto, such Pooling and Servicing Agreement or Trust
Agreement will constitute a legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter
relating to or affecting creditors' rights generally or by general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(2) When a Series of Certificates has been duly authorized by all
necessary action on the part of the Company (subject to the terms
thereof being otherwise in compliance with applicable law at such
time), duly executed and authenticated by the Trustee or Owner Trustee
for such Series in accordance with the terms of the related Pooling and
Servicing Agreement or Trust Agreement, as applicable, and issued and
delivered against payment therefor as described in the Registration
Statement, such Series of Certificates will be legally and validly
issued, fully paid and nonassessable, and the holders thereof will be
entitled to the benefits of the related Pooling and Servicing Agreement
or Trust Agreement, as applicable.
(3) When any Indenture relating to a Series of Notes has been
duly and validly authorized by all necessary action on the part of the
Trust and has been duly executed and delivered by the Trust, the
Indenture Trustee and any other party thereto, such Indenture will
constitute a legal, valid and binding agreement of the Trust,
enforceable against the Trust in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter
relating to or affecting creditors' rights generally or by general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(4) When a Series of Notes has been duly authorized by all
necessary action on the part of the Trust (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Indenture Trustee for such Series in
accordance with the terms of the related Indenture and issued and
delivered against payment therefor as described in the Registration
Statement, such Series of Notes will be legally and validly issued,
fully paid and nonassessable, and the holders thereof will be entitled
to the benefits of the related Indenture.
We have also advised the Company with respect to certain federal
income tax consequences of the proposed issuance of the Securities. This
advice is summarized under "Material Federal Income Tax Considerations" in
each Base Prospectus. Such description does not purport to discuss all
possible federal income tax ramifications of the proposed issuance, but
<PAGE>
ACE Securities Corp.
September 30, 1999
Page 3
with respect to those federal income tax consequences that are discussed, in
our opinion, the description is accurate in all material respects.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York (excluding
choice of law principles therein) and the federal laws of the United States of
America.
We hereby consent to the filing of this letter and to the references to
this firm under the headings "Legal Matters" and "Material Federal Income Tax
Considerations" in the applicable Base Prospectus and Prospectus Supplement,
without implying or admitting that we are "experts" within the meaning of the
Act or the rules and regulations of the Commission issued thereunder, with
respect to any part of any Base Prospectus or Prospectus Supplement.
Very truly yours,
/s/ Brown & Wood LLP
Exhibit 8.1
Opinion of Brown & Wood LLP as to certain tax matters
(Included in Exhibit 5.1)
Exhibit 23.1
Consent of Brown & Wood LLP
(Included in Exhibit 5.1)
Exhibit 24.1
Power of Attorney
(Included on page II-4)
