<PAGE>
As filed with the Securities and Exchange Commission on October 13, 1998
Registration Number 333-64939
------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CRSM SECURITIES, INC.
(Exact name of registrant as specified in the governing documents)
CALIFORNIA 95-4706150
(State or other jurisdiction of organization) (I.R.S. Identification No.)
CRSM Securities, Inc.
9665 Wilshire Boulevard, Suite 410
Beverly Hills, California 90212
310-285-7400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Robert S. Manns, President
CRSM Securities, Inc.
9665 Wilshire Boulevard, Suite 410
Beverly Hills, California 90212
310-285-7400
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
------------------------
COPIES TO:
Jeffrey P. Berg, Esq.
Matthias & Berg LLP
1990 South Bundy Drive, Suite 790
Los Angeles, California 90025
------------------------
Approximate date of commencement of proposed sale of securities to the
public: From time to time after the effective date of this Registration.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to be Proposed Amount of
Securities to be Registered Registered(1) Maximum Registration Fee
Aggregate (.000295)
Offering
Price(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized Mortgage
Obligation Bonds $1,000,000 $ 1,000,000 $ 295.00
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,000,000 $ 1,000,000 $ 295.00
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
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 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
CRSM SECURITIES, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501 of Regulation S-K.
Showing Location in the Prospectus of Information
Required by Items 1 through 13, Part I, of Form S-3
<TABLE>
<CAPTION>
Registration Statement Item Number and Caption Location in Prospectus
- ---------------------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration Statements and Outside Front Cover
Outside Front Cover Page of Prospectus . . . . . . . . Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . . . . Inside Front and
Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges . . . . . . . . . . Prospectus Summary,
Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . Plan of Distribution
5. Determination of Offering Price . . . . . . . . . . . * *
6. Dilution. . . . . . . . . . . . . . . . . . . . . . . *
7. Selling Security Holders. . . . . . . . . . . . . . . Plan of Distribution
8. Plan of Distribution. . . . . . . . . . . . . . . . . Plan of Distribution
9. Description of Securities to be Registered. . . . . . Description of the
Bonds; Security for
the Bonds
10. Interests of Named Expert and Counsel. . . . . . . . Experts; Legality of
Bonds
11. Material changes. . . . . . . . . . . . . . . . . . . *
12. Incorporation of Certain Information by Reference . . *
13. Disclosure of Commission Position on Indemnification
for Securities Acts Liabilities . . . . . . . . The Issuer
</TABLE>
- ---------------
* OMITTED SINCE NOT APPLICABLE
** TO BE INCLUDED OR SUPPLEMENTED FROM TIME TO TIME BY PROSPECTIVE
SUPPLEMENT
<PAGE>
PROSPECTUS
MORTGAGE-COLLATERALIZED BONDS, ISSUABLE IN SERIES
This Prospectus relates to Mortgage-Collateralized Bonds ("Bonds") which
may be issued from time to time in one or more series ("Series"). The issuer
with respect to a Series of Bonds will be CRSM Securities, Inc. a California
corporation, (the "Issuer"), or a separate trust established by the Issuer. The
prospectus supplement ("Prospectus Supplement") relating to a Series of Bonds
will specify with respect to such Series: (i) the aggregate principal amount;
(ii) the interest rate and authorized denominations of each class ("Class") of
Bonds; (iii) certain information concerning the Collateral (defined below)
securing such Bonds; (iv) the Stated Maturity (defined below) of each Class of
Bonds; (v) the order of the application of principal payments to the Classes of
such Bonds and the allocation of principal thereof; (vi) the identity of each
Class of Bonds upon which interest will accrue but will not be payable until
each Class of Bonds of such Series with an earlier Stated Maturity (defined
below) has been paid in full or until such other time as may be specified in the
Prospectus Supplement for such Series of Bonds ("Compound Interest Bonds"), if
any, included in such Series of Bonds; (vii) the Payment Dates (defined below)
and the Assumed Reinvestment Rates (defined below), if applicable, for such
Bonds; (viii) information with respect to the Issuer of such Bonds; and (ix)
additional information with respect to the plan of distribution of such Bonds.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF BONDS OF ANY SERIES UNLESS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT FOR SUCH SERIES.
Each Series of Bonds will consist of one or more Classes of Bonds, which
may include one or more Classes of Compound Interest Bonds. Interest on each
Class of Bonds that bears interest, other than a Class of Compound Interest
Bonds, will be payable on each Payment Date (defined below) specified in the
related Prospectus Supplement. Payments of interest on a Class of Compound
Interest Bonds will begin no later than the Payment Date (defined below)
specified in the related Prospectus Supplement. Prior to such time, interest on
such Class of Compound Interest Bonds will accrue and the amount of interest so
accrued will be added to the principal thereof on each Payment Date (defined
below). The amount of principal payable on the Bonds of a Series on each
Payment Date (defined below) will be applied to the Classes of Bonds of such
Series in the order and as otherwise specified in the related Prospectus
Supplement. Principal payments on each Class of Bonds of a Series will be made
on a pro rata, random lot or other selection basis among Bonds of such Class as
specified in the related Prospectus Supplement.
Each Series of Bonds offered hereby will be secured by collateral
consisting of one or more of the following: (i) a pool of promissory notes or
other evidences of indebtedness secured by liens on fee simple or leasehold
interests in single family or multifamily properties, cooperative apartment
buildings or installment sale contracts with respect to any such properties,
manufactured housing contracts, installment agreements, or participation
interests in any of the foregoing ("Pledged Loans"), (ii) certain Mortgage
Certificates and Other Mortgage Certificates (both defined below), and (iii)
Security Funds (defined below).
Each Series of Bonds will be subject to redemption only under the
circumstances described herein and specified in the related Prospectus
Supplement. With respect to certain Series of Bonds, the Issuer may elect to
treat as a Real Estate Mortgage Investment Conduit ("REMIC") the arrangement
pursuant to which the Collateral (defined below) will secure that Series, in
which case the Bonds would be considered to be "regular interests" or "residual
interests" (both defined below) in the REMIC. The Prospectus Supplement for a
particular Series will specify whether the Bonds related thereto will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). See "Prospectus Summary and Introduction -
Redemption of the Bonds."
There can be no assurance that a secondary market will develop for the
Bonds of any Series or, if it does develop, that it will provide the holders of
Bonds of such series with liquidity of investment or that such secondary market
will be maintained for the term of such Series of Bonds. See "Certain
Considerations."
AN INVESTMENT IN THE BONDS SHOULD BE MADE ONLY AFTER REVIEWING THE MATERIAL
APPEARING UNDER THE CAPTION "CERTAIN CONSIDERATIONS" IN THIS PROSPECTUS. SEE
"CERTAIN CONSIDERATIONS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is ________
This Prospectus may be deemed to contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"). Forward-looking statements in this Prospectus or
hereafter included in other publicly available documents filed with the
Securities and Exchange Commission (the "Commission"), reports to the
Company's stockholders and other publicly available statements issued or
released by the Company involve known and unknown risks, uncertainties and
other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to, the risks
set forth herein, each of which could adversely affect the Company's business
and the accuracy of the forward-looking statements contained herein.
THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE
SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES, IN ANY JURISDICTION IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representation must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the Bonds
offered hereby as supplemented thereby nor an offer of the Bonds to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date; however,
if any material change occurs while this Prospectus is required by law to be
delivered, this Prospectus will be amended or supplemented accordingly.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY AND INTRODUCTION . . . . . . . . . . . . . . . . . . . . 2
CERTAIN CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 12
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DESCRIPTION OF THE BONDS . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECURITY FOR THE BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SERVICING OF THE PLEDGED LOANS . . . . . . . . . . . . . . . . . . . . . . 41
FINANCE COMPANIES AND FUNDING AGREEMENTS . . . . . . . . . . . . . . . . . 47
MANAGEMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
THE DEPOSIT TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . 53
CERTAIN LEGAL ASPECTS OF PLEDGED LOANS . . . . . . . . . . . . . . . . . . 54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . 59
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
LEGAL INVESTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
LEGALITY OF BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 70
INDEX OF DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . 71
FINANCIAL STATEMENTS AND INFORMATION . . . . . . . . . . . . . . . . . . .F 1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY AND INTRODUCTION
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement.
ISSUER The Issuer is CRSM Securities, Inc. a California
corporation. The Issuer was established solely for the
purpose of issuing one or more Series of Bonds directly
or through one or more trusts ("Trusts") established by
the Issuer. Each such Trust will be created by an
agreement ("Deposit Trust Agreement") between the
Issuer, acting as depositor, and a bank, trust company
or other fiduciary, acting as owner-trustee
("Owner-Trustee"). Each such Trust will be established
solely for the purpose of issuing one Series of Bonds.
The address of the Issuer is 9665 Wilshire Blvd.,
Suite 410, Beverly Hills, California 90212 and its
telephone number is (310) 385-7400. The Bonds of each
Series will be limited obligations of the Issuer of
the Bonds of such Series in that they will be payable
solely from the Collateral (defined below) pledged to
secure such Series of Bonds. With respect to any Series
of Bonds issued by a Trust established by the Issuer,
neither the Issuer nor the Finance Companies (defined
below) will guarantee, nor will otherwise be obligated
to pay, the Bonds of any such Series. See "The
Issuer," "Security for the Bonds" and "Finance
Companies and Funding Arrangements."
TITLE OF SECURITY Mortgage-Collateralized Bonds, issuable from time to
time in Series. Each Series of Bonds will be issued
pursuant to an indenture ("Indenture") between the
Issuer of such Series of Bonds and the Bond Trustee
(defined below) for such Series of Bonds as specified
in the related Prospectus Supplement.
SERVICER The Pledged Loans which constitute part of the Mortgage
Collateral (defined below) for a Series of Bonds will
be serviced by a person ("Servicer") specified in the
related Prospectus Supplement.
DESCRIPTION OF BONDS Each Series of Bonds will consist of one or more
Classes of Bonds, one or more of which may be Classes
of Compound Interest Bonds. The Bonds of each Class
may differ in, among other things, the amounts and
priority of principal payments allocated to such Class,
the maturity date and interest rate. The Bonds of each
Series will be issued in fully registered, certificated
or book-entry form in the minimum denominations
specified in the related Prospectus Supplement.
INTEREST PAYMENTS Unless otherwise specified in the related Prospectus
Supplement, each Class of Bonds of a Series will bear
interest on its outstanding principal amount at a fixed
or variable rate as specified in the related Prospectus
Supplement. Unless otherwise specified in the related
Prospectus Supplement, interest on all Bonds of a
Series other than Compound Interest Bonds will be paid
periodically on the dates specified in such Prospectus
Supplement ("Payment Dates"). Payments of interest on
a Class of Compound Interest Bonds included in such
Series will not begin until each Class of Bonds of such
Series with an earlier Stated Maturity (defined below)
has been paid in full or until such other time as may
be specified in the Prospectus Supplement for such
Series of Bonds. A later Class of Compound Interest
Bonds would, unless otherwise specified in the related
Prospectus Supplement, be effectively subordinated to
Bonds with an earlier Stated Maturity (defined below).
Prior to that time, interest on such Class of Compound
Interest Bonds will accrue and will be added to the
principal amount of such Bonds. Thereafter, unless
otherwise specified in the related Prospectus
Supplement, interest payments will be made on such
Class of Compound Interest Bonds on the unpaid accreted
value ("Accreted Value") of such Class of
2
<PAGE>
Compound Interest Bonds. Unless otherwise
specified in the related Prospectus Supplement, the
Accreted Value of a Class of Compound Interest
Bonds will equal the original principal amount of
such Class of Compound Interest Bonds plus accrued
and accumulated interest compounded thereon through
the immediately preceding Payment Date for such
Series, less any principal payments made on such
Class of Compound Interest Bonds. See "Description
of the Bonds - Payments of Principal and Interest."
PRINCIPAL PAYMENTS Unless otherwise specified in the Prospectus Supplement
for a Series of Bonds, principal payments will be made
on the Bonds of such Series on the Payment Dates
specified in such Prospectus Supplement in an aggregate
amount equal to the sum of (i) the Required Principal
Payment (defined below) and (ii) the percentage, if
any, of the Excess Cash (defined below) specified in
such Prospectus Supplement. With respect to Required
Principal Payments (defined below):
(i) Unless otherwise specified in the Prospectus
Supplement for a Series of Bonds, the required
principal payment ("Required Principal Payment") for
each Payment Date for such Series of Bonds will be
an amount equal to the difference between (a) the
sum of (1) the principal amount of the Bonds of such
Series outstanding as of the close of business on
the immediately preceding Payment Date and (2) the
amount of interest, if any, accrued on any Compound
Interest Bonds included in such Series but not paid
or compounded since the date of issuance of the
Bonds ("Issue Date") and (b) the aggregate
Outstanding Bond Values (defined below) of the
Mortgage Collateral (defined below) securing such
Series of Bonds as of the current Payment Date.
(ii) In the case of the first Payment Date, the
Required Principal Payment will be an amount equal
to the difference between (a) the sum of (1) the
principal amount of the Bonds of such Series
outstanding as of the Issue Date and (2) the amount
of interest, if any, accrued on any Compound
Interest Bonds included in such Series but not paid
or compounded since the Issue Date and (b) the
aggregate Outstanding Bond Values (defined below)
of the Mortgage Collateral (defined below) securing
such Series of Bonds as of the current Payment Date.
(iii) In the event a redemption or Special
Redemption (defined below) has occurred since the
immediately preceding Payment Date, the Required
Principal Payment will be the difference between
(a) the sum of (1) the principal amount of the
Bonds of such Series outstanding as of the latest
redemption date or special redemption date (defined
below) and (2) the amount of interest, if any,
accrued on any Compound Interest Bonds included in
such Series but not paid or compounded since the
immediately preceding Payment Date which is not
then payable and (b) the aggregate Outstanding Bond
Values (defined below) of the Mortgage Collateral
(defined below) securing such Series of Bonds as of
the current Payment Date.
All payments of principal on the Bonds of a Series
will be allocated among the Classes of Bonds of
such Series in the order and amounts specified in
the related Prospectus Supplement. All payments of
principal on Bonds of a particular Class will be
applied on a PRO RATA, random lot or other
selection basis among all Bonds of such Class, as
specified in the related Prospectus Supplement.
See "Description of the Bonds-Payments of
Principal."
The bond value ("Bond Value") for an item of
Mortgage Collateral (defined below) securing a
Series of Bonds will represent the principal amount
of Bonds of such Series which can be supported by
the distributions on such item of Mortgage
Collateral (defined below), together with the
reinvestment income thereon at the Assumed
Reinvestment Rate (defined below) and, if
applicable, the cash available to be
3
<PAGE>
withdrawn from any Security Fund (defined below)
securing such Series of Bonds. This will be the
case irrespective of prepayment on certain items of
Mortgage Collateral (defined below) and the method
used to determine its Bond Value. See "Security
for the Bonds."
The Excess Cash ("Excess Cash") for a Series of
Bonds as of any Payment Date will be the excess, if
any, of the sum of (i) all distributions received on
the Mortgage Collateral (defined below) securing
such Series of Bonds in the period preceding such
Payment Date, (ii) the reinvestment income thereon,
and (iii) if applicable, the amount of cash
withdrawn from any Security Fund (defined below)
securing such Series of Bonds since the immediately
preceding Payment Date, over the sum of (a) all
interest accrued and paid or payable on the Bonds of
such Series since the immediately preceding Payment
Date, (b) the Required Principal Payment for such
Series of Bonds for such Payment Date, (c) the
principal amount of Bonds of such Series redeemed
pursuant to any redemption since the immediately
preceding Payment Date, (d) the amount of any
required deposits to any applicable Security Fund
(defined below) and (e) certain expenses, including
the Owner-Trustee Fees and expenses, the Bond
Trustee (defined below) fees and expenses (as
disclosed in the Indenture for a Series of Bonds),
the fees of the Master Servicer (defined below) and
expenses (as disclosed in the Master Servicing
Agreement [defined below] for a Series of Bonds) all
as defined below. Reference is made to a form of
Indenture filed as an Exhibit to the Registration
Statement of which this Prospectus constitutes a
part.
The Stated Maturity ("Stated Maturity") for each
Class of Bonds comprising a Series of Bonds will be
the date no later than that on which all Bonds of
such Class will be fully paid. The Stated Maturity
for a Class of Bonds will be determined based upon
the quantity and quality of the Collateral (defined
below) securing a Class of Bonds. Material facts
regarding such Collateral (defined below) will be
specified in the related Prospectus Supplement for
a Series of Bonds and will be the basis of
determining the Stated Maturity for a Class of
Bonds. All or a portion of the payments, including
prepayments on the Mortgage Collateral (defined
below) securing a Series of Bonds, will be used to
amortize Bonds of such Series, as specified in the
related Prospectus Supplement. The rate of
prepayments on the Mortgage Collateral (defined
below) securing a Series of Bonds will depend on
the characteristics of any mortgage loans included
in or underlying such Mortgage Collateral (defined
below), as well as on the prevailing level of
interest rates from time to time and other economic
factors. No assurance can be given as to the actual
prepayment experience of such Mortgage Collateral
(defined below). See "Description of the Bonds -
Maturity and Prepayment Considerations."
REDEMPTION OF THE BONDS To the extent specified in the Prospectus Supplement
for a Series of Bonds, Bonds of such Series having
other than monthly Payment Dates may be subject to
special redemption ("Special Redemption"), in whole
or in part, at a redemption price equal to 100% of
the unpaid principal amount of the Bonds (or portion
thereof) to be redeemed (or 100% of the unpaid
Accreted Value of a Class of Compound Interest Bonds
or portion thereof to be redeemed), plus accrued
interest, if any, to the date specified in the
related Prospectus Supplement, if, as a result of
principal prepayments on the Mortgage Collateral
(defined below) securing such Series of Bonds and
the reinvestment yields then available, the Issuer,
or the Bond Trustee determines, on the basis of
assumptions specified in the Indenture for such
Series of Bonds, that the debt service requirements
on any portion
4
<PAGE>
of the Bonds of such Series cannot be met. Any
such redemption would be limited to the principal
amount of the Bonds of such Series that would
otherwise be required to be paid on the next
Payment Date out of such principal prepayments due
to the fact that the Bonds of a Series having other
than a monthly Payment Date are payable on
maturity, with no periodic payments, or have only
one periodic payment remaining. In such an event
100% of the unpaid principal balance plus interest
would be paid and the Bonds redeemed. If more
principal were collected than could be distributed,
the Excess Cash would be applied to the Collection
Account (defined below) and then, if all stated
conditions were met, the Excess Cash, or portion
thereof, would be distributed to the Issuer or its
designee. As a result, no Special Redemption of
Bonds of a Series can shorten the maturity of the
Bonds so redeemed by more than the period of time
between the date on which the redemption occurs and
the next succeeding Payment Date. Principal
payments in the case of a Special Redemption will
be applied to Bonds of a Series on a PRO RATA,
random lot or other selection basis in the priority
and manner specified in the related Prospectus
Supplement. See "Description of the
Bonds-Redemption."
Any Class of Bonds of a Series also may be redeemed
prior to its Stated Maturity, in whole or in part,
at the Issuer's option, or at the option of such
other persons or entities described in the
Prospectus Supplement, under the circumstances
specified in the related Prospectus Supplement, at
the percentage of the unpaid principal amount of
such Bonds (or portion thereof specified in such
Prospectus Supplement), plus accrued interest, if
any, to the date specified in the related
Prospectus Supplement. The Issuer may redeem Bonds
of a Series on such terms as are disclosed in a
Prospectus Supplement, which terms may be different
than those set forth herein. See "Description of
the Bonds - Redemption."
Any Class of Bonds of a Series also may be subject
to optional redemption by the holders of such Bonds
or to mandatory redemption by the Issuer through
the operation of a redemption fund ("Redemption
Fund") on the terms and conditions specified in the
related Prospectus Supplement.
SECURITY FOR THE BONDS Unless otherwise specified in the related Prospectus
Supplement, each Series of Bonds will be secured by
collateral ("Collateral") which will consist of the
Mortgage Collateral (defined below) and the Security
Funds (defined below); and the Mortgage Collateral
("Mortgage Collateral") will consist of the Pledged
Loans (defined below), the Mortgage Certificates
(defined below) and the Other Mortgage Certificates
(defined below).
MORTGAGE COLLATERAL
A. PLEDGED LOANS Unless otherwise specified in the related Prospectus
Supplement the Pledged Loans for a Series of Bonds
may consist of mortgage loans insured by the
Federal Housing Administration ("FHA Loans");
mortgage loans partially guaranteed by the Veterans
Administration ("VA Loans"); conventional mortgage
loans; manufactured housing installment sale
contracts ("Manufactured Housing Contracts") and
installment loan agreements and either (i) security
interests in the manufactured homes ("Manufactured
Homes" or "Manufactured Housing") purchased with
the proceeds of such Manufactured Housing Contracts
or (ii) with respect to certain of such
Manufactured Housing Contracts, liens on the real
estate to which the related manufactured homes are
deemed permanently affixed; and loans to acquire
interests in cooperative apartment buildings. The
properties securing such Pledged Loans may consist
of (i) detached homes, (ii) attached homes
(single-family units having a common wall), (iii)
units located in condominiums, (iv) units in
multifamily residential buildings, (v)
5
<PAGE>
interests in cooperative buildings; (vi)
Manufactured Housing and (vii) such other types of
homes or units specified in the related Prospectus
Supplement. Each such detached or attached home
will be constructed on land owned in fee simple by
the mortgagor or on land leased by the mortgagor
for a term at least two years greater than the term
of the applicable Pledged Loan. The fee interest
in any leased land will be subject to the lien
securing the applicable Pledged Loan. Attached
homes may consist of duplexes, triplexes and
fourplexes (multi-family structures where the
entire lot on which each structure is built is
owned by the owners of the units) or townhouses
(multi-family structures in which each mortgagor
owns the land upon which the unit is built with the
remaining adjacent land owned in common).
The Pledged Loans securing a Series of Bonds may be
secured by residential properties which (a) are
owner-occupied, (b) are owned by investors, or (c)
serve as second residences, provided that, based
upon information available at the origination of
such Pledged Loans, the aggregate unpaid principal
amount of all such Pledged Loans secured by second
residences and investor owned residences may not
exceed the percentage set forth in the related
Prospectus Supplement of the aggregate unpaid
principal amount of all Pledged Loans securing such
Series of Bonds. The Pledged Loans secured by loans
made in connection with a purchase or refinancing
of cooperative apartments ("Cooperative Loans") are
not secured by liens on real estate.
B. MORTGAGE
CERTIFICATES The Bonds of a Series may, but will not necessarily,
be secured by certificates ("Mortgage
Certificates"); GNMA certificates ("GNMA
Certificates") guaranteed by the Government
National Mortgage Association ("GNMA"); Mortgage
Participation Certificates ("FHLMC Certificates")
issued by the Federal Home Loan Mortgage
Corporation ("FHLMC"); and Guaranteed Mortgage
Pass-Through Certificates ("FNMA Certificates")
issued by the Federal National Mortgage Association
("FNMA").
C. OTHER MORTGAGE
CERTIFICATES The Bonds of a Series may, but will not necessarily, be
secured by such other types of mortgage collateral,
including mortgage pass-through certificates and
mortgage-collateralized obligations ("Other Mortgage
Certificates") as may be specified in the related
Prospectus Supplement; and any other loans secured by
direct or indirect interests in real estate which may
be deemed acceptable as such by the rating agency or
agencies ("Rating Agency") rating the Bonds of such
Series.
Each item of Mortgage Collateral securing a Series
of Bonds will be assigned a Bond Value at the Issue
Date for the Bonds of such Series ("Initial Bond
Value"), such that the Aggregate Initial Bond
Values (defined below) of the Mortgage Collateral
securing such Series of Bonds will at least be
equal to the original principal amount of the Bonds
of such Series. Scheduled payments of principal and
interest on such Mortgage Collateral, together with
cash available from the Security Funds (defined
below) to the extent specified in the related
Prospectus Supplement, net of applicable servicing,
administration and guarantee fees and insurance
premiums, together with reinvestment income thereon
at the applicable Assumed Reinvestment Rates
(defined below), all as specified in the related
Prospectus Supplement, will be sufficient to make
the required payments of interest on the Bonds of
such Series and to pay the principal of each Class
of Bonds of such Series not later than its Stated
Maturity. The Mortgage Collateral securing a
Series of Bonds will be registered or recorded in
the name of the Bond Trustee (defined below) for
such Series of Bonds and held by such Bond Trustee
(defined below) as collateral security for the
Bonds of that Series only. See "Security for the
Bonds - GNMA Certificates," "Security for the
Bonds-FHLMC Certificates,"
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<PAGE>
"Security for the Bonds - FNMA Certificates" and
"Security for the Bonds-The Pledged Loans."
SECURITY FUNDS For a Series of Bonds, the Security Funds ("Security
Funds") will consist of one or more of the following
accounts:
A. COLLECTION ACCOUNT All distributions on the Mortgage Collateral
securing a Series of Bonds (net of any applicable
servicing fees with respect to any Pledged Loans
included in such Mortgage Collateral) will be
remitted to an account ("Collection Account") to be
maintained by the trustee for the Bonds ("Bond
Trustee") for such Series of Bonds. The portion
required, together with reinvestment income thereon
at the applicable Assumed Reinvestment Rate (defined
below) specified in the related Prospectus
Supplement, will be available for application to the
payment of the principal of and interest on the
Bonds of such Series. The funds in the Collection
Account will be used first for the payment of the
fees and expenses of the Owner-Trustee, the Bond
Trustee, and the Master Servicer. After payment of
such fees and expenses the funds in the Collection
Account will then be used to pay principal and
interest on the Bonds. After the payment of such
amounts excess funds may be used to fund the
Over-Collateralization fund. See "Security for the
Bonds - Collection Account."
B. SUPPLEMENTAL DEBT
SERVICE FUND With respect to each Series of Bonds secured by any
GNMA Certificates backed by FHA insured or VA
guaranteed graduated payment mortgage loans ("GPM GNMA
Certificates") or by any Pledged Loans which provide
for mortgage payments during a portion of their term
which are less than the actual amount of principal and
interest which would be payable thereon on a level debt
service basis ("GPM Pledged Loans") (GPM GNMA
Certificates and GPM Pledged Loans are collectively
referred to herein as the "GPM Collateral"), the Issuer
will deposit cash, certificates of deposit or
irrevocable letters of credit in the supplemental debt
service fund maintained by the Bond Trustee for such
Series of Bonds ("Supplemental Debt Service Fund"), but
only with respect to GPM Collateral which is assigned
an Initial Bond Value as if such GPM Collateral
provided for payment on a level debt service basis over
its full term. The amount of any deposit in the
Supplemental Debt Service Fund for a Series of Bonds
(together with reinvestment income thereon at the
applicable Assumed Reinvestment Rate (defined below)
specified in the related Prospectus Supplement) will be
sufficient to cover the amount by which payments of
principal and interest on such GPM Collateral assumed
in calculating payments due on the Bonds of such Series
exceed scheduled payments on such GPM Collateral. The
Bond Trustee will, on any payment date on which the
balance of the Supplemental Debt Service Fund exceeds
the amount required to be maintained in such fund, pay
such excess to the Issuer or its designee. However, a
withdrawal of funds from the Supplemental Debt Service
Fund cannot be effectuated if it results in an
underfunded Supplemental Debt Service Fund, even if it
would not affect the credit rating of a Series of
Bonds. See "Security for the Bonds - Supplemental
Debt Service Fund."
C. BUY-DOWN FUND With respect to each Series of Bonds secured by any
Pledged Loans which consist of level payment mortgage
loans for which funds are provided by any person to
reduce the borrowers' monthly payments during the early
years of such Pledged Loans ("Buy-Down Pledged Loans"),
the Issuer will deposit cash, certificates of deposit
or irrevocable letters of credit in the buy-down fund
maintained by the Bond Trustee for such Series of Bonds
("Buy-Down Fund"), but only with respect to Buy-Down
Pledged Loans which are assigned an Initial Bond Value
as if such Buy-Down Pledged
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<PAGE>
Loans provided for payment on a level debt service
basis over their full term. The amount of any
deposit in the Buy-Down Fund for a Series of Bonds
(together with reinvestment income thereon at the
applicable Assumed Reinvestment Rate (defined
below)specified in the related Prospectus
Supplement) will provide funds which, when added to
the required payments by the mortgagors on such
Buy-Down Pledged Loans, will be sufficient to cover
payments of principal and interest on such Buy-Down
Pledged Loans securing such Series of Bonds on a
level debt service basis. The Issuer will have the
right on any Payment Date to cause the Bond Trustee
to withdraw funds from the Buy-Down Fund for a
Series of Bonds to the extent the balance thereof
exceeds the amount required to be maintained in
such fund. See "Security for the Bonds -Buy-Down
Fund."
D. RESERVE FUND The Prospectus Supplement for a Series of Bonds may
specify that the Issuer will deposit cash,
certificates of deposit, irrevocable letters of
credit or other financial guarantees in one or more
reserve funds maintained by the Bond Trustee for
such Series of Bonds (collectively the "Reserve
Fund"), which may be used by the Bond Trustee to
make any required payments of principal or interest
on the Bonds of such Series to the extent funds are
not otherwise available. The amount of any deposit
in the Reserve Fund for a Series of Bonds will be
specified in the Prospectus Supplement for such
Series. In the alternative, the Reserve Fund for a
Series of Bonds may be funded, in whole or in part,
through application of all or a portion of the
Excess Cash, to the extent described in the related
Prospectus Supplement. The Issuer will have the
right on any Payment Date to cause the Bond Trustee
to withdraw funds from the Reserve Fund for a
Series of Bonds and pay such funds to or upon the
order of the Issuer to the extent that any such
withdrawal does not result in a downgrading of the
applicable rating of the Bonds of such Series by
the Rating Agency. However, a withdrawal of funds
from the Reserve Fund may not be effected if it
would result in an under funded Reserve Fund, even
if it would not adversely affect the credit rating
of a Series of Bonds. See "Security for the
Bonds-Collection Account" and "Security for the
Bonds-Reserve Fund."
E. OVERCOLLATERALIZATION To the extent specified in the Prospectus Supplement
FUND for a Series of Bonds, the Initial Bond Value of the
Mortgage Collateral securing such Series of Bonds
may exceed the original principal amount of the
Bonds of such Series by an aggregate amount
("Aggregate Initial Overcollateralization Amount").
In such event, the Issuer will establish an
overcollateralization fund to be maintained by the
Bond Trustee for such Series of Bonds
("Overcollateralization Fund"). The amount of any
deposits in the Overcollateralization Fund for a
Series of Bonds (together with reinvestment income
thereon at the applicable Assumed Reinvestment Rate
(defined below) specified in the related Prospectus
Supplement) may be used by the Bond Trustee to make
any required payments of principal and interest on
the Bonds of such Series in the event of uninsured
losses on the Pledged Loans securing such Series of
Bonds. See "Description of the Bonds-Valuation of
the Mortgage Collateral."
F. SUPPLEMENTAL CUSTODIAL
FUND If specified in the related Prospectus Supplement,
the Bond Trustee shall deposit monies, if any,
received by it for the establishment of a
supplemental custodial reserve fund ("Supplemental
Custodial Reserve Fund") and monies from the
Collection Account upon notification that either the
Master Servicer or Servicer are making servicing
advances under a specific mortgage loan due to
delinquency or failure by the mortgagor to make
regularly scheduled mortgage payments, which shall
be in the amount of such advances, liquidation
proceeds deposited directly by the Bond Trustee in
the event the Bond Trustee forecloses on or
otherwise liquidates a mortgaged property
("Mortgaged Property").
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<PAGE>
G. INSURANCE POLICIES If specified in the Prospectus Supplement for a
Series of Bonds secured by any Pledged Loans, the
Issuer will assign to the Bond Trustee for such
Series of Bonds payments due under certain
mortgage insurance, hazard insurance and other
policies (collectively, "Insurance Policies"),
which may include (i) Mortgage Insurance Policies
(defined below) which may consist of (a) primary
mortgage insurance policies ("Primary Mortgage
Insurance Policies") which, either alone or in
combination with excess coverage mortgage
insurance policies ("Excess Coverage Mortgage
Insurance Policies"), will insure (subject to
their provisions and certain limitations)
conventional Pledged Loans not covered solely by
the Pool Insurance Policy (defined below) against
all or a portion of any loss sustained by reason
of nonpayments by the mortgagors, (b) one or more
mortgage pool insurance policies (collectively,
"Pool Insurance Policy") providing coverage in an
amount specified in the related Prospectus
Supplement, or (c) any combination thereof as
specified in the related Prospectus Supplement,
(ii) FHA insurance and VA guarantees covering all
Pledged Loans which are FHA and VA Loans,
respectively, in the amounts and subject to the
terms described herein, (iii) standard hazard
insurance policies ("Standard Hazard Insurance
Policies") insuring Pledged Loans against certain
losses due to various causes, including fire,
lightning and windstorm, (iv) a special hazard
insurance policy ("Special Hazard Insurance
Policy") insuring Pledged Loans, unless otherwise
specified in the related Prospectus Supplement,
against certain losses which are not covered by
the Standard Hazard Insurance Policies with
respect to such Pledged Loans (including
vandalism, earthquakes, landslides and mud flows)
in an amount specified in the related Prospectus
Supplement, (v) a mortgagor bankruptcy bond
("Mortgagor Bankruptcy Bond") in an initial amount
specified in the related Prospectus Supplement
which will provide for payments in an amount
specified in such Prospectus Supplement in the
event of the bankruptcy of the mortgagor of a
Pledged Loan and (vi) such other Insurance
Policies as may be specified in the related
Prospectus Supplement. In the alternative,
partially or entirely in lieu of any Insurance
Policy, to the extent specified in the Prospectus
Supplement for a Series of Bonds, the Issuer may
make deposits to a reserve fund for such Series of
Bonds in amounts acceptable to the Rating Agency.
To the extent specified in the applicable
Prospectus Supplement and to the extent it will
not result in the downgrading of the then rating
of any Series of Bonds by the Rating Agency,
certain Insurance Policies (or deposits in lieu
thereof) may be pledged to secure more than one
Series of Bonds. With respect to any Series of
Bonds, the Issuer also will have the right to
substitute comparable coverage from another
insurer or provide equivalent protection for any
of the Insurance Policies (or deposits in lieu
thereof) securing such Series of Bonds so long as
such substitution will not result in the
downgrading of the then rating of the Bonds of
such Series by the Rating Agency. See "Security
for the Bonds -Insurance Policies - Mortgage
Insurance on the Pledged Loans," "Security for the
Bonds - Insurance Policies - Hazard Insurance on
the Pledged Loans," "Security for the Bonds -
Mortgagor Bankruptcy Insurance on the Pledged
Loans" and "Security for the Bonds - Other
Coverage on the Pledged Loans."
H. MASTER SERVICER AND
AGREEMENTS Various Servicers will perform certain servicing
functions with respect to any Pledged Loans
securing a Series of Bonds. If specified in
the Prospectus Supplement for a Series of
Bonds, the Issuer may enter into a master
servicing agreement with respect to such Series
of Bonds ("Master Servicing Agreement") with a
company identified in such Prospectus
Supplement ("Master Servicer") pursuant to
which the Master Servicer will administer and
supervise the performance by the Servicers of
their duties and responsibilities under the
Servicing Agreements with respect to such
Series of Bonds. Each such Servicer will be
obligated under a servicing agreement
(collectively, "Servicing Agreements") to
perform customary servicing
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<PAGE>
functions and to advance funds to cover certain
payments not made by the mortgagors to the
extent described herein. Pursuant to the Master
Servicing Agreement with respect to a Series of
Bonds, the Master Servicer will be obligated to
advance funds to cover any required advances
not made by the Servicers to the extent such
advances are recoverable under the Insurance
Policies or from the proceeds of liquidation of
the Pledged Loans securing such Series of Bonds
or as provided in the related Prospectus
Supplement. If the Issuer of a Series of Bonds
is a Trust, the Issuer will assign to such
Trust its rights under the Master Servicing
Agreement with respect to such Series of Bonds.
The Issuer will assign to the Bond Trustee its
rights under the Master Servicing Agreement and
the Servicing Agreements with respect to a
Series of Bonds as security for the Bonds of
such Series. If the Issuer does not enter into
a Master Servicing Agreement with respect to a
Series of Bonds, another entity acceptable to
the Rating Agency will assume the obligations
of the Master Servicer described herein. See
"Servicing of the Pledged Loans."
I. THE FUNDING AGREEMENTS The Issuer and various currently undesignated
limited purpose Finance Companies which may be
affiliated with home builders, thrifts, commercial
banks, mortgage bankers or other entities engaged
in mortgage finance may enter into Funding
Agreements ("Funding Agreements") pursuant to
which (i) each such Finance Company will borrow a
portion of the proceeds of the sale of such Series
of Bonds; (ii) each such Finance Company will
agree to repay the loan made to it by causing
payments to be made to the Bond Trustee in such
amounts as are necessary to pay the principal of
and interest on the loan made to it as the same
becomes due; and (iii) each Finance Company will
pledge to the Issuer security for its loan. The
right, title and interest in the Collateral and
all proceeds thereof pledged by the Finance
Companies under the Funding Agreements (except for
the rights to receive certain fees and
reimbursement for certain expenses and the right
to indemnification) will be assigned to the Bond
Trustee as security for a Series of Bonds. See
"Funding Agreements" and "The Issuer - Directors
and Executive Officers."
J. OTHER FUNDS AND
ACCOUNTS If specified in the Prospectus Supplement for a
Series of Bonds, the Issuer will maintain with the
Bond Trustee for such Series of Bonds such other
funds or accounts ("Other Funds") described in
such Prospectus Supplement.
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<PAGE>
TAX STATUS OF THE BONDS The Bonds of each Series will be taxable
obligations as provided in the Internal Revenue
Code of 1986, as amended ("Code"), and interest
paid or accrued, including original issue discount
("OID") with respect to any Compound Interest
Bonds or any other Class of Bonds issued with OID
will constitute taxable interest income. If
specified in the related Prospectus Supplement, an
election may be made with respect to the
Collateral securing a Series of Bonds to treat
such Collateral as a REMIC for federal income tax
purposes. In the absence of a REMIC election,
Bonds owned by domestic building and loan
associations and other thrift institutions will
not be considered "loans secured by an interest in
real property" or "qualifying real property
loans." Bonds owned by a real estate investment
trust will not be treated as "real estate assets."
Interest on the Bonds will not be considered
"interest on obligations secured by mortgages on
real property." See "Certain Federal Income Tax
Consequences."
ERISA A fiduciary of any employee benefit plan subject
to the Employment Retirement Income Security Act
of 1974 ("ERISA") should consult his own legal
advisors as to whether the acquisition or
retention of bonds could constitute a "prohibited
transaction" under the ERISA provisions. See
"Certain Federal Income Tax Consequences - ERISA
Consequences."
LEGAL INVESTMENT The Prospectus Supplement for each Series of Bonds
will specify whether the Bonds of such Series will
constitute "mortgage related securities" under
SMMEA and, as such, will be "legal investments"
for certain types of institutional investors to
the extent provided in SMMEA. See "Legal
Investment."
CERTAIN CONSIDERATIONS
THE BONDS OF A SERIES OFFERED THROUGH THIS PROSPECTUS AND A RELATED
PROSPECTUS SUPPLEMENT ARE SUBJECT TO CERTAIN RISKS. PRIOR TO MAKING AN
INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING SPECIAL CONSIDERATIONS, ALONG WITH OTHER INFORMATION IN THIS
PROSPECTUS AND A RELATED PROSPECTUS SUPPLEMENT. THE NUMBER AND NATURE OF ALL
POSSIBLE RISKS CANNOT BE ASCERTAINED; OFFEREES MUST RECOGNIZE THAT ALMOST ANY
KIND OF ADVERSITY MAY PRECLUDE THE ACHIEVEMENT OF STATED OBJECTIVES OF THE
ISSUER, PRECLUDE POSITIVE OPERATING RESULTS AND/OR RESULT IN A LOSS OF
INVESTMENT. OFFEREES UNABLE OR UNWILLING TO ASSUME SUCH RISKS MUST NOT CONSIDER
THE PURCHASE OF THE BONDS OF A PARTICULAR SERIES.
LIMITED LIABILITY. The Bonds of each Series will be limited obligations of
the Issuer, payable solely from the Collateral pledged to secure such Series of
Bonds. The Bonds of a Series will represent obligations solely of the Issuer
and will not be insured or guaranteed by the United States Government or any
other governmental agency. A default with respect to the Bonds of a Series
could occur even in the absence of a default of a portion of the Pledged Loans
securing the Bonds of such Series. The Finance Companies will not guaranty, nor
otherwise be obligated to pay, the Bonds of any Series. The Issuer will not
guaranty, nor otherwise will be obligated to pay, any Series of Bonds issued by
a Trust established by the Issuer. Although, with respect to any Series of
Bonds, the GNMA Certificates, FHLMC Certificates and FNMA Certificates securing
such Series of Bonds will be covered by GNMA, FHLMC and FNMA guarantees,
respectively, and the Pledged Loans securing a Series of Bonds will be covered
by certain Insurance Policies, no Series of Bonds will be insured or guaranteed
by GNMA, FHLMC, FNMA, any insurer, the Master Servicer, any Servicer or by any
other person or entity. Any Insurance Policies on the Pledged Loans securing a
Series of Bonds will not cover all contingencies and will cover other
contingencies only to a limited extent. The Overcollateralization Amount
(defined below) securing a Series of Bonds will cover losses on such Pledged
Loans only to the extent of such Overcollateralization Amount.
See "Security for the Bonds - Overcollateralization Fund."
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<PAGE>
LIMITED LIQUIDITY. There can be no assurance that a secondary market will
develop for the Bonds of any Series or, if it does develop, that it will provide
the holders of Bonds ("Bondholders") of such Series with liquidity in their
investment or that such liquidity will remain for the term of such Series of
Bonds. Holders of the Bonds may have difficulty selling the Bonds during
periods in which a secondary market fails to develop. Even if such markets
develop, market and yield fluctuations may preclude immediate realization of
amounts originally paid for such Bonds in the event the Bonds are sold in such
markets. See "Description of the Bonds - Book Entry Registration."
CERTAIN INVESTMENT CONSIDERATIONS. An investment in Bonds may be adversely
affected by, among other things, a decline in real estate values or a decline in
mortgage market interest rates. Secondly, notwithstanding the state of the real
estate market generally, the actual rates of delinquencies or foreclosures
experienced with respect to the Pledged Loans could be higher than those now
generally experienced in the mortgage lending industry. To the extent that such
losses are not covered by an applicable credit enhancements, Bondholders of
Bonds of a Series will bear the risk of loss resulting from defaults by
mortgagors and certain other hazards and will have to look primarily to the
value of the Mortgaged Properties (or related mortgaged properties) for recovery
of the outstanding principal and unpaid interest of the defaulted Pledged Loans.
The rate at which prepayments are made on the Pledged Loans will affect the life
of the related series of Bonds. If mortgage interest rates fall below the rates
on the Mortgage Collateral underlying a Series of Bonds, the rate of prepayment
on such Mortgage Collateral can be expected to increase. Prepayments may also
be influenced by a number of other factors, such as homeowner mobility, economic
conditions, enforceability of "due-on-sale" clauses, prevailing general and
local economic conditions and the availability of mortgage funds. Such
prepayments would reduce the value of the Mortgage Collateral for a Series of
Bonds. See "Description of the Bonds - Valuation of the Mortgage Collateral."
SALE OF MORTGAGE COLLATERAL ON DEFAULT. If an Event of Default (defined
below) occurs with respect to any Series of Bonds, there can be no assurance
that the Mortgage Collateral securing such Series of Bonds will be sufficient to
pay the principal and interest due on such Bonds. The value of the Mortgage
Collateral securing a Series of Bonds generally will fluctuate with changes in
prevailing rates of interest. Consequently, the Mortgage Collateral securing a
Series of Bonds or the Eligible Investments (defined below) in which the
Collection Account and the Security Funds for a Series of Bonds may be invested
may be liquidated at a discount from par value or from their purchase price, in
which case the proceeds of liquidation might be less than the outstanding
principal amount of and accrued interest on the Bonds of that Series. In such
event the Issuer may be unable to pay in full the principal of and interest on
the Bonds of such Series. The Bond Trustee will be prohibited from selling the
Collateral securing a Series of Bonds unless (a) the proceeds of such sale will
be sufficient to pay in full the principal of and accrued interest on the
outstanding Bonds of such Series at the date of such sale, or (b) if the
proceeds of such sale will not be sufficient to pay in full the principal of and
accrued interest on the outstanding Bonds of such Series at the date of such
sale, the Bond Trustee (i) obtains the consent of holders of two-thirds of the
entire principal amount of the outstanding Bonds of such Series and determines
that the Collateral securing the Bonds would not continue to provide sufficient
funds for the payment of principal of and interest on the Bonds as they would
have become due if the Bonds had not been declared due and payable or (ii)
obtains the consent of the holders of the entire principal amount of the
outstanding Bonds. (Indenture, Section 6.04.)
If, following an Event of Default (defined below), the Bonds of a Series
have not been declared to be due and payable or if such declaration and its
consequences are annulled and rescinded, the Bond Trustee may, if it determines
it to be in the best interests of the Bondholders, or at the request of the
holders of the majority in principal amount of the outstanding Bonds of such
Series shall, refrain from liquidating the Mortgage Collateral for the Bonds of
such Series. (Indenture, Section 6.05.) See "Certain Legal Aspects of Pledged
Loans - Foreclosure."
FHLMC GUARANTY. Payment of principal and interest on any FHLMC
Certificates securing a Series of Bonds will be guaranteed by FHLMC. This
guaranty will be backed by the credit of FHLMC, a federally chartered, privately
owned corporation. The full faith and credit of the United States will not,
however, guarantee any payments on any such FHLMC Certificates. Neither the
United States nor any agency thereof is obligated to finance FHLMC's operations
or to assist FHLMC in any other manner. See "Additional Information" for the
availability of the FHLMC Information Statement and other information respecting
FHLMC and FHLMC Certificates. See "Security for the Bonds - FHLMC
Certificates."
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<PAGE>
FNMA GUARANTY. Full and timely payment of interest and principal on any
FNMA Certificates securing a Series of Bonds will be guaranteed by FNMA. This
guaranty will be backed by the credit of FNMA, a federally chartered, privately
owned corporation. The full faith and credit of the United States will not,
however, guarantee any payments on any such FNMA Certificates. Neither the
United States nor any agency thereof is obligated to Finance FNMA's operations
or to assist FNMA in any other manner. See "Additional Information" for the
availability of the FNMA Prospectus and other information respecting FNMA and
FNMA Certificates. See "Security for the Bonds - FNMA Certificates."
BOOK-ENTRY REGISTRATION. Issuance of Bonds in book-entry form may reduce
the liquidity of such Bonds in the secondary trading market since investors may
be unwilling to purchase Bonds for which they cannot obtain physical
certificates. Since transactions in Bonds will, in most cases, be able to be
effected only through Cede & Co. and certain banks, the ability of a Bondholder
to pledge a Bond to persons or entities that do not participate in the Cede
system, or otherwise to take actions in respect of such Bonds, may be limited
due to lack of a physical certificate representing the Bonds. See "Description
of the Bonds - Book Entry Registration."
CREDIT ENHANCEMENTS. If credit enhancements are provided with respect to a
Series of Bonds, such credit enhancements will not cover all contingencies and
will cover certain contingencies only to a limited extent, in each case as
specified in the related Prospectus Supplement. See "Security for the Bonds -
Other Coverage on the Pledged Loans."
STATE AND FEDERAL REGULATIONS. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the entities originating or acquiring the Pledged Loans
("Originators") and the Master Servicer. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers and which regulate unfair and deceptive practices and practices
which may apply to the origination, servicing and collection of the Pledged
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Pledged Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. The Pledged Loans may be
subject to certain federal laws, including; (i) the Federal Truth in Lending Act
and Regulation Z promulgated thereunder, which require certain disclosures to
the borrowers regarding the terms of the Pledged Loans; (ii) the Equal Credit
Opportunity Act and Regulation B promulgated thereunder, which require certain
disclosures to the borrowers regarding the terms of the Pledged Loans; (ii) the
Equal Credit Opportunity Act and Regulation B promulgated thereunder, which
prohibit discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act, which establishes certain
requirements for disclosure regarding mortgage transactions and originators of
mortgage loans; and (iv) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit experience. See
"Certain Legal Aspects of the Pledged Loans."
SECURITY INTERESTS AND OTHER ASPECTS OF MANUFACTURED HOUSING CONTRACTS.
Each Manufactured Housing Contract is secured by a security interest in a
Manufactured Home. Perfection of security interests in Manufactured Homes and
enforcement of rights to realize upon the value of Manufactured Homes as
collateral for Manufactured Housing Contracts are subject to a number of Federal
and state laws, including the Uniform Commercial Code ("UCC") as adopted in each
state and each state's certificate of title statutes. The steps necessary to
perfect the security interest in a Manufactured Home will vary from state to
state. In addition, numerous Federal and state consumer protection laws impose
requirements on lending under conditional sales contracts and installment loan
agreements such as the Manufactured Housing Contracts, and the failure by the
lender or seller of goods to comply with such requirements could give rise to
liabilities of assignees for amounts due under such agreements and claims by
such assignees may be subject to set-off as a result of such lender's or
seller's noncompliance. These laws would apply to the Bond Trustee as assignee
of the Manufactured Housing Contracts. The seller of Manufactured Housing
Contracts to the Issuer will warrant that each Manufactured Housing Contract
complies with all requirements of law and will make certain warranties relating
to the validity, subsistence, perfection and priority of the security interest
in each manufactured home securing a Manufactured Housing Contract. A breach of
any such warranty that materially and adversely affects any Manufactured Housing
Contract would create an obligation of the seller to repurchase such
Manufactured Housing Contract unless such breach is cured. If the recovery of
amounts due on Manufactured Housing Contracts is dependent on repossession and
resale of Manufactured Homes securing Manufactured Housing Contracts that are in
default, certain other factors may limit the ability of the Bondholders to
realize upon the Manufactured Homes or may
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limit the amount realized to less than the amount due. See "Certain Legal
Aspects of Pledged Loans - Enforcement of Rights under Installment Contracts."
RISKS ASSOCIATED WITH NON-OWNER OCCUPIED PROPERTIES. Certain of the
Mortgaged Properties relating to Pledged Loans may not be owner occupied. It is
possible that the rate of delinquencies, foreclosures and losses on Pledged
Loans secured by non-owner occupied properties could be higher than for Pledged
Loans secured by the primary residence of the borrower. See "Certain Legal
Aspects of Pledged Loans."
CHARACTERISTICS OF SECOND MORTGAGES. Certain of the Mortgage Collateral
may consist of Pledged Loans which will be home equity loans secured by junior
liens subordinate to senior liens ("Second Mortgage Loans"). As a result, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the principal balance of a Second Mortgage Loan only to the
extent that the claims, if any, of each such senior mortgagee are satisfied in
full, including any related foreclosure costs. In addition, a second mortgagee
may not foreclose on the Mortgaged Property securing the Second Mortgage Loan
unless it forecloses subject to the related senior mortgage, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of a default thereunder.
Generally, a Servicer will satisfy each such senior mortgage at or prior to the
foreclosure sale only to the extent that it determines that any amounts so paid
will be recoverable from future payments and collections on the Second Mortgage
Loans or otherwise. See "Certain Legal Aspects of Pledged Loans."
COOPERATIVE LOANS. If specified in the related Prospectus Supplement for a
Series of Bonds, the Mortgage Collateral may contain Pledged Loans which are
Cooperative Loans. Such Cooperative Loans are not secured by liens on real
estate. The "owner" of a cooperative apartment does not own the real estate
constituting the apartment, but owns shares of stock in a corporation which
holds title to the building in which the apartment is located, and by virtue of
owning such stock is entitled to a proprietary lease to occupy the specific
apartment. Thus, a Cooperative Loan is a personal loan secured by a lien on the
shares and an assignment of the lease. If the borrower defaults on a
Cooperative Loan, the lender's remedies are similar to the remedies which apply
to a foreclosure of a mortgage or deed of trust, in that the lender can
foreclose the loan and assume "ownership" of the apartment. There are certain
risks which arise as a result of the cooperative form of ownership which
differentiate Cooperative Loans from other types of Pledged Loans. For example,
the power of the board of directors of most cooperative corporations to reject a
proposed purchaser of a unit owner's shares (and prevent the sale of an
apartment) for any reason (other than reasons based upon unlawful
discrimination), or for no reason, significantly reduces the number of potential
purchasers in the event of a foreclosure. See "Certain Legal Aspects of Pledged
Loans - Anti-Deficiency Legislation and Other Limitations on Lenders."
BALLOON LOANS. Certain of the Mortgage Collateral may consist of Pledged
Loans which were originated with a Stated Maturity of less than the period of
time of the corresponding amortization schedule ("Balloon Loans"). As a result,
upon the maturity of a Balloon Loan, the mortgagor will be required to make a
"balloon payment" which will be significantly larger than such mortgagor's
previous monthly payments. The ability of such a mortgagor to repay a Balloon
Loan at maturity frequently will depend on such mortgagor's ability to refinance
such Balloon Loan. The ability of a mortgagor to refinance such Balloon Loan
will be affected by a number of factors, including the interest rates on real
estate loans at the time, the value of the related Mortgaged Property, the
mortgagor's equity in the related Mortgaged Property, the financial condition of
the mortgagor, the tax laws and general economic conditions at the time. See
"Certain Aspects of Pledged Loans - General."
DEFAULTS ON MORTGAGE COLLATERAL. Unless otherwise specified in the
Prospectus Supplement, the Collateral securing a series of Bonds will not be
insured or guaranteed in whole or in part by the United States, any other
governmental agency or any private mortgage insurer. The Mortgage Collateral
may include non-recourse loans with respect to the mortgagor meaning the only
source of payment will be amounts realized from the property secured by such
Mortgage Collateral. In addition, if a mortgagor files for bankruptcy
protection, bankruptcy laws may preclude immediate process to realize any
proceeds from the underlying property securing such Mortgage Collateral and may
prevent any deficiency judgment against a mortgagor from being obtained, thus
reducing the total amount of collateral securing a series of Bonds. See "Certain
Legal Aspects of Pledged Loans - Foreclosure."
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RISKS ASSOCIATED WITH LIQUIDATION OF PROPERTY SECURED BY DEFAULTED PLEDGED
LOANS. General economic conditions and other factors (which may not affect real
property values) may have an impact on the ability of borrowers to repay
Pledged Loans. Loss of earnings, illness, divorce and other factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of personal bankruptcy of a mortgagor, it is possible that the Bondholders could
experience a loss with respect to such mortgagor's loan. In conjunction with a
mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such mortgage loan or
permanently reduce the principal balance of such mortgage loan, thus either
delaying or permanently limiting the amount received by the Bond Trustee with
respect to such mortgage loan. Moreover, in the event a bankruptcy court
prevents the transfer of the related Mortgaged Property to the Bond Trustee, any
remaining balance on such mortgage loan may not be recoverable. See "Security
for the Bonds - Mortgagor Bankruptcy Insurance on the Pledged Loans."
Even assuming that the Mortgaged Properties provide adequate security for
the Pledged Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Pledged Loans, with corresponding delays in the
receipt of related proceeds by the Bond Trustee. An action to foreclose on a
Mortgaged Property securing a Pledged Loan is regulated by state statutes and
rules and is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed, sometimes requiring several years to
complete. In some states an action to obtain a deficiency judgment would not be
permitted following a nonjudicial sale of a Mortgaged Property. In the event of
a default by a mortgagor, these restrictions, among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Mortgaged Property.
The Master Servicer will be entitled to deduct from liquidation proceeds thereof
all expenses reasonably incurred in attempting to recover amounts due on the
related loan payments to prior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses. In the
event that any Mortgaged Properties fail to provide adequate security for the
related Pledged Loans, if insufficient funds are available from any Reserve
Account and the Issuer does not receive sufficient funds from the insurance
company covering the loss, the Bondholders may experience a loss.
Liquidation expenses with respect to defaulted Pledged Loans do not vary
directly with the outstanding principal balance of the Pledged Loans at the time
of default. Therefore, assuming that a Master Servicer would take the same
steps in realizing upon a defaulted Pledged Loan having a small remaining
principal balance as it would in the case of a defaulted Pledged Loan having a
larger principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
smaller Pledged Loan than would be the case with a larger mortgage loan.
Because the average outstanding principal balances of the Pledged Loans which
are Second Mortgage Loans are small relative to the size of the Pledged Loans in
a typical pool composed entirely of first mortgages, realizations net of
liquidation expenses on defaulted Pledged Loans which are Second Mortgage Loans
may also be smaller as a percentage of the principal amount of such Pledged
Loans than would be the case with typical pool of first mortgage loans. See
"Certain Legal Aspects of Pledged Loans - Foreclosure."
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
("Relief Act"), or similar state legislation, a mortgagor who enters military
service after the origination of a mortgage loan (including a mortgagor who is a
member of the National Guard or is in reserve status at the time of the
origination of the Pledged Loan and is later called to active duty) may not be
charged interest (including fees and charges) above an annual rate of 6% during
the period of such mortgagor's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action could
affect, for an indeterminate period of time, the ability of the Master Servicer
to collect full amounts of interest on certain of the Pledged Loans. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Pledged Loan during the
mortgagor's period of active duty status. Thus, in the event that such a
mortgage loan goes into default, there may be delays and losses caused by the
inability to realize upon the Mortgaged Property in a timely fashion. See
"Certain Legal Aspects of Pledged Loans - Anti-Deficiency Legislation and Other
Limitations on Lenders."
ENVIRONMENTAL CONSIDERATIONS. Under the federal Comprehensive Environmental
Response Compensation and Liability Act, as amended, ("CERCLA") and under
certain state laws, a secured party which takes a deed in lieu of foreclosure,
purchases a Mortgaged Property at a foreclosure sale or operates a Mortgaged
Property may become liable in certain circumstances for the costs of remedial
action ("Remedial Action Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the property. Such Remedial Action Costs
may be substantial. It is possible that such Remedial Action Costs could
subject the Collateral to a lien and reduce the amounts otherwise available to
pay to the holders
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of the Bonds if a Mortgaged Property securing a Pledged Loan was acquired by
the Bond Trustee through foreclosure or deed-in-lieu of foreclosure and if
such Remedial Action Costs were incurred. Moreover, certain state laws
impose a lien for any Remedial Action Costs incurred by such states on the
property that is the subject of such Remedial Action Costs. Foreclosure on
any Mortgaged Property known to be contaminated with or affected by hazardous
wastes or hazardous substances will be prohibited. The amounts otherwise
available to distribute to Bondholders may be reduced if a Mortgaged Property
securing a defaulted Pledged Loan is prohibited to be foreclosed. If a
Mortgaged Property is foreclosed upon and thereafter such Mortgaged Property
is determined to be contaminated, the Collateral may be reduced by the
amounts of any Remedial Action Costs imposed on the Bond Trustee. See "Legal
Aspects of Pledged Loans - Environmental Considerations."
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USE OF PROCEEDS
The Issuer will use all of the net proceeds from the sale of the Bonds of a
Series (i) to purchase or repay indebtedness with respect to the Mortgage
Collateral securing such Series of Bonds or (ii) to fund loans to each Finance
Company participating in such Series of Bonds pursuant to the Funding Agreements
with each such Finance Company. The net proceeds of the offering of Bonds of a
Series will be held in trust by the Issuer for the benefit of holders of Bonds
of such Series pending release (expected to be simultaneous) from such trust
upon receipt by the Bond Trustee of the Collateral for such Series of Bonds.
DESCRIPTION OF THE BONDS
The Bonds of each Series will be issued pursuant to the Indenture for such
Series and will be secured by the Mortgage Collateral and the Security Funds for
such Series of Bonds. The following summaries describe certain provisions of the
Bonds. The summaries do not purport to be complete and are subject to the
provisions of the Indenture relating to each Series of Bonds. When particular
provisions or terms used in the Indenture are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that any Bonds of a Series may be issued thereunder up
to the aggregate principal amount that may be authorized from time to time by
the Issuer. (Indenture, Section 3.01.) Each Series of Bonds will consist of one
or more Classes of Bonds and may include (i) one or more Classes of Compound
Interest Bonds upon which interest will accrue but will not be payable until
each Class of Bonds of such Series with an earlier Stated Maturity has been paid
in full or until such other time as may be specified in the Prospectus
Supplement for such Series of Bonds, (ii) one or more Classes of Bonds
("Floating Rate Bonds" or "Variable Rate Bonds") on which the interest rate may
be adjusted periodically, (iii) one or more Classes of Bonds ("Principal Only
Bonds" or "Zero Coupon Bonds") which do not bear interest and (iv) one or more
Classes of Bonds ("Planned Amortization Class Bonds," "Super Planned
Amortization Class Bonds," "Targeted Planned Amortization Class Bonds,"
"Scheduled Amortization Yield Bonds," "Stabilized Mortgage Reduction Term Bonds"
or "Sinker Bonds") on which principal payments are made pursuant to a specified
repayment schedule to the extent to which funds are available therefor,
regardless of which other Classes of such Bonds remain outstanding as described
in the Prospectus Supplement for such Series. As specified in the Prospectus
Supplement for a Series of Bonds, the Bonds of a Series may be (i) Bonds with
respect to which no election is intended to be made with respect to the
Collateral securing such Series of Bonds to treat such Collateral as a REMIC for
federal income tax purposes ("Non-REMIC Bonds") or (ii) Bonds as to which such
an election is intended to be made ("REMIC Bonds"). The Classes of Bonds in a
Series consisting of REMIC Bonds may constitute "regular interests" (defined
below) in a REMIC or "residual interests" (defined below) in a REMIC. See
"Federal Income Tax Consequences to Bondholders."
The Bonds of each Series will be issued in fully registered, certificated
or book-entry form in the minimum denominations for each Class specified in the
related Prospectus Supplement. (Indenture, Section 3.02.) The Bonds of each
Series in certificated form may be transferred or exchanged at the corporate
trust office of the Bond Trustee without the payment of any service charge,
other than any tax or other governmental charge payable in connection therewith.
(Indenture, Section 3.05.). See "Description of the Bonds Book Entry
Registration."
Unless otherwise specified in the Prospectus Supplement for a Series of
Bonds, the Bond Trustee will make payments of principal and interest on the
Bonds of a Series by checks mailed to registered holders of such Bonds as of the
record date specified in such Prospectus Supplement for such Series of Bonds at
their addresses appearing on the books and records of the Issuer, except that
the final payments in retirement of each Class of Bonds of a Series in
certificated form will be made only upon presentation and surrender of such
Bonds at the office or agency of the Issuer maintained for that purpose.
(Indenture, Section 3.07.)
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PAYMENTS OF INTEREST
Unless otherwise specified in the related Prospectus Supplement, each Class
of Bonds of a Series will bear interest on its outstanding principal amount at a
fixed or variable rate as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, interest on all
Bonds of a Series other than Compound Interest Bonds will be paid periodically
on the dates specified in such Prospectus Supplement. Payments of interest on a
Class of Compound Interest Bonds included in such Series will not begin until
each Class of Bonds of such Series with an earlier Stated Maturity has been paid
in full or until such other time as may be specified in the Prospectus
Supplement for such Series of Bonds. A later Class of Compound Interest Bonds
would, unless otherwise specified in the related Prospectus Supplement, be
effectively subordinated to bonds with an earlier Stated Maturity. Prior to
that time, interest on such Class of Compound Interest Bonds will accrue and
will be added to the principal amount of such Bonds. Thereafter, unless
otherwise specified in the related Prospectus Supplement, interest payments will
be made on such Class of Compound Interest Bonds on the unpaid Accreted Value of
such Class of Compound Interest Bonds. Unless otherwise specified in the
related Prospectus Supplement, the Accreted Value of a Class of Compound
Interest Bonds will equal the original principal amount of such Class of
Compound Interest Bonds plus accrued and accumulated interest compounded thereon
through the immediately preceding Payment Date for such Series, less any
principal payments made on such Class of Compound Interest Bonds.
PAYMENTS OF PRINCIPAL
Unless otherwise specified in the Prospectus Supplement for a Series of
Bonds, principal payments will be made on the Bonds of such Series on the
Payment Dates specified in such Prospectus Supplement in an aggregate amount
equal to the sum of (i) the Required Principal Payment (defined below) and (ii)
the percentage, if any, of the Excess Cash (defined below) specified in such
Prospectus Supplement. With respect to Required Principal Payments:
(i) Unless otherwise specified in the Prospectus for a Series of Bonds, the
Required Principal Payment for each Payment Date for such Series of Bonds will
be an amount equal to the difference between (a) the sum of (1) the principal
amount of the Bonds of such Series outstanding as of the close of business on
the immediately preceding Payment Date, and (2) the amount of interest, if any,
accrued on any Compound Interest Bonds included in such Series but not paid or
compounded since the Issue Date and (b) the aggregate Outstanding Bond Values
(defined below) of the Mortgage Collateral securing such Series of Bonds as of
the current Payment Date.
(ii) In the case of the first Payment Date, the Required Principal
Payment will be an amount equal to the difference between (a) the sum of (1)
the principal amount of the Bonds of such Series outstanding as of the Issue
Date and (2) the amount of interest, if any, accrued on any Compound Interest
Bonds included in such Series but not paid or compounded since the Issue
Date, and (b) the aggregate Outstanding Bond Values of the Mortgage
Collateral securing such Series of Bonds as of the current Payment Date.
(iii) In the event a redemption or Special Redemption has occurred since
the immediately preceding Payment Date, the Required Principal Payment will
be the difference between (a) the sum of (1) the principal amount of the
Bonds of such Series outstanding as of the latest redemption date or special
redemption date (defined below), and (2) the amount of interest, if any,
accrued on any Compound Interest Bonds included in such Series but not paid
or compounded since the immediately preceding Payment Date which is not then
payable and (b) the aggregate Outstanding Bond Values of the Mortgage
Collateral securing such Series of Bonds as of the current Payment Date.
All payments of principal on the Bonds of a Series will be allocated among
the Classes of Bonds of such Series in the order and amounts specified in the
related Prospectus Supplement. All payments of principal on Bonds of a
particular Class will be applied on a PRO RATA, random lot or other selection
basis among all Bonds of such Class, as specified in the related Prospectus
Supplement. See "Description of the Bonds-Payments of Principal and Interest."
The Excess Cash for a Series of Bonds as of any Payment Date will be the
excess, if any, of the sum of (i) all distributions received on the Mortgage
Collateral securing such Series of Bonds in the period preceding such Payment
Date, (ii) the reinvestment income thereon, and (iii) if applicable, the amount
of cash withdrawn from any Security Fund securing such Series of Bonds since the
immediately preceding Payment Date, over the sum of (a) all interest accrued and
paid or
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payable on the Bonds of such Series since the immediately preceding Payment
Date, (b) the Required Principal Payment for such Series of Bonds for such
Payment Date, (c) the principal amount of Bonds of such Series redeemed
pursuant to any redemption since the immediately preceding Payment Date, (d)
the amount of any required deposits to any applicable Security Fund and (e)
certain expenses, including the Owner-Trustee fees and expenses, the Bond
Trustee fees and expenses (disclosed in the Indenture for a Series of Bonds),
the Master Servicer fees and expenses (as disclosed in the Master Servicing
Agreement for a Series of Bonds) and the Manager (defined below) fees and
expenses (as disclosed in the Management Agreement for a Series of Bonds).
Reference is made to a form of Indenture, Master Servicing Agreement and
Management Agreement filed as Exhibits to the Registration Statement of which
this Prospectus constitutes a part.
The Stated Maturity for a Class of Bonds will be determined based upon the
quantity and quality of the Collateral securing a Class of Bonds. Material
facts regarding such Collateral will be specified in the related Prospectus
Supplement for a Series of Bonds and will be the basis of determining the Stated
Maturity for a Class of Bonds. All or a portion of the payments, including
prepayments on the Mortgage Collateral securing a Series of Bonds, will be used
to amortize Bonds of such Series, as described in the related Prospectus
Supplement. The rate of prepayments on the Mortgage Collateral securing a
Series of Bonds will depend on the characteristics of any mortgage loans
included in or underlying such Mortgage Collateral, as well as on the prevailing
level of interest rates from time to time and other economic factors. No
assurance can be given as to the actual prepayment experience of such Mortgage
Collateral. See "Description of the Bonds - Maturity and Prepayment
Considerations."
The proceeds of any mortgage loans underlying the Mortgage Certificates
securing a Series of Bonds liquidated as the result of defaults by mortgagors
together with the proceeds paid by GNMA, FHLMC and FNMA pursuant to their
guarantees will be treated as prepayments under such Mortgage Certificates.
The proceeds of any Pledged Loans securing a Series of Bonds liquidated as a
result of defaults by mortgagors, together with proceeds of Insurance
Policies, guarantees or the Overcollateralization Fund with respect to such
Pledged Loans will be treated as prepayments on such Pledged Loans, to the
extent not reimbursable to a Servicer or the Master Servicer. The
liquidation proceeds of the mortgage loans underlying such Mortgage
Certificates and of such Pledged Loans plus proceeds of Insurance Policies,
guarantees or the Overcollateralization Fund expected to be realized in
connection therewith will be sufficient to cover the Outstanding Bond Values
attributable to such liquidated Mortgage Certificates and Pledged Loans.
VALUATION OF THE MORTGAGE COLLATERAL
Unless otherwise specified in the related Prospectus Supplement, the Bond
Value for each item of Mortgage Collateral securing a Series of Bonds will
represent the principal amount of Bonds of such Series that, based on certain
assumptions and irrespective of the prepayments on such item of Mortgage
Collateral, can be supported by the distributions on such item of Mortgage
Collateral, together with (depending on the type of such Mortgage Collateral and
the method used to determine its Bond Value) the Reinvestment Income (defined
below) thereon at the Assumed Reinvestment Rate (defined below) and, if
applicable, the cash available to be withdrawn from any Security Fund with
respect to such Series of Bonds. The method and related assumptions for
calculating the Bond Values of the Mortgage Collateral securing a Series of
Bonds will be specified in the Indenture for such Series of Bonds. In any
event, the aggregate of the Bond Values of all Mortgage Collateral securing a
Series of Bonds at the Issue Date of the Bonds of such Series ("Aggregate
Initial Bond Value") will be at least equal to the original principal amount of
the Bonds of such Series.
The method of calculation of the outstanding Bond Value with respect to any
item of Mortgage Collateral securing a Series of Bonds may be modified at any
time so long as such modification does not result in a downgrading of the then
applicable rating by the Rating Agency. The Issuer may withdraw Mortgage
Collateral or cash securing a Series of Bonds to the extent of the excess, if
any, of the outstanding Bond Value of the Mortgage Collateral securing such
Series of Bonds over the unpaid principal amount of the Bonds of such Series
then outstanding. However, such withdrawal may occur only if the Bond Trustee
shall have received a certificate of a firm of independent certified public
accountants acceptable to the Bond Trustee to the effect that the disbursement
of such funds will not impair the security of the Bonds in contravention of the
provisions of the Indenture for a Series of Bonds. (Indenture, Section 13.05)
Reinvestment Income ("Reinvestment Income") for a Series of Bonds will be
based on the applicable contractually specified interest rates pursuant to
guaranteed reinvestment agreements with an institution acceptable to the Rating
Agency or other specified interest rates acceptable to the Rating Agency
("Assumed Reinvestment Rates"). The Assumed
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Reinvestment Rates for a Series of Bonds will be specified in the related
Prospectus Supplement when Reinvestment Income is used to calculate Bond
Value.
Unless otherwise specified in the Prospectus Supplement for a Series of
Bonds, each Buy-Down Pledged Loan securing such Series of Bonds will be valued
by taking into account the deposit to the Buy-Down Fund for such loan. If any
item of GPM Collateral securing a Series were to be valued on a level debt
service basis in calculating its Bond Value at the Issue Date of the Bonds of
such Series then such item of GPM Collateral would be valued as though such item
of GPM Collateral were amortized on a level debt service basis by taking into
account the deposit to the Supplemental Debt Service Fund for such item of GPM
Collateral. See "Security for the Bonds-Supplemental Debt Service Fund" and
"Security for the Bonds - Buy-Down Fund."
OVERCOLLATERALIZATION
To the extent specified in the Prospectus Supplement for a Series of Bonds,
the Mortgage Collateral securing such Series of Bonds may include a certain
level of overcollateralization ("Overcollateralization Amount") to fund losses
resulting from delinquencies, defaults and other losses not recoverable from
insurance policies ("Aggregate Loan Losses") on Pledged Loans securing such
Series of Bonds. The Aggregate Initial Overcollateralization Amount with
respect to a Series of Bonds will be based on an assumed level of Aggregate Loan
Losses with respect to the Pledged Loans securing such Series of Bonds and will
be specified in the Prospectus Supplement for such Series.
If the Mortgage Collateral securing a Series of Bonds includes an
Overcollateralization Amount, the Issuer will be required to maintain with the
Bond Trustee an Overcollateralization Fund for such Series of Bonds in an amount
equal to the Aggregate Initial Overcollateralization Amount reduced by (i) the
Aggregate Loan Losses on the related Pledged Loans securing such Series of Bonds
and (ii) the difference between (a) the Aggregate Outstanding Collateral Value
(defined below) of the Mortgage Collateral at the date of determination and (b)
the principal amount of the Bonds outstanding at the date of determination. The
Aggregate Outstanding Collateral Value represents the aggregate outstanding Bond
Values of the Mortgage Collateral before taking into account any
Overcollateralization Amounts. The amount required to be maintained in the
Overcollateralization Fund may be reduced from time to time to the extent that
such reductions will not result in a downgrading of the then applicable rating
by the Rating Agency. However, such withdrawal may only occur if the Bond
Trustee shall have received a certificate of a firm of independent certified
public accountants acceptable to the Bond Trustee to the effect that the
disbursement of such funds will not impair the security of the Bonds in
contravention of the provisions of the Indenture for a Series of Bonds.
(Indenture, Section 13.05)
Amounts in the Overcollateralization Fund for a Series of Bonds will be
available to fund the Aggregate Loan Losses on the related Mortgage
Collateral securing such Series of Bonds. See "Security for the
Bonds-Overcollateralization Fund."
REDEMPTION
To the extent specified in the Prospectus Supplement for a Series of
Bonds having other than monthly Payment Dates, the Bonds of such Series may
be subject to Special Redemption, in whole or in part, on a PRO RATA, random
lot or other selection basis as may be specified in such Prospectus
Supplement, on the day of any month specified in such Prospectus Supplement
upon the Issuer's or the Bond Trustee's determination in accordance with
certain assumptions specified in the Indenture for such Series of Bonds that,
because of principal prepayments on the Pledged Loans and the yields then
available for reinvestment, the funds in the Collection Account for such
Series of Bonds on the next succeeding Payment Date would be insufficient to
meet the debt service requirements on the Bonds of such Series on such
Payment Date. The amount of any Special Redemption with respect to a Series
of Bonds will be limited to the amount of principal payments on the Mortgage
Collateral securing such Series of Bonds received since the immediately
preceding Payment Date or intervening special redemption date or redemption
date that would otherwise be required to be applied to the payment of
principal on the Bonds of such Series on the next succeeding Payment Date.
As a result, no Special Redemption of Bonds of a Series can shorten the
maturity of the Bonds so redeemed by more than the period of time between
the date on which the Special Redemption occurs and the next succeeding
Payment Date for such Series.
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With respect to a Series of Bonds subject to Special Redemption, a portion
of the Excess Cash specified in the related Prospectus Supplement may be held by
the Bond Trustee for application, if necessary, to the payment of interest on
the Bonds of such Series in the event of prepayments on the Mortgage Collateral
securing such Series of Bonds and will, when the amounts so held reach the
required level, preclude the need for a Special Redemption. To the extent
specified in the related Prospectus Supplement such Excess Cash may be applied
to pay principal on the Bonds of such Series.
All payments of principal pursuant to any Special Redemption will be made
in the priority and manner specified in the related Prospectus Supplement. The
special redemption dates ("Special Redemption Dates") for a Series of Bonds will
be the day of the month specified in the related Prospectus Supplement. Notice
of any Special Redemption must be mailed by the Issuer or the Bond Trustee as
specified in the related Prospectus Supplement. The redemption price for any
Bonds of a Series to be redeemed pursuant to a Special Redemption will be equal
to the unpaid principal amount of the Bonds of such Series (or portion thereof
to be redeemed) or 100% of the unpaid Accreted Value of any Compound Interest
Bonds or portion thereof to be redeemed) together with accrued interest thereon,
if any, as specified in the related Prospectus Supplement. (Indenture, Section
11.02.)
The Issuer also may redeem, at its option, or at the option of such
other persons or entities specified in the Prospectus Supplement, in whole or
in part, on a PRO RATA, random lot or other selection basis, the Bonds of any
Class of a Series as specified in the related Prospectus Supplement prior to
their Stated Maturity under the circumstances specified in the related
Prospectus Supplement. Notice of such redemption must be mailed by the Issuer
or the Bond Trustee as specified in the related Prospectus Supplement. The
redemption price for any Bond (or portion thereof) to be redeemed will be the
percentage of the unpaid principal amount of such Bonds specified in the
related Prospectus Supplement, together with accrued interest thereon, if
any, as specified in the related Prospectus Supplement. (Indenture, Section
11.01.)
To the extent specified in a Prospectus Supplement for a Series of Bonds,
one or more Classes of Bonds of such Series may be subject to optional
redemption by the holders of such Bonds or to mandatory redemption by the Issuer
through the operation of a Redemption Fund specified in such Prospectus
Supplement. Any such optional or mandatory redemption with respect to a Series
of Bonds and the operation of such Redemption Fund for such Series of Bonds will
be described in the related Prospectus Supplement and will be on such terms and
conditions as described therein and specified in the Indenture for such Series
of Bonds.
The Issuer also may, at its option, obtain for any Series of Bonds one or
more guarantees from a company or companies acceptable to the Rating Agency.
Such guarantees may provide for one or more of the following for any Series of
Bonds: (i) call protection for any Class of Bonds of such Series, (ii) a
guaranty of a certain prepayment rate of some or all of the Pledged Loans
included in or underlying the Mortgage Collateral for such Series, (iii) a
guarantee of a certain prepayment experience (described below) for the Bonds of
such Series, or (iv) certain other guarantees, all as specified in the related
Prospectus Supplement.
MATURITY AND PREPAYMENT CONSIDERATIONS FOR CERTAIN FIRST MORTGAGES ON SINGLE-
FAMILY RESIDENCES
For any Series of Bonds, a portion of the mortgage loans underlying the
Mortgage Certificates and the Pledged Loans securing a Series of Bonds may
consist of first lien residential mortgages or deeds of trust. The mortgage
loans underlying the GNMA Certificates securing a Series of Bonds may consist of
FHA or VA Loans and other qualifying conventional mortgage loans; the mortgage
loans underlying the FNMA Certificates securing a Series of Bonds may consist of
conventional loans, FHA or VA Loans; the mortgage loans underlying the FHLMC
Certificates securing a Series of Bonds may consist of conventional loans; and
the Pledged Loans securing a Series of Bonds may consist of conventional loans,
FHA or VA Loans. See "Security for the Bonds."
The prepayment experience on the mortgage loans underlying the Mortgage
Certificates and on the Pledged Loans will affect the average life of each Class
of Bonds of a Series secured thereby and the extent to which each such Class is
paid prior to its Stated Maturity. The Stated Maturity for each Class of Bonds
of a Series will be the date on which the principal thereof will be fully paid,
assuming a rate of principal prepayments with respect to the Mortgage Collateral
securing such Bonds as specified in the related Prospectus Supplement and that
the scheduled payments of principal and interest on such Mortgage Collateral
will be invested at the applicable Assumed Reinvestment Rates for such Series.
Because certain of the mortgage loans underlying the Mortgage Certificates may
have terms to maturity that are shorter than those indicated by the
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maturity of the related Mortgage Certificates, the Bonds of the related
Series may be fully paid prior to their Stated Maturity even in the absence
of prepayments and a rate of return on the distributions on such Mortgage
Certificates in excess of the Assumed Reinvestment Rates for such Series.
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The experience of the FHA relating to insured single-family mortgage
loans at various interest rates with original maturities of 15 years or 26 to
30 years, all of which permit assumption by the new buyer if the home is sold
(as will the FHA and the VA Loans and certain of the mortgage loans
underlying the FHLMC Certificates and FNMA Certificates and certain of the
Pledged Loans pledged to secure a Series of Bonds), indicates that, while
some of such mortgage loans will remain outstanding until their scheduled
maturity, a substantial number will be prepaid prior to their scheduled
maturity. Prepayments on the mortgage loans underlying the Mortgage
Certificates and on the Pledged Loans securing a Series of Bonds will be
passed through to the holder of the Mortgage Certificate or Pledged Loan as a
prepayment on such Mortgage Certificate or Pledged Loan and a portion of such
prepayment proceeds will be paid to holders of Bonds of such Series as
additional principal payments on the Bonds of such Series. Accordingly, if
the prepayment experience on the mortgage loans underlying the Mortgage
Certificates and on the Pledged Loans securing a Series of Bonds conforms to
the general experience described above, a substantial portion of the mortgage
loans underlying the Mortgage Certificates and the Pledged Loans, and
consequently the Bonds of such Series, will be prepaid prior to their
maturity.
Prepayments on mortgages are commonly measured relative to a prepayment
standard or model, such as the FHA Prepayment Experience, the Single Monthly
Mortality prepayment model ("SMM"), the Conditional Prepayment Rate
prepayment model ("CPR"), each as described below, or such other prepayment
model assumption ("PMA") as may be specified in the Prospectus Supplement
relating to a Series of Bonds.
The Actuarial Division of the U.S. Department of Housing and Urban
Development ("HUD") has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentage ("FHA
Prepayment Experience") of the original number of FHA Loans in a pool
consisting of 15-year, 20-year, 25-year or 30-year level payment mortgage
loans which will remain outstanding on each anniversary of the origination
date of such mortgage loans (assuming such mortgage loans all have the same
origination date).
SMM represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgages for the life
of the mortgages.
CPR represents an annual constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgages for
the life of the mortgages.
The Prospectus Supplement for each Series of Bonds will contain tables
setting forth the projected weighted average life of each Class of Bonds of
such Series and percentages of the original principal amount of each Class of
Bonds of such Series that would be outstanding on specified Payment Dates for
such Series based on the terms of the Bonds of such Series and on the
following assumptions. In preparing the table for each Series of Bonds, it
will be assumed that the mortgage loans underlying the Mortgage Certificates
and the Pledged Loans securing such Series of Bonds will prepay in full at
rates exactly equal to the percentages identified therein of FHA Prepayment
Experience, SMM, CPR or PMA as specified in the related Prospectus
Supplement. Unless and until any such loan prepays in full, it will be
assumed that the loan will pay principal and interest in accordance with its
original payment schedule. The information provided in the table for each
Series of Bonds will be based on the Mortgage Collateral expected to be
pledged as security for such Series of Bonds as specified under "Security for
the Bonds - The Mortgage Collateral Securing the Bonds" specified in the
related Prospectus Supplement. To the extent that the Mortgage Collateral
ultimately pledged as security for a Series of Bonds differs from the
description contained in the related Prospectus Supplement, non-material
variances in such information may result.
There is no assurance that prepayment of the mortgage loans underlying
the Mortgage Certificates and the Pledged Loans securing a Series of Bonds
will conform to any of the percentages of FHA Prepayment Experience, SMM, CPR
or PMA specified in the table in the related Prospectus Supplement. In
preparing the table, unless otherwise specified in the Prospectus Supplement
for a Series of Bonds, the FHA Prepayment Experience, SMM, CPR or PMA, as
applicable, will be applied to the remaining principal payments of the
mortgage loans within each pool underlying the Mortgage Certificates and to
the remaining principal payments on the Pledged Loans securing such Series of
Bonds as if each were originated on approximately the date of the issuance of
the Bonds of such Series, although the Mortgage Collateral securing a Series
of Bonds may have origination dates which vary substantially from the date of
issuance of the Bonds of such Series as specified in the related Prospectus
Supplement. It will be assumed that reductions in the number of mortgage
loans in a pool will effect proportionate reductions in the aggregate balance
of loans within that pool. It also will be assumed that the mortgage loans
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within each pool underlying the Mortgage Certificates securing a Series of
Bonds will prepay at the indicated rates of FHA Prepayment Experience, SMM,
CPR or PMA, as applicable, notwithstanding the fact that each pool of
mortgage loans underlying the Mortgage Certificates may vary substantially,
both as to interest rate and payment terms, from all other such pools. It
should also be noted that certain Mortgage Certificates securing a Series of
Bonds may be backed by mortgage loans with different interest rates.
Accordingly, the prepayment experience of such Mortgage Certificates will to
some extent be a function of the mix of interest rates of the underlying
mortgage loans. The stated certificate rate on certain Mortgage Certificates
may be up to 3% less than the underlying mortgage loans. Variations in actual
prepayment experience and the balance of the mortgage loans which prepay,
both within and among pools underlying the Mortgage Certificates securing a
Series of Bonds, may increase or decrease the percentages of original
principal amount (and weighted average lives) shown in the table which will
be set forth in the related Prospectus Supplement. Such variations may occur
even if the average prepayment experience of all such pools exactly equals
the indicated levels of FHA Prepayment Experience, SMM, CPR or PMA specified
in the related Prospectus Supplement.
In addition to the foregoing, there are likely to be substantial
differences between the composition of the mortgage portfolio on which the
prepayment statistics of the FHA were based and the composition of the
mortgage loans underlying the Mortgage Certificates and the Pledged Loans
securing a Series of Bonds. The FHA statistics were based on mortgage loans
which bore interest rates which generally can be expected to differ from the
rates on the mortgage loans underlying the Mortgage Certificates and the
Pledged Loans which will be pledged to secure a Series of Bonds and to have
payment terms different than the mortgage loans underlying the Mortgage
Certificates and the Pledged Loans which will be pledged to secure a Series
of Bonds. Certain of such Pledged Loans may be Buy-Down Pledged Loans or GPM
Pledged Loans and certain of the GNMA Certificates may be Buy-Down GNMA
Certificates or GPM GNMA Certificates. No statistics comparable to the FHA
Prepayment Experience with respect to 30-year single-family mortgage loans
are available regarding buy-down or graduated payment mortgage loans. The
FHA statistics were based on FHA Loans. Although certain of the mortgage
loans underlying the GNMA Certificates, the FNMA Certificates and certain of
the Pledged Loans securing a Series of Bonds may be FHA Loans, most of the
mortgage loans underlying the Other Mortgage Certificates and most of the
Pledged Loans may be conventional loans. Moreover, the FHA statistics were
compiled from mortgage loans secured by single-family residences located in
all geographic regions of the United States while the mortgage loans
underlying the Mortgage Certificates and the Pledged Loans securing a Series
of Bonds may be secured by residences located in only certain geographic
locations. Certain of the conventional Pledged Loans securing a Series of
Bonds may contain "due-on-sale" clauses. In the case of transfers of the
underlying Mortgaged Property securing FHLMC Certificates and FNMA
Certificates, FHLMC and FNMA servicers are required to exercise "due-on-sale"
clauses to the extent permitted under law. Under current law, such exercise
is permitted for substantially all of the mortgage loans which contain such
clauses. Acceleration is not permitted however, for certain types of
transfers including transfer on the death of a joint tenant or tenant by the
entirety and the granting of a leasehold interest of three years or less not
containing an option to purchase. In addition, there is no assurance that
the economic and other factors existing during the period when the FHA
statistics were compiled are applicable today or will be applicable in the
future. Similarly, there are likely to be substantial differences between
the composition of the mortgage portfolio on which the prepayment statistics
of SMM, CPR or PMA were based and the composition of the mortgage loans
underlying the Mortgage Certificates and the Pledged Loans securing a Series
of Bonds. As a result, there is no assurance that the prepayment experience
of the mortgage loans underlying the Mortgage Certificates and of the Pledged
Loans securing the Bonds of a Series will approximate such FHA Prepayment
Experience, SMM, CPR or PMA, as applicable. See "Certain Legal Aspects of
Pledged Loans - "Due-on-Sale" Clauses."
With respect to a Series of Bonds secured by Other Mortgage Certificates
which have rates of repayment that may be affected by prepayments, the
prepayment experience of such Other Mortgage Certificates will affect the
average life of each Class of Bonds of a Series secured thereby and the
extent to which each Class is paid prior to its Stated Maturity. The
Prospectus Supplement for a Series of Bonds secured by any such Other
Mortgage Certificates will set forth information regarding the prepayment
experience of such Other Mortgage Certificates.
Year 2000 Readiness. The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process date
fields containing a two-digit year is commonly referred to as the "Year 2000
Issue". As the year 2000 approaches, such systems may recognize a date using
"00" as the year 1900 rather than the year 2000 and be unable to accurately
process certain date-based information.
The Issuer has reviewed mission-critical computer systems in order to
evaluate necessary modifications for Year 2000 readiness. The Issuer does not
anticipate any material difficulties in achieving Year 2000 readiness with
respect to mission-critical computer systems. Furthermore, the Issuer does
not anticipate that they will incur material expenditures in connection with
any modifications necessary to achieve Year 2000 readiness. In addition, the
Issuer is in the process of communicating with other companies with whom they
do significant business to determine their Year 2000 readiness status and the
extent to which the Issuer could be affected by any third party Year 2000
readiness issues. Although the Issuer has not received responses from all
third parties with whom it does business, the Issuer does not anticipate that
it will be materially affected by any third party Year 2000 readiness issues.
However there can be no assurance that the systems of the Issuer or those of
the other companies on which the systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Issuer's systems, would not have a material adverse
effect on the Issuer and its ability to perform its obligations under any
Agreement.
The anticipated costs and timeliness of completion of Year 2000
modifications are based on management's best estimates, which were derived
using numerous assumptions relating to future events, including, without
limitation, the continued availability of certain resources and third party
modification plans. However, there can be no assurance that the estimates
and assumptions will prove to be accurate.
RATINGS FOR THE BONDS
Unless specified otherwise in the related Prospectus Supplement, the
Bonds of a Series may be rated by one or more of the following rating
agencies; (i) Moody's Investors Service ("Moody's"); (ii) Standard & Poor's
Ratings Group ("Standard & Poor's"); (iii) Duff & Phelps Credit Rating
Company ("Duff & Phelps"); or (iv) another nationally recognized rating
agency. A rating from such agency is merely at opinion of the Rating
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Agency, and is not a recommendation to buy, sell or hold securities and does
not constitute a guarantee by such agency or the Issuer.
The Issuer, at its cost, may from time to time request a re-rating of a
Series or Class of Bonds with respect to any of the funds which together
constitute the Security Funds as specified in a related Prospectus Supplement
for a Series of Bonds. The Issuer may reduce and release from one or more of
such funds under certain conditions, as would not result in a downgrading of
the rating of a Series or Class of Bonds or an underfunding of such fund.
However, a withdrawal or reduction of funds from any such fund cannot be
effectuated if it would result in an underfunded fund, even if it would not
impact the credit rating of a Series of Bonds. (Indenture, Section 13.05)
See "Security for the Bonds."
ASSIGNMENT OF MORTGAGE COLLATERAL
At the time of issuance of the Bonds of a Series, unless specified
otherwise in the related Prospectus Supplement, the Issuer will cause the
Pledged Loans to be sold and assigned to the Bond Trustee, together with all
principal and interest received by or on behalf of the Issuer on or with
respect to such Pledged Loans after a date certain ("Cut-off Date"), other
than principal and interest due on or before the Cut-off Date. Each Pledged
Loan will be identified in a schedule which includes information as to the
outstanding principal balance of each Pledged Loan after application of
payments due on the Cut-off Date, as well as information regarding the
interest rate, the current scheduled monthly payment of principal and
interest, the maturity of the loan, the loan-to-value ratio at origination
and certain other information.
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, the
Bonds will be registered in the name of Cede & Co., the nominee of the
Depository Trust Company ("DTC"). DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the UCC and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of Bonds. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to others such as brokers, dealers, banks
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participant").
Under a book-entry format, Bondholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Bonds registered in the name of Cede, as nominee of DTC, may do
so only through Participants and Indirect Participants. In addition, such
Bondholders will receive all distributions of principal of and interest on
the Bonds from the Bond Trustee through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations ("Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Bonds and is
required to receive and transmit payments of principal of and interest on the
Bonds. Participants and Indirect Participants with which Bondholders have
accounts with respect to the Bonds similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their
respective Bondholders. Accordingly, although Bondholders will not possess
Bonds, the Rules provide a mechanism by which Bondholders will receive
distributions and will be able to transfer their interests.
Bondholders who are not Participants may transfer ownership of Bonds
only through Participants by instructing such Participants to transfer Bonds,
by book-entry transfer, through DTC for the account of the purchasers of such
Bonds, which account is maintained with their respective Participants. Under
the Rules transfers of ownership of Bonds will be executed through DTC and
the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the respective Participants will make debits or credits,
as the case may be, on their records on behalf of the selling and purchasing
Bondholders.
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Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Bondholder to pledge Bonds to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such Bonds may be
limited due to the lack of a physical Bond for such Bonds.
Any Bonds initially registered in the name of Cede ("Cede Bond"), as
nominee of DTC, will be issued in fully registered, bond form to Bondholders
or their nominees ("Definitive Bonds"), rather than to DTC or its nominee
only under the circumstances specified in the related Prospectus Supplement.
Such events may include the following: (i) the Depositor advises the Bond
Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as Depository with respect to the Bonds, and
the Bond Trustee or the Depositor is unable to locate a qualified successor,
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC, or (iii) after the occurrence of an Event of Default,
Bondholders representing not less than 50% of the aggregate of outstanding
Bonds advise the Bond Trustee and DTC through Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interest of the Bondholders. Upon the occurrence of
any of the events specified in the related Prospectus Supplement, DTC will be
required to notify all Participants of the availability through DTC of
Definitive Bonds. Upon surrender by DTC of the Cede Bonds and instruction
for re-registration, the Bond Trustee will issue the Bonds in the form of
Definitive Bonds, and thereafter the Bond Trustee will recognize the holders
of such Definitive Bonds as Bondholders. Thereafter, payments of principal of
and interest on the Bonds will be made by the Bond Trustee directly to
Bondholders in accordance with the procedures specified in the Prospectus
Supplement. The final distribution of any Bond (whether Definitive Bonds or
Cede Bonds however, will be made only upon presentation and surrender of such
Bonds on the final Payment Date at such office or agency as is specified in
the notice of final payment to Bondholders.
SECURITY FOR THE BONDS
GENERAL
Each Series of Bonds will be secured by the pledge to the Bond Trustee
of the Collateral, net of applicable servicing, administration and guarantee
fees and insurance premiums, together with Reinvestment Income thereon at the
applicable Assumed Reinvestment Rates for such Series, will be sufficient to
make the required payments of interest on the Bonds of such Series and to pay
the entire principal amount of each Class of Bonds of such Series not later
than the Stated Maturity of such Class. Unless otherwise stated in the
Prospectus Supplement for a Series of Bonds, the principal of and interest on
the Bonds of such Series will be payable solely from the Collateral securing
such Series.
Any Series of Bonds also may be secured by certain other funds,
accounts, letters of credit, surety bonds and other credit enhancement
devices described in the Prospectus Supplement for such Series of Bonds. To
the extent described in the applicable Prospectus Supplement and to the
extent that it will not result in the downgrading of the then rating of a
Series of Bonds by the Rating Agency, certain Collateral may be pledged to
secure more than one Series of Bonds.
With respect to any Series of Bonds, the Issuer also will have the right
to substitute comparable coverage with another insurer or provide equivalent
protection for any of the Insurance Policies (or deposits in lieu thereof
securing such Series of Bonds so long as such substitution will not result in
the downgrading of the then rating of the Bonds of such Series by the Rating
Agency).
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GNMA is a wholly-owned corporate instrumentality of HUD. Section 306(g)
of Title III of the Housing Act of 1949 ("Housing Act") authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgages insured by FHA or HUD
under the Housing Act, or Title V of the Housing Act or partially guaranteed
by the United States Veterans Administration ("VA") under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United
States Code and other loans eligible for inclusion in mortgage pools
underlying GNMA certificates.
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Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guaranty under this subsection." An
opinion, dated December 12, 1969, of an Assistant Attorney General of the
United States, states that such guarantees under Section 306(g) of
mortgage-backed certificates of the type to be pledged to the Bond Trustee as
security for the Bonds are authorized to be made by GNMA and "would
constitute general obligations of the United States backed by its full faith
and credit."
In order to meet its obligation under any such guaranty, GNMA may, under
Section 306(d) of the Housing Act, issue its general obligations to the
United States Treasury in an amount which is at any time sufficient to enable
GNMA, with no limitations as to amount, to perform its obligations under its
guaranty. GNMA represents that, in the event it is called upon at any time to
make good its guaranty, it has the full power and authority to borrow from
the Treasury of the United States, if necessary, amounts sufficient to make
payments of principal and interest on GNMA certificates and that the
Secretary of the Treasury has agreed to lend such amounts.
GNMA CERTIFICATES
Each GNMA Certificate securing a Series of Bonds (which may be a GNMA I
Certificate or a GNMA II Certificate as referred to by GNMA) will be a
"fully-modified pass-through" mortgage-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA and by FNMA as a seller-servicer of FHA and VA Loans.
GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guaranty agreement ("Guaranty Agreement") between GNMA and
the GNMA Issuer. Reference is made to a Form of the Guaranty Agreement,
which has been filed as an Exhibit to the Registration Statement of which
this Prospectus forms a part. Pursuant to the Guaranty Agreement, the GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the
payments received by the GNMA Issuer on the mortgage loans underlying each
such GNMA Certificate are less than the amounts due on each such GNMA
Certificate.
GNMA will guarantee the full and timely payment of principal of and
interest on each GNMA Certificate securing a Series of Bonds, which
obligation will be backed by the full faith and credit of the United States.
Each such GNMA Certificate will have an original maturity of not more than 30
years (but may have original maturities of substantially less than 30 years).
Each such GNMA Certificate will be based on and backed by a pool of mortgage
loans and will provide for the payment by or on behalf of the GNMA Issuer to
the registered holder of such GNMA Certificate of fixed monthly payments of
principal and interest equal to the aggregate amount of the scheduled monthly
principal and interest payments on the mortgage loans underlying such GNMA
Certificate, less servicing and guarantee fees. In addition, each payment
will include any prepayments of principal on the mortgage loans underlying
such GNMA Certificate and liquidation proceeds in the event of a foreclosure
or other disposition of any such mortgage loans.
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the issuers of the GNMA Certificates, the Issuer, the
Servicer, or any of their respective affiliates, and the only recourse of a
holder thereof, such as the Bond Trustee, is to enforce a GNMA guaranty of
timely payment of principal and interest.
FEDERAL HOME LOAN MORTGAGE CORPORATION
FHLMC is a corporate instrumentality of the United States created
pursuant to an Act of Congress (Title III of the Emergency Home Finance Act
of 1970, as amended, 12 U.S.C. Sub-Sections 451-1459) ("FHLMC Act") on July
24, 1970. FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed housing.
It seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets
for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities, primarily FHLMC
Certificates. All mortgage loans purchased by FHLMC must meet certain
standards set forth in the FHLMC Act. FHLMC is confined to purchasing, so
far as practicable, mortgage loans which it deems to be of such quality, type
and class as to meet generally the purchase standards imposed by private
institutional mortgage investors. All of the mortgage loans evidenced by a
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FHLMC certificate are conventional mortgages and therefore do not have the
benefit of any guarantee or insurance by, and are not obligations of, the
United States or any agency or instrumentality of the United States.
FHLMC CERTIFICATES
Each FHLMC Certificate securing a Series of Bonds will represent an
undivided interest in a group of mortgages ("FHLMC Certificate group")
purchased by FHLMC. Each such FHLMC Certificate group will contain fixed
rate level installment conventional mortgage loans with original terms to
maturity of between 10 and 30 years secured by first liens on one-family or
two-to-four family residential properties. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and individual
interests in whole loans and/or participations comprising another FHLMC
Certificate group. Each such FHLMC Certificate will be issued under the
terms of a Mortgage Participation Certificate Agreement which, if applicable
will be filed as an exhibit to an amended Registration Statement. A FHLMC
Certificate may be issued under programs created by FHLMC, including its
Cash Program or Guarantor Program.
FHLMC will guarantee to the Bond Trustee as the registered holder of
each FHLMC Certificate securing a Series of Bonds the timely payment of
interest by each mortgagor to the extent of the applicable certificate rate
on the registered holder's PRO RATA share of the unpaid principal balance
outstanding on the mortgage loans underlying such FHLMC Certificate. FHLMC
also will guarantee to the Bond Trustee as the registered holder of each
FHLMC Certificate collection by such holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
such holder's PRO RATA share thereof, but will not guarantee the timely
payment of scheduled principal, except under certain programs. Pursuant to
its guaranty, FHLMC will indemnify the Bond Trustee as the holder of such
FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal
at any time after default on an underlying mortgage loan, but not later
than (i) 30 days following a foreclosure sale, (ii) 30 days following payment
of the claim by any Mortgage Insurer (defined below), or (iii) 30 days
following the expiration of any right of redemption, whichever occurs later,
but in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding
the collection of principal after default on the mortgage loans underlying
FHLMC Certificates, including the timing of demand for acceleration, FHLMC
reserves the right to exercise its judgment in the same manner for mortgage
loans which it has purchased but not sold. The FHLMC Certificates securing a
Series of Bonds will not be guaranteed by the United States or by any Federal
Home Loan Bank and will not constitute debts or obligations of the United
States or any Federal Home Loan Bank. If FHLMC were unable to satisfy such
obligations, distributions on FHLMC Certificates securing a Series of Bonds
would consist solely of payments and other recoveries on the underlying
mortgage loans and, accordingly, delinquencies and defaults would impact
monthly distributions on such FHLMC Certificates and could adversely impact
upon the payments on the Bonds of such Series.
Holders of FHLMC Certificates are entitled to receive their PRO RATA
share of all principal payments on the underlying mortgage loans received by
FHLMC, including any scheduled principal payments, full and partial
prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, including prepayments of
principal resulting from acquisition by FHLMC of the real property securing
the mortgage. FHLMC is required to remit each registered FHLMC Certificate
holder's PRO RATA share of principal payments on the underlying mortgage
loans, interest at the FHLMC Certificate rate and any other sums such as
prepayment fees, within 60 days of the date on which such payments are
received by FHLMC.
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FEDERAL NATIONAL MORTGAGE ASSOCIATION
FNMA is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act (12
U.S.C. SubSection 1716 et seq). It is the nation's largest supplier of
residential mortgage funds. FNMA 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.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, FNMA helps to redistribute mortgage funds from capital-surplus to
capital-short areas.
FNMA CERTIFICATES
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
("FNMA MBS"). Each FNMA Certificate securing a Series of Bonds will represent
a fractional undivided interest in a pool of mortgage loans formed by FNMA.
Each such pool will consist of mortgage loans of one of the following types:
(i) fixed rate level installment conventional mortgage loans, or (ii) fixed
rate level installment mortgage loans that are insured by FHA or partially
guaranteed by the VA. Each mortgage loan must meet the applicable standards
set forth under the FNMA purchase program. Each such mortgage loan will be
secured by a first lien on a one-family or two-to-four family residential
property.
The Mortgage Collateral for a Series of Bonds may include FNMA
Certificates having terms and characteristics and terms different from those
described above, also long as such FNMA Certificates and underlying mortgage
loans meet the criteria of the Rating Agency. Such FNMA Certificates and
underlying mortgage loans will be described in the related Prospectus
Supplement.
THE PLEDGED LOANS
The Pledged Loans securing a Series of Bonds may consist of conventional
mortgage loans, FHA and VA Loans, all of which will be secured by mortgages
or deeds of trust on residential properties. Regular monthly installment
payments of principal and interest on each Pledged Loan securing such Series
of Bonds will be due on the first day of each month and will be payable to
the Bond Trustee by the Servicer as specified in the Servicing Agreement.
Any principal prepayments on any such Pledged Loans or any other early
recovery of principal will be passed through to the Bond Trustee by the
Servicer no later than a specified date of the month following the month in
which received, and a portion of such prepayments will be paid to holders of
Bonds of such Series as additional principal payments on the Bonds of such
Series.
The properties securing such Pledged Loans may consist of (i) detached
homes, (ii) attached homes (single-family units having a common wall), (iii)
units located in condominiums, (iv) units in multifamily residential
buildings, (v) interests in cooperative buildings (vi) Manufactured Housing
and (vii) such other types of homes or units specified in the related
Prospectus Supplement. Each such detached or attached home will be
constructed on land owned in fee simple by the mortgagor or on land leased by
the mortgagor for a term at least two years greater than the term of the
applicable Pledged Loan. The fee interest in any leased land will be subject
to the lien securing the applicable Pledged Loan. Attached homes may consist
of duplexes, triplexes and fourplexes (multi-family structures where the
entire lot on which each structure is built is owned by the owners of the
units) or townhouses (multi-family structures in which each mortgagor owns
the land upon which the unit is built with the remaining adjacent land owned
in common).
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The Pledged Loans securing a Series of Bonds may be secured by
residential properties which (a) are owner-occupied, (b) are owned by
investors, or (c) serve as second residences, provided that, based upon
information available at the origination of such Pledged Loans, the aggregate
unpaid principal amount of all such Pledged Loans secured by second
residences and investor owned residences may not exceed the percentage set
forth in the related Prospectus Supplement of the aggregate unpaid principal
amount of all Pledged Loans securing such Series of Bonds.
Each Pledged Loan securing a Series of Bonds generally will provide for
the payment of interest and full repayment of principal in level monthly
installments over an original term to maturity of up to 30 years, with a
fixed rate of interest computed on the declining principal balance of the
Pledged Loan. Some Pledged Loans, however, may consist of Buy-Down Pledged
Loans. Payments due on such Buy-Down Pledged Loans will be the same as
payments due on level payment Pledged loans, except that the former will
include amounts to be collected from the mortgagors and withdrawn from the
applicable Buy-Down Fund. Unless otherwise specified in the Prospectus
Supplement for a Series of Bonds, such a Buy-Down Pledged Loan generally
either will (i) provide for a reduction in monthly interest payments by the
mortgagor for a period of up to the first four years of the term of such
Pledged Loan or (ii) provide for a reduction or elimination of monthly
principal and interest payments by the mortgagor for up to the first six
months of the term of such Pledged Loan.
The Collateral securing a Series of Bonds also may include GPM Pledged
Loans. The interest not paid in the early years of such a GPM Pledged Loan
will be added to the principal balance of such GPM Pledged Loan and will be
paid, together with interest thereon, in the later years. Unless otherwise
specified in the Prospectus Supplement for a Series of Bonds, graduated
payments during such period of each GPM Pledged Loan generally may not
increase annually more than 7.5% and negative amortization generally may not
exceed 15% of the original principal amount of such GPM Pledged Loan.
The Collateral securing a Series of Bonds also may include fixed-rate
Pledged Loans providing for annual increases in the amount of the monthly
payments ("Growing Equity Pledged Loans"). Monthly payments for the first
year are based on a 25 to 30 year amortization schedule, but are increased in
each subsequent year at a predetermined rate of generally not more than 7.5%
of the monthly payment during the preceding year, resulting in full repayment
in approximately 11 to 18 years. The related Prospectus Supplement will
indicate the annual increases in the amount of the monthly payments.
OTHER MORTGAGE CERTIFICATES
A Series of Bonds also may be secured by Other Mortgage Certificates
which may include conventional mortgage pass-through certificates or
collateralized mortgage obligations as described in the Prospectus Supplement
for such Series of Bonds. Such Other Mortgage Certificates must be in form
and substance satisfactory to the Rating Agency.
SUBSTITUTION OF MORTGAGE COLLATERAL
Subject to the limitations set forth in the Indenture for a Series of
Bonds, the Issuer at any time may deliver to the Bond Trustee other items of
Mortgage Collateral in substitution for any one or more items of Mortgage
Collateral pledged as security for such Series of Bonds. Any such substitute
Mortgage Collateral will have an outstanding Bond Value (determined in a manner
consistent with the Mortgage Collateral for which it is substituted) that is at
least equal to the outstanding Bond Value of the Mortgage Collateral for which
it is substituted after taking into account any cash deposit, have an interest
rate within one percentage point of the item of Mortgage Collateral pledged as
of the issuance of the Bonds of the Series for which it is substituted after
taking into account any cash deposit, and have a maturity date not later than
the item of Mortgage Collateral for which it is substituted. Each Mortgage
Certificate may only be substituted for a like type of Mortgage Certificate
while any type of Mortgage Collateral may be substituted for Pledged Loans.
COLLECTION ACCOUNT
All distributions on the Mortgage Collateral securing a Series of Bonds
will be remitted to the Collection Account for such Series. A portion of the
amounts in such Collection Account, together with Reinvestment Income thereon
at the applicable Assumed Reinvestment Rate specified in the related
Prospectus Supplement, will be available for application to the payment of
the principal of and interest on the Bonds of such Series.
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SUPPLEMENTAL DEBT SERVICE FUND
The GNMA Certificates securing a Series of Bonds may include GPM GNMA
Certificates, and the Pledged Loans securing a Series of Bonds may include
GPM Pledged Loans. GPM Collateral provides for graduated payments during the
early years which are less than the actual amount of interest and principal
which would be payable thereon on a level debt service basis. The interest
not paid in the early years of such GPM Collateral is added to the principal
balance of such GPM Collateral and is paid, together with interest thereon,
in the later years.
The Issuer will deliver to the Bond Trustee cash, certificates of
deposit or irrevocable letters of credit to fund the Supplemental Debt
Service Fund for a Series of Bonds secured by any GPM Collateral valued on a
level debt service basis in determining its Initial Bond Value. The
Supplemental Debt Service Fund for a Series of Bonds (together with
Reinvestment Income thereon at the applicable Assumed Reinvestment Rate
specified in the related Prospectus Supplement) will be sufficient to cover
the amount by which payments of principal and interest on such GPM Collateral
assumed in calculating payments due on the Bonds of such Series exceed
scheduled payments on such GPM Collateral. The Bond Trustee will withdraw
amounts from the Supplemental Debt Service Fund for a Series of Bonds as
necessary and apply such amounts to the payment of principal of and interest
on the Bonds of such Series. The scheduled withdrawals from the applicable
Supplemental Debt Service Fund will be taken into account in determining the
Initial Bond Value of such GPM Collateral.
In the event the balance of the Supplemental Debt Service Fund for a
Series of Bonds exceeds the amount required to be maintained in such fund,
the Bond Trustee will pay the amount of such excess funds to the Issuer or
the Issuer's designee on the next Payment Date as specified in the Prospectus
Supplement for such Series of Bonds.
BUY-DOWN FUND
The Pledged Loans securing a Series of Bonds may include Buy-Down
Pledged Loans. A Buy-Down Pledged Loan provides for level monthly payments
of principal and interest with portions of such payments during the early
period of such Pledged Loan being provided by a third party to reduce the
borrower's monthly payment.
For a Series of Bonds, unless otherwise specified in the related
Prospectus Supplement, the Issuer will deliver to the Bond Trustee cash,
certificates of deposit or irrevocable letters of credit to fund the Buy-Down
Fund for a Series of Bonds secured by one or more Buy-Down Pledged Loans. The
Buy-Down Fund for a Series of Bonds (together with Reinvestment Income thereon
at the applicable Assumed Reinvestment Rate specified in the related Prospectus
Supplement) will provide funds which, when added to the payments by the
mortgagors on the Buy-Down Pledged Loans securing such Series of Bonds, will be
sufficient to cover payments of principal and interest on such Buy-Down Pledged
Loans on a level debt service basis. The Bond Trustee will withdraw amounts from
the Buy-Down Fund for a Series of Bonds as necessary and apply such amounts to
the payment of principal of and interest on the Bonds of such Series. The
scheduled withdrawals from the applicable Buy-Down Fund will be taken into
account in determining the Initial Bond Value of a Buy-Down Pledged Loan.
Upon the prepayment in full of any Buy-Down Pledged Loan, the Issuer
will have the right to cause the Bond Trustee to withdraw the portion of the
funds in the Buy-Down Fund allocable to such Pledged Loan and to pay such
portion to the Issuer. The Issuer also will have the right on any Payment
Date to cause the Bond Trustee to withdraw funds from the Buy-Down Fund with
respect to any such Buy-Down Pledged Loan to the extent the amount in the
Buy-Down Fund with respect thereto exceeds the amount necessary to service
such Buy-Down Pledged Loan on a level debt service basis and to pay such
funds to the Issuer.
RESERVE FUND
If specified in the Prospectus Supplement for a Series of Bonds, the
Issuer will deposit in the Reserve Fund maintained by the Bond Trustee for
such Series of Bonds cash, certificates of deposit, irrevocable letters of
credit or other financial guarantees as additional security for such Series
of Bonds. In the alternative, the Reserve Fund for a Series may be funded
over time through application of all or a portion of the Excess Cash, to the
extent described in the related Prospectus Supplement. The amount of any
funds in the Reserve Fund for a Series of Bonds may be applied by the Bond
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Trustee to make payments on the Bonds of such Series in the manner and to the
extent specified in the related Prospectus Supplement to the extent funds are
not otherwise available.
The Issuer will have the right on any Payment Date to cause the Bond
Trustee to withdraw funds from the Reserve Fund for a Series of Bonds to the
extent that any such withdrawal will not result in a downgrading of the then
rating of the Bonds of such Series by the Rating Agency or in an underfunding
of the Reserve Fund, and to pay such funds to or upon the order of the Issuer.
OVERCOLLATERALIZATION FUND
If specified in the Prospectus Supplement for a Series of Bonds, the
Mortgage Collateral for such Series of Bonds will include an
Overcollateralization Amount with respect to Pledged Loans securing such
Series of Bonds. In such event, the Issuer will maintain in an
Overcollateralization Fund maintained with the Bond Trustee an amount equal
to the Aggregate Initial Overcollateralization Amount reduced by (1) the
Aggregate Loan Losses on the applicable Pledged Loans securing such Series of
Bonds and (2) the difference between (a) the Aggregate Outstanding Collateral
Value of the Mortgage Collateral at the date of determination and (b) the
principal amount of the Bonds outstanding on the date of determination. A
portion of the amounts in the Overcollateralization Fund, together with
Reinvestment Income thereon at the Assumed Reinvestment Rate specified in the
Prospectus Supplement, will be available for application to the payment of
the principal of and interest on the Bonds of such Series to fund the
Aggregate Loan Losses on the Pledged Loans securing such Series of Bonds.
The Issuer will have the right on any Payment Date to cause the Bond
Trustee to withdraw funds from the Overcollateralization Fund to the extent
that any such withdrawal will not result in a downgrading of the then rating
of the Bonds of such Series by the Rating Agency and to pay such funds to the
Issuer. However, such withdrawal may only occur if the Bond Trustee shall
have received a certificate of a firm of independent certified public
accountants acceptable to the Bond Trustee to the effect that the
disbursement of such funds will not impair the security of the Bonds in
contravention of the provisions of the Indenture for a Series of Bonds.
(Indenture, Section 13.05)
SUPPLEMENTAL CUSTODIAL RESERVE FUND.
If specified in the related Prospectus Supplement, the Bond Trustee
shall deposit monies, if any, received by it for the establishment of a
Supplemental Custodial Reserve Fund as specified in the related Prospectus
Supplement, monies from the Collection Account upon notification that either
the Master Servicer or Servicer are making servicing advances under a
specific mortgage loan due to delinquency or failure by the mortgagor to make
regularly scheduled mortgage payments, which shall be in the amount of such
advances, liquidation proceeds deposited directly by the Bond Trustee (in the
event the Bond Trustee forecloses on or otherwise liquidates a Mortgaged
Property).
OTHER FUNDS
If specified in the Prospectus Supplement for a Series of Bonds, the
Issuer will establish with the Bond Trustee such other funds or accounts in
the amounts and for such purposes described in such Prospectus Supplement.
INSURANCE POLICIES
The Insurance Policies will not cover all contingencies and will cover
certain contingencies only to a limited extent. To the extent that Bond
payments are dependent upon Pledged Loan payments which become unavailable to
the Bond Trustee due to an uninsurable loss, funds may not be available from
other Collateral or from the Issuer to make up for any such shortfall.
However, application of the Initial Overcollateralization Amount, if any,
with respect to a Series of Bonds is designed to cover the level of
uninsurable losses assumed in calculating Initial Bond Value. See
"Description of the Bonds - Valuation of the Mortgage Collateral."
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MORTGAGE INSURANCE ON THE PLEDGED LOANS.
The conventional Pledged Loans securing a Series of Bonds may be covered
by Primary Mortgage Insurance Policies, Excess Coverage Mortgage Insurance
Policies and one or more mortgage pool insurance policies or any combination
thereof (together, "Mortgage Insurance Policies"), and the FHA and VA Loans
securing a Series of Bonds will be covered by FHA insurance or VA guarantees,
respectively, and by the Pool Insurance Policy for such Series of Bonds.
Certain conventional Pledged Loans securing a Series of Bonds may be covered
by Primary Mortgage Insurance Policies and, in certain cases, by Excess
Coverage Mortgage Insurance Policies (collectively, "100% Mortgage Insurance
Policies") which, subject to their provisions and certain conditions and
exclusions described below, will insure such Pledged Loans 100% against any
loss sustained by reason of nonpayments by the mortgagors; other conventional
Pledged Loans securing a Series of Bonds with initial loan-to-value ratios of
greater than 80% which are not covered by 100% Mortgage Insurance Policies
may be covered by Primary Mortgage Insurance Policies providing coverage on
at least the amount of each such Pledged Loan in excess of 75% of the
original fair market value of the Mortgaged Property and remaining in force
until the principal balance of such Pledged Loan is reduced to 80% of such
original fair market value; and other conventional Pledged Loans securing a
Series of Bonds with initial loan-to-value ratios of 80% or less may be
covered solely by the Pool Insurance Policy for such Series of Bonds. The
initial loan-to-value ratio of any Pledged Loan represents the ratio of the
principal amount of the Pledged Loan outstanding at the origination of such
loan divided by the fair market value of the Mortgaged Property. The fair
market value of the Mortgaged Property securing any Pledged Loan is the
lesser of the sale price or the appraised value of such Mortgaged Property.
If specified in the Prospectus Supplement for a Series of Bonds, the Pool
Insurance Policy for a Series of Bonds will be designed to provide coverage
for all conventional Pledged Loans which are not covered by 100% Mortgage
Insurance Policies and for all FHA and VA Loans securing such Series of
Bonds. However, such Mortgage Insurance Policies will not insure against
certain losses sustained in the event of a personal bankruptcy of the
mortgagor under a Pledged Loan. Such losses will be covered to the extent
provided by the Mortgagor Bankruptcy Bond as described below for such Series
of Bonds. See "Certain Legal Aspects of Mortgage Loans - Anti-Deficiency
Legislation and Other Limitations on Lenders."
Since the Mortgage Insurance Policies for a Series of Bonds will require
that the Mortgaged Property securing a defaulted Pledged Loan be restored to
its original condition (normal wear and tear excepted) prior to claiming
against any Mortgage Insurance Policies, such policies will not provide
coverage when a Mortgaged Property has been subject to hazard losses which
have not been repaired or restored. The Standard Hazard Insurance Policies
covering the Pledged Loans securing a Series of Bonds typically will exclude
from coverage physical damage resulting from a number of causes and, even
when the damage is covered, may afford recoveries which are significantly
less than full replacement cost of such losses. Further, the Special Hazard
Insurance Policy for a Series of Bonds will not cover all risks, and the
coverage of such policy will be limited in amount. Certain hazard risks
will, as a result, be uninsured against and will therefore be borne by the
Issuer, and thus may impact on payments to holders of Bonds of such Series.
See "Security for the Bonds - Hazard Insurance on the Pledged Loans."
To the extent that the Primary Mortgage Insurance Policies, the FHA
insurance or the partial VA guaranty do not cover all losses on a defaulted
or foreclosed Pledged Loan securing a Series of Bonds, and to the extent such
losses are not covered by the Pool Insurance Policy for such Series, such
losses would adversely affect on payments to holders of Bonds of such Series.
The Primary Mortgage Insurance Policies and the Excess Coverage Mortgage
Insurance Policies with respect to a Series of Bonds will be issued by the
insurance company or companies specified in the related Prospectus Supplement
("Mortgage Insurer") and the Pool Insurance Policies with respect to a Series
of Bonds will be issued by the insurance company or companies specified in
the related Prospectus Supplement ("Pool Insurance Insurer"). The following
descriptions of such policies and the coverage thereunder does not purport to
be complete. Reference is made to the forms of Primary Mortgage Insurance
Policies, such Excess Coverage Mortgage Insurance Policy and such Pool
Insurance Policies, to be filed as exhibits to an amended Registration
Statement.
PRIMARY AND EXCESS COVERAGE MORTGAGE INSURANCE.
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Each Primary Mortgage Insurance Policy and, if applicable, an Excess
Coverage Mortgage Insurance Policy covering Pledged Loans securing a Series
of Bonds will be issued by the Mortgage Insurer pursuant to the Mortgage
Insurer's applicable master policy. The Issuer and the Bond Trustee as
assignee of the lender under such Pledged Loans will be the insured or
assignees of record ("Insured"), as their interests may appear, under each
such Primary Mortgage Insurance Policy, and the Issuer and the Bond Trustee
will be named Insureds under each such Excess Coverage Mortgage Insurance
Policy. Each Servicing Agreement with respect to such Series of Bonds will
require the Servicer to cause a Primary Mortgage Insurance Policy and, if
applicable, an Excess Coverage Mortgage Insurance Policy to be maintained in
full force and effect with respect to each Pledged Loan covered by the
Servicing Agreement requiring such insurance and to act on behalf of the
Insureds with respect to all actions required to be taken by the Insureds
under each such Mortgage Insurance Policy.
For a Series of Bonds, unless otherwise specified in the related
Prospectus Supplement, the amount of a claim for benefits under a Primary or
Excess Coverage Mortgage Insurance Policy covering a Pledged Loan securing a
Series of Bonds will consist of the insureds portion of the unpaid principal
amount of the covered Pledged Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the Insureds (other than the proceeds of hazard
insurance) which are derived from or in any way related to such Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore such Mortgaged Property and which have not been applied to the
payment of such Pledged Loan, (iii) amounts expended by the Insureds in
connection with the Mortgaged Property which are either due to the fault of
the Insureds or not approved by the Mortgage Insurer, (iv) claim payments
previously made by the Mortgage Insurer, and (v) unpaid premiums.
Unless otherwise specified in the related Prospectus Supplement for a
Series of Bonds, as conditions precedent to the filing of or payment of a
claim under a Primary or Excess Coverage Mortgage Insurance Policy covering a
Pledged Loan securing a Series of Bonds, the Insureds generally will be
required to, in the event of default by the mortgagor: (i) advance or
discharge (a) all hazard insurance premiums and (b) as necessary and approved
in advance by the Mortgage Insurer to, (1) real estate property taxes, (2)
all expenses required to preserve, repair and prevent waste to the Mortgaged
Property so as to maintain such Mortgaged Property in at least as good a
condition as existed at the effective date of such Primary or Excess Coverage
Mortgage Insurance Policy, ordinary wear and tear excepted, (3) property
sales expenses, (4) any outstanding liens (as defined in such Primary or
Excess Coverage Mortgage Insurance Policy) on the Mortgaged Property and (5)
foreclosure costs, including court costs and reasonable attorneys' fees;
(ii) in the event of any physical loss or damage to the Mortgaged Property,
have restored and repaired the Mortgaged Property to at least as good a
condition as existed at the effective date of such Primary or Excess Coverage
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Mortgage Insurer good and merchantable title to and possession of the
Mortgaged Property. It is expected that restoration of the Mortgaged
Property with the proceeds described under "Security for the Bonds -
Insurance Policies - Hazard Insurance on the Pledged Loans" and "Security for
the Bonds - Insurance Policies - Special Hazard Insurance Policies" will
satisfy the conditions under the applicable Mortgage Insurance Policy that
the Mortgaged Property be restored before a claim may be validly presented in
respect of the defaulted Pledged Loan secured by such property.
Unless otherwise specified in the related Prospectus Supplement, other
provisions and conditions of each Primary or Excess Coverage Mortgage
Insurance Policy covering a Pledged Loan securing a Series of Bonds generally
will provide that: (a) no change may be made in the terms of, and no
mortgagor may be released from liability under, such Pledged Loan without the
consent of the Mortgage Insurer except as permitted by such Pledged Loan; (b)
written notice must be given to the Mortgage Insurer within the period
specified in the policy (generally 10 days) after the Insured becomes aware
that a mortgagor is delinquent in the payment of a sum equal to the aggregate
number (specified in the policy) of monthly payments due under such Pledged
Loan or that any proceedings affecting the mortgagor's interest in the
Mortgaged Property securing such Pledged Loan have been commenced, and
thereafter the Insured must report monthly to the Mortgage Insurer the status
of such Pledged Loan until such Pledged Loan is brought current, such
proceedings are terminated or a claim is filed; (c) the Insured must commence
proceedings at certain times specified in the policy and diligently proceed
to obtain good and merchantable title to and possession of the Mortgaged
Property after the mortgagor has been delinquent in the payment of the
specified number of payments; (d) the Insured must notify the Mortgage
Insurer of the institution of such proceedings, provide it with copies of
documents relating thereto, notify the Mortgage Insurer of the purchase price
or such other amount as specified in the policy within the time period
provided in the policy (generally at least 15 days prior to the sale of the
Mortgaged Property by foreclosure), and bid such amount unless the Mortgage
Insurer specifies a lower or higher amount; (e) the Insured may accept a
conveyance of the Mortgaged Property in lieu of foreclosure with written
approval of the Mortgage Insurer or provided the ability of the Insured to
assign specified rights to the Mortgage Insurer is not thereby
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impaired or the specified rights of the Mortgage Insurer are not thereby
adversely affected; (f) the Insured and the Mortgage Insurer may modify or
amend the policy in any respect whatsoever or rescind or terminate the policy
without the consent of or notice to any third party; (g) the Insured agrees
that the Mortgage Insurer has issued the policy in reliance upon the
correctness and completeness of the statements contained in the application
for the policy and in the appraisal, plans and specifications and other
exhibits and documentation submitted therewith or at any time thereafter; (h)
under certain policies, the Mortgage Insurer will not pay claims involving or
arising out of dishonest, fraudulent, criminal or knowingly wrongful acts
(including error or omission) by certain persons, or claims involving or
arising out of the negligence of certain persons if such negligence is
material either to the acceptance of the risk or to the hazard assumed by the
Mortgage Insurer; (i) the Insured and/or the mortgagor may not carry
additional or duplicate mortgage guaranty insurance on the Mortgaged Property
with another insurer without the prior written approval of the Mortgage
Insurer; and (j) the Insured must comply with other notice provisions in the
policy. Under certain policies, the Mortgage Insurer will have the right to
purchase such Pledged Loan, at any time subsequent to the notice described in
(b) above and prior to the commencement of foreclosure proceedings, at a
price equal to the unpaid principal amount of such Pledged Loan plus accrued
and unpaid interest thereon at the contractual rate and reimbursable amounts
expended by the Insured for real estate taxes and fire and extended coverage
insurance on the Mortgaged Property for a period not exceeding 12 months and
less the sum of any claim previously paid under the policy and any due and
unpaid premium with respect to such policy.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Insurer will be required to pay to the Insured either: (1) the
insured percentage of the loss; or (2) at its option under certain of the
Primary and Excess Coverage Mortgage Insurance Policies, the sum of the
delinquent monthly payments plus any advances made by the Insured, both to
the date of the claim payment, and thereafter, monthly payments in the amount
which would have become due under the Pledged Loan if it had not been
discharged plus any advances made by the Insured until the earlier of (A) the
date the Pledged Loan would have been discharged in full if the default had
not occurred, or (B) an Approved Sale (defined below). Any rents or other
payments collected or received by the Insured which are derived from or are
in any way related to the Mortgaged Property will be deducted from any claim
payment.
POOL INSURANCE.
Unless otherwise specified in the related Prospectus Supplement, if any
Pledged Loan securing a Series of Bonds is not covered by a 100% Mortgage
Insurance Policy, the Issuer will obtain a Pool Insurance Policy to cover any
loss (subject to the limitations described below) by reason of nonpayment by
the mortgagor of any Pledged Loan securing such Series of Bonds to the extent
such loss is not covered by any Primary Mortgage Insurance Policy, FHA
insurance or VA guaranty. The amount and terms of the Pool Insurance Policy
for a Series of Bonds will be specified in the related Prospectus Supplement.
The Pool Insurance Policy for a Series of Bonds, however, will not be a
blanket policy against loss, since claims thereunder may only be made
respecting particular defaulted Pledged Loans and only upon satisfaction of
certain conditions precedent described below. If the Pool Insurance Policy
for a Series of Bonds does not provide for coverage in the case of a loss due
to fraud or negligence, this fact will be prominently disclosed on the cover
page of the related Prospectus Supplement and thoroughly described in the
text thereof.
The Master Servicer for each such Series of Bonds will be required to
maintain the Pool Insurance Policy for such Series of Bonds and to present or
cause the Servicers to present claims thereunder to the Pool Insurance
Insurer on behalf of the Issuer, the Bond Trustee and the holders of Bonds of
such Series. The responsibilities of the Servicers, the amount of a claim
for benefits, the conditions precedent to the filing or payment of a claim,
the policy provisions and the payment of claims under a Pool Insurance Policy
generally will be similar to those described above for Primary Mortgage
Insurance Policies, subject to the aggregate limit on the amount of coverage
afforded thereby.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy for a Series of Bonds will provide that as a condition
precedent to the payment of any claim, the Insured generally will be required
(i) to advance hazard insurance premiums on the Mortgaged Property securing
the defaulted Pledged Loan; (ii) to advance, as necessary and approved in
advance by the Pool Insurance Insurer, (a) real estate property taxes, (b)
all expenses required to preserve and repair the Mortgaged Property and to
protect the Mortgaged Property from waste, so that the Mortgaged Property is
in at least as good a condition as existed on the date upon which coverage
under the Pool Insurance Policy with respect to such Mortgaged Property first
became effective, ordinary wear and tear excepted, (c) property sales
expenses, (d) amounts sufficient to discharge any outstanding liens on the
Mortgaged Property, and (e) foreclosure costs including court costs and
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reasonable attorneys' fees; and (iii) if there has been physical loss or
damage to the Mortgaged Property, to restore the Mortgaged Property to its
condition (reasonable wear and tear excepted) as of the issue date of the
Pool Insurance Policy. It also will be a condition precedent to the payment
of any claim under the Pool Insurance Policy that the Insured maintain a
Primary Mortgage Insurance Policy which is acceptable to the Pool Insurance
Insurer on all Pledged Loans that have loan-to-value ratios at the time of
origination in excess of 80%. FHA insurance and VA guarantees will be deemed
to be an acceptable Primary Mortgage Insurance Policy under the Pool
Insurance Policy. Assuming satisfaction of these conditions, the Pool
Insurance Insurer will pay to the Insured the amount of the loss which will
be: (a) the amount of the unpaid principal balance of the Pledged -Loan
immediately prior to an Approved Sale (defined below) of the Mortgaged
Property, (b) the amount of the accumulated unpaid interest on such Pledged
Loan to the date of claim settlement at the contractual rate of interest, and
(c) advances made by the Insured as described above less certain payments.
An Approved Sale is (1) a sale of the Mortgaged Property acquired by the
Insured because of a default by the borrower to which the Pool Insurance
Insurer has given prior approval, (2) a foreclosure or trustee's sale of the
Mortgaged Property at a price exceeding the maximum amount specified by the
Pool Insurance Insurer to be bid by the Insured, (3) the acquisition of the
Mortgaged Property under the Primary Mortgage Insurance Policy by the
Mortgage Insurer or (4) the acquisition of the Mortgaged Property by the Pool
Insurance Insurer. In addition, pursuant to the claims payment option
provision of a Pool Insurance Policy for a Series of Bonds, if any, the
Insured must, as a condition precedent to the payment of any loss, provide
the Pool Insurance Insurer with good and merchantable title to the Mortgaged
Property, unless it has been conveyed to the Pool Insurance Insurer pursuant
to the Primary Mortgage Insurance Policy. If any property securing a
defaulted Pledged Loan is damaged and the proceeds, if any, from the related
Standard Hazard Insurance Policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Servicer
of the related Pledged Loan will not be required to expend its own funds to
restore the damaged Mortgaged Property unless it determines and the Master
Servicer agrees (A) that such restoration will increase the proceeds to the
Issuer on liquidation of the Pledged Loan after reimbursement of the Servicer
for its expenses and (B) that such expenses will be recoverable by it through
liquidation proceeds or insurance proceeds.
The original amount of coverage under the Pool Insurance Policy securing
a Series of Bonds will be reduced over the life of the Bonds of such Series
by the aggregate dollar amount of claims paid less the aggregate of the net
amounts realized by the Pool Insurance Insurer upon disposition of all
foreclosed mortgaged properties covered thereby. The amount of claims paid
includes certain expenses incurred by the Servicer of the defaulted Pledged
Loan as well as accrued interest on delinquent Pledged Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under a Pool
Insurance Policy reach the original policy limit, coverage under the Pool
Insurance Policy will lapse and any further losses will be borne by the
Issuer, and thus may impact on payments to holders of Bonds of such Series.
In addition, unless the Servicer could determine that an advance in respect
of a delinquent Pledged Loan would be recoverable to it from the proceeds of
the liquidation of such Pledged Loan or otherwise, neither the Servicer nor
the Master Servicer would be obligated to make an advance respecting any such
delinquency since the advance would not be ultimately recoverable by it from
either the Pool Insurance Policy or any other related source. See "Certain
Legal Aspects of Mortgage Loans - Foreclosure" and "Servicing of the Pledged
Loans - Advances."
FHA INSURANCE AND VA GUARANTEES.
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the Housing Act and the United
States Housing Act of 1937, as amended. The insurance premiums for FHA Loans
are collected by HUD approved lenders or by the Servicers 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 HUD or
upon assignment of the defaulted FHA Loan to HUD. With respect to a defaulted
FHA Loan, the Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that the
default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with
the mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made up on
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other
criteria, HUD may provide relief by making payments to the Servicer in
partial or full satisfaction of amounts due under the loan (which payments
are to be repaid by the mortgagor to HUD) or by accepting assignment of the
FHA Loan from the Servicer. With certain exceptions, at least three full
monthly installments
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must be due and unpaid under the FHA Mortgage Loan and HUD must have rejected
any request for relief from the mortgagor before the Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. HUD debentures issued in satisfaction of FHA
insurance claims bear interest at the applicable FHA debenture interest rate.
The Servicer of each FHA Loan securing a Series of Bonds will be obligated to
purchase any such debenture issued in satisfaction of a defaulted FHA Loan
serviced by it for an amount equal to the principal amount of any such
debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted FHA Loan adjusted to
reimburse the Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Servicer after default. When entitlement
to insurance benefits results from foreclosure (or other acquisition of
possession) and conveyance to HUD, the Servicer is compensated for no more than
two-thirds of its foreclosure costs, and is compensated for interest accrued and
unpaid prior to such date but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the FHA Loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself bears interest (i) upon foreclosure of a FHA
Loan, from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation or make any payment due under the mortgage and (ii) upon
assignment of a FHA Loan, 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.
With respect to a defaulted VA Loan, the Servicer is, absent exceptional
circumstances, authorized to announce its intention to foreclose only when
the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the VA
Loan originally guaranteed applied to the indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the VA
Loan, interest accrued on the unpaid balance thereof to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only
to the extent that such amounts have not been recovered through liquidation
of the Mortgaged Property. The amount payable under the guaranty may in no
event exceed the amount of the original guaranty.
HAZARD INSURANCE ON THE PLEDGED LOANS
A form of a Standard Hazard Insurance Policy and forms of Special Hazard
Insurance Policies have been filed as exhibits to the Registration Statement
of which this Prospectus forms a part. The following descriptions do not
purport to be complete. Reference is made to such forms of policies which
have been filed as Exhibits to the Registration Statement of which this
Prospectus forms a part.
STANDARD HAZARD INSURANCE POLICIES.
The terms of each Servicing Agreement relating to a Series of Bonds will
require each Servicer to cause to be maintained a Standard Hazard Insurance
Policy covering the Mortgaged Property underlying each Pledged Loan covered
by such Servicing Agreement. The coverage of each Standard Hazard Insurance
Policy will be required to be in an amount not less than the maximum
insurable value of the Mortgaged Property and other improvements securing
such Pledged Loan or the principal amount owing on such Pledged Loan,
whichever is less. All amounts collected by the Servicer under any Standard
Hazard Insurance Policy (less amounts to be applied to the restoration or
repair of the Mortgaged Property and other amounts necessary to reimburse the
Servicer for previously incurred advances or approved expenses, which may be
retained by the Servicer) will be deposited to the applicable Custodial
Account (defined below) maintained with respect to such Pledged Loan.
The Standard Hazard Insurance Policies will provide for coverage at least
equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized
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in each such policy. Because the Standard Hazard Insurance Policies relating
to the Pledged Loans securing a Series of Bonds will be underwritten by
different insurers and will cover mortgaged properties located in various
states, such policies will not contain identical terms and conditions. The
basic terms thereof, however, generally will be determined by state law and
generally will be similar. Most such policies typically will not cover any
physical damage to the mortgaged properties resulting from any of the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mud flows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive. When a Mortgaged Property is located in a flood area
identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the applicable Servicing Agreement will require that the Servicer
cause to be maintained flood insurance with respect to such Mortgaged
Property.
The Standard Hazard Insurance Policies covering mortgaged properties
securing Pledged Loans typically will contain a "coinsurance" clause which,
in effect, will require the insured at all times to carry insurance of a
specified percentage (generally 80% to 90%) of the full replacement value of
the dwellings, structures and other improvements on the Mortgaged Property in
order to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, such clause will provide that
the insurer's liability in the event of partial loss will not exceed the
greater of (i) the actual cash value (the replacement cost less physical
depreciation) of the dwellings, structures and other improvements damaged or
destroyed or (ii) such proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such dwellings, structures and
other improvements. Any losses incurred with respect to Pledged Loans
securing a Series of Bonds due to uninsured risks (including earthquakes, mud
flows and floods) or insufficient hazard insurance proceeds may reduce the
Collateral securing such Series of Bonds to the extent such losses are not
covered by the Special Hazard Insurance Policy for such Series and would
adversely impact on payments to holders of Bonds of such Series.
SPECIAL HAZARD INSURANCE POLICIES.
To the extent specified in the Prospectus Supplement for a Series of
Bonds secured by any Pledged Loans, a Special Hazard Insurance Policy will be
obtained from the insurer or insurers specified in the related Prospectus
Supplement ("Special Hazard Insurer") which, subject to the limitations
described below, will protect the holders of Bonds of such Series from (i)
loss by reason of damage to mortgaged properties underlying defaulted Pledged
Loans securing such Series of Bonds caused by certain hazards (including
vandalism, earthquakes, mud flows and, except where the mortgagor is required
to obtain flood insurance, floods) not insured against under the Standard
Hazard Insurance Policies covering such Pledged Loans and (ii) loss from
partial damage to the mortgaged properties securing such defaulted Pledged
Loans caused by reason of the application of the coinsurance clause contained
in the applicable Standard Hazard Insurance Policies. The Special Hazard
Insurance Policy for a Series of Bonds, however, generally will not cover
losses occasioned by infidelity, conversion or other dishonest act on the
part of any insured or an insured's agent or employee, war, warlike action in
time of peace or war, insurrection, rebellion, nuclear reaction, certain
governmental actions or certain other risks. Coverage under the Special
Hazard Insurance Policy with respect to a Series of Bonds will be at least
equal to the amount specified in the related Prospectus Supplement.
Subject to the foregoing limitations, the Special Hazard Insurance
Policy with respect to a Series of Bonds will provide that, when there has
been damage to Mortgaged Property securing a defaulted Pledged Loan and such
damage is not covered by the Standard Hazard Insurance Policy maintained by
the mortgagor or the Servicer with respect to such Pledged Loan, the Special
Hazard Insurer will pay the lesser of (a) the cost to repair or replace such
property or (b) upon transfer of such property to it, the unpaid principal
amount of such Pledged Loan at the time of the acquisition of such property
by the Insured, plus accrued interest (excluding applicable late charges and
penalty interest) to the date of claim settlement and certain expenses
incurred in respect of such property. No claim may be validly presented
under the Special Hazard Insurance Policy unless (1) hazard insurance on the
Mortgaged Property securing the defaulted Pledged Loan has been kept in force
and other reimbursable protection, preservation and foreclosure expenses
approved in advance by the Special Hazard Insurer have been paid and (2) the
insured has acquired title to the Mortgaged Property as a result of default
by the mortgagor. If the sum of the unpaid principal amount plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the
amount of further coverage under the Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Mortgaged
Property. Any amount paid as the cost to repair or replace the Mortgaged
Property will reduce coverage by such amount.
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The terms of the Master Servicing Agreement with respect to a Series of
Bonds may require the Master Servicer to maintain the Special Hazard
Insurance Policy for such Series of Bonds in full force and effect throughout
the term of such Master Servicing Agreement subject to certain conditions
contained therein. The Master Servicer also must present claims, on behalf of
the Issuer and the Bond Trustee, for all losses not otherwise covered by the
applicable Standard Hazard Insurance Policies and take all reasonable steps
necessary to permit recoveries on such claims. See "Servicing of the Pledged
Loans-Maintenance of Insurance Policies; Claims Thereunder and Other
Realization Upon Defaulted Pledged Loans."
MORTGAGOR BANKRUPTCY INSURANCE ON THE PLEDGED LOANS
In the event of a personal bankruptcy of a mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property of such mortgagor at
an amount less than the then outstanding principal balance of the Pledged
Loan secured by such Mortgaged Property. The amount of the secured debt
could be reduced to such value, and the holder of such Pledged Loan thus
would become an unsecured creditor to the extent the outstanding principal
balance of such Pledged Loan exceeds the value so assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Pledged Loan can result from a bankruptcy proceeding. If
specified in the Prospectus Supplement for a Series of Bonds secured by any
Pledged Loans, losses resulting from a bankruptcy proceeding affecting
Pledged Loans securing a Series of Bonds will be covered under a Mortgagor
bankruptcy bond for such Series of Bonds (or any other instrument that will
not result in a downgrading of the rating of the Bonds of such Series by the
Rating Agency). The amount of any Mortgagor Bankruptcy Bond for a Series of
Bonds will provide for payments in an amount specified in the related
Prospectus Supplement which must be acceptable to the Rating Agency. Subject
to the terms of the Mortgagor Bankruptcy Bond, the Issuer thereof may have
the right to purchase any Pledged Loan with respect to which a payment or
drawing has been made or may be made for an amount equal to the outstanding
principal amount of such Pledged Loan plus accrued and unpaid interest
thereon. In the alternative, to the extent specified in the related
Prospectus Supplement, the Issuer may deposit cash, a certificate of deposit,
an irrevocable letter of credit or any other instrument acceptable to the
Rating Agency in the Reserve Fund in an initial amount acceptable to the
Rating Agency. The amount of the Mortgagor Bankruptcy Bond for a Series of
Bonds or of the deposit to the Reserve Fund for such Series in lieu thereof
may be reduced as long as any such reduction will not result in a downgrading
of the then rating of the Bonds of such Series by the Rating Agency.
However, such withdrawal may only occur if the Bond Trustee shall have
received a certificate of a firm of independent certified public accountants
acceptable to the Bond Trustee to the effect that the disbursement of such
funds will not impair the security of the Bonds in contravention of the
provisions of the Indenture for a Series of Bonds. (Indenture, Section 13.05)
See "Certain Legal Aspects of Mortgage Loans - Anti-Deficiency Legislation
and Other Limitations on Lenders" and "Description of the Bonds-Ratings of
the Bonds."
OTHER COVERAGE ON THE PLEDGED LOANS
To the extent specified in the Prospectus Supplement for a Series of Bonds,
the Issuer may make deposits to a reserve fund for such Series of Bonds in
amounts acceptable to the Rating Agency.
Certain of the Mortgage Insurance Policies securing a Series of Bonds will
contain an exclusion from coverage for certain circumstances involving
fraudulent conduct or negligence by certain persons in connection with the
Pledged Loans covered thereby. The Servicers with respect to such Series of
Bonds will agree in the Servicing Agreements with respect to such Series of
Bonds to repurchase any such Pledged Loan in the event that coverage relating to
such Pledged Loan which otherwise would have been available under such a
Mortgage Insurance Policy is not ultimately available by reason of materially
incomplete or inaccurate information being submitted to the applicable Mortgage
Insurer which information is material either to the acceptance of the risk or to
the hazard assumed by such Mortgage Insurer. The Master Servicer with respect to
such Series of Bonds will agree in the Master Servicing Agreement with respect
to such Series of Bonds to repurchase any such Pledged Loan which any such
Servicer fails to repurchase.
A mortgage repurchase bond ("Mortgage Repurchase Bond") may be obtained for
a Series of Bonds secured by any Pledged Loans for the purpose of insuring the
repurchase obligation of the Master Servicer for such Series of Bonds described
above. The amount and duration of the coverage of such Mortgage Repurchase Bond
will be determined by the Rating Agency and will be specified in the related
Prospectus Supplement. The amount of the Mortgage Repurchase Bond for a Series
of Bonds may be reduced so long as any such reduction will not result in a
downgrading of the then rating of the
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Bonds of such Series by the Rating Agency. However, such withdrawal may only
occur if the Bond Trustee shall have received a certificate of a firm of
independent certified public accountants acceptable to the Bond Trustee to
the effect that the disbursement of such funds will not impair the security
of the Bonds in contravention of the provisions of the Indenture for a Series
of Bonds. (Indenture, Section 13.05).
All Mortgage Insurance Policies provide that the applicable Mortgage
Insurer has issued its Mortgage Insurance Policy in reliance upon the
correctness and completion of the information submitted to such Mortgage
Insurer. Any such Mortgage Insurer may deny coverage pursuant to such a
provision. It is unclear whether any such denial would be upheld by a court.
Neither the repurchase obligation of a Servicer or the Master Servicer nor a
Mortgage Repurchase Bond would apply to any such denial of coverage unless, as
described above, such denial is based upon materially incomplete or inaccurate
information being submitted to the applicable Mortgage Insurer which information
is material either to the acceptance of the risk or to the hazard assumed by
such Mortgage Insurer.
As required by the Rating Agency, the Issuer may, from time to time, obtain
further insurance policies or bonds (or make deposits in lieu thereof to enhance
the credit rating of the Bonds of such Series). To the extent any such
insurance policies or bonds are obtained by the Issuer for a Series of Bonds, or
deposits are made in lieu thereof, a description thereof will be set forth in
the related Prospectus Supplement.
INVESTMENT OF FUNDS
The Security Funds for a Series of Bonds are to be invested by the Bond
Trustee, as directed by the Issuer, in certain eligible investments
("Eligible Investments"), which may include (i) obligations of the United
States or any agency thereof provided such obligations are backed by the full
faith and credit of the United States, (ii) general obligations of or
obligations guaranteed by any state of the United States receiving the
highest rating of the Rating Agency at the time of the investment, (iii)
commercial or finance company paper which is then rated in the highest
commercial or finance company paper rating category of the Rating Agency or
such lower category that will not result in a downgrading of the then rating
of the Bonds of such Series by the Rating Agency, (iv) certificates of
deposit, demand and time deposits, federal funds or bankers' acceptances
issued by any depository institution or trust company incorporated under the
laws of the United States or of any state thereof and subject to supervision
and examination by federal and/or state banking authorities provided that the
commercial paper and/or debt obligations of such depository institution or
trust company (or in the case of the principal depository institution in a
holding company system, the commercial paper or debt obligations of such
holding company) are then rated in the highest bond rating category of the
Rating Agency or such lower category that will not result in a downgrading of
the rating on the Bonds of such Series, (v) demand or time deposits or
certificates of deposit issued by any bank or trust company or savings and
loan association and fully insured by the Federal Deposit Insurance
Corporation ("FDIC"), (vi) guaranteed reinvestment agreements ("Reinvestment
Agreements") issued by any bank, insurance company or other corporation
acceptable to the Rating Agency at the time of issuance of such Bonds, (vii)
repurchase obligations with respect to any security described in (i) and (ii)
above or any other security issued or guaranteed by an agency or
instrumentality of the United States, in either case entered into with a
depository institution or trust company (acting as principal) described in
(iv) above, and (viii) securities bearing interest or sold at a discount
issued by any corporation incorporated under the laws of the United States or
any state thereof which, at the time of such investment or contractual
commitment providing for such investment, are then rated in the highest
rating category of the Rating Agency or in such lower rating category that
will not result in the downgrading of the then rating of the Bonds of such
Series by the Rating Agency; PROVIDED, HOWEVER, securities issued by any
particular corporation will not be Eligible Investments to the extent that
investments therein will cause the then outstanding principal amount of
securities issued by such corporation and held as part of the Collateral for
the Bonds to exceed 10% of the aggregate outstanding principal balances and
amounts of all the Mortgage Collateral and Eligible Investments held as part
of the Collateral for the Bonds. The Bond Trustee must however, at all times
invest at least 55% of the initial value of the Bonds in the form of assets
secured exclusively by real property; and at no time shall more than 20% of
the total initial value of the Bonds consist of assets not secured either
exclusively or substantially by real estate. See "Description of the
Bonds-Ratings of the Bonds."
Eligible Investments with respect to a Series of Bonds will include only
obligations or securities that mature on or before the date on which the
Collection Account or the applicable Security Fund for such Series of Bonds is
required or may be anticipated to be required to be applied for the benefit of
the holders of Bonds of such Series. (Indenture, Section 1.01.) Any income or
other gain from such investments for a Series of Bonds will be credited to the
Collection Account or the
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applicable Security Fund for such Series of Bonds and any loss resulting from
such investments will be charged to the Collection Account or the applicable
Security Fund for such Series.
The Indenture requires the Bond Trustee to invest funds deposited in the
Collection Account and the Security Funds for a Series of Bonds pursuant to the
terms of the applicable Reinvestment Agreement, if any, for such Collection
Account or Security Funds for such Series of Bonds.
The investment provisions described above are subject to the restriction
that, if an election for federal income tax purposes to have the Collateral
securing a Series of Bonds treated as a REMIC has been or will be made,
investments with respect to such Series will be restricted in such a manner as
to constitute "permitted investments" as defined in Section 860G(a)(5) of the
and dispositions thereof will not be made if the result would be to cause any
part of the proceeds to be subject to the tax on "prohibited transactions"
imposed by Section 860F(a)(1) or would cause a loss of REMIC status for such
Series under Section 860D of the Code.
SERVICING OF THE PLEDGED LOANS
GENERAL
With respect to each Series of Bonds secured by any Pledged Loans, except
as otherwise specified in the Prospectus Supplement, various Servicers will
provide certain customary servicing functions with respect to the Pledged Loans
securing such Series of Bonds pursuant to Servicing Agreements. If specified in
the related Prospectus Supplement for a Series of Bonds secured by any Pledged
Loans, the Issuer will enter into a Master Servicing Agreement for such Series
of Bonds with a company specified in the related Prospectus Supplement pursuant
to which the Master Servicer will administer and supervise the performance by
the Servicers of their duties and responsibilities under the Servicing
Agreements with respect to such Series of Bonds. Each such Servicer must be
approved by the Master Servicer, the Issuer and, to the extent relevant for a
Series of Bonds, either FNMA or FHLMC as a seller-servicer of mortgage loans and
in the case of FHA Loans, by HUD as an FHA approved mortgage servicer. The
Master Servicer may have the right to recommend to the Bond Trustee the removal
of any Servicer for cause. Upon termination of a Servicer by the Bond Trustee,
a back up servicer (which may be the Master Servicer) will assume the servicing
obligations of the terminated Servicer, or the Master Servicer, at its option,
may appoint a substitute Servicer acceptable to the Bond Trustee to assume the
servicing obligations of the terminated Servicer.
The duties to be performed by the Servicers with respect to the Pledged
Loans securing a Series of Bonds will include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of insurance claims, foreclosure procedures, and, if necessary, the
advance of funds to the extent certain payments are not made by the mortgagors
and are recoverable under the applicable Insurance Policies with respect to such
Series of Bonds or from proceeds of liquidation of such Pledged Loans. Each
Servicer also will provide such accounting and reporting services as are
required by the Issuer and the Bond Trustee with respect to the Pledged Loans
securing such Series of Bonds. Each Servicer will be required to service any FHA
and VA Loans securing such Series of Bonds in accordance with HUD and VA
servicing requirements, respectively.
The Master Servicer, if any, will be entitled to amounts from payments with
respect to the Pledged Loans securing such Series of Bonds remitted to the Bond
Trustee to cover its fees as Master Servicer. The Servicers will be entitled to
withhold their servicing fees and certain other fees and charges from payments
on such Pledged Loans serviced by them.
The Master Servicer will monitor the performance of each Servicer, if any,
and will have the right to remove a Servicer at any time if it considers such
removal to be in the best interest of the related Bondholders. The duties to be
performed by the Master Servicer, directly or through a Servicer, will include
collection and remittance of principal and interest payments, insurance claims,
and, if necessary, foreclosure. If a Servicer is terminated by the Master
Servicer, the servicing function of the Servicer shall either be transferred to
a substitute Servicer or performed by the Master Servicer. The Master Servicer
shall be entitled to retain the portion of the servicing fee paid to the
Servicer under the terminated Servicing Agreement if the Master Servicer elects
to perform such servicing functions itself.
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If the Issuer does not enter into a Master Servicing Agreement with respect
to a Series of Bonds, an entity or entities acceptable to the Rating Agency will
assume the obligations of the Master Servicer described herein.
If the Issuer with respect to a Series of Bonds is a Trust, the Issuer will
assign to such Trust its rights under the Master Servicing Agreement with
respect to such Series of Bonds. The Master Servicing Agreement, if any, and
each Servicing Agreement with respect to a Series of Bonds will be assigned to
the Bond Trustee as security for such Series of Bonds.
The following descriptions do not purport to be complete. A form of
Master Servicing Agreement and a form of Servicing Agreement will be filed as
Exhibits to an amended Registration Statement.
PAYMENTS ON PLEDGED LOANS
Pursuant to the Servicing Agreements with respect to a Series of Bonds,
each Servicer will be required to establish and maintain one or more separate,
insured (to the available limits) custodial accounts (collectively, the
"Custodial Account") into which the Servicer will be required to deposit on a
daily basis payments of principal and interest received with respect to Pledged
Loans serviced by such Servicer and securing such Series of Bonds. Such amounts
will include principal prepayments, insurance proceeds and proceeds received in
connection with the liquidation of defaulted Pledged Loans, any advances of such
Servicer's funds made, and proceeds of any Pledged Loans withdrawn from the
Collateral securing such Series of Bonds as provided in the Indenture for
defects in documentation, breach of representations or warranties or otherwise.
Deposits in each Custodial Account will be required to be insured by the
FDIC. If at any time the sums in any Custodial Account exceed the limits of
insurance on such account, the Servicer will be required within one business day
to withdraw such excess funds from such account and remit such amounts to the
Bond Trustee for deposit in the Collection Account for such Series of Bonds.
For a Series of Bonds, not later than the date specified in the Servicing
Agreements (or the next preceding business day, if such day is not a business
day) ("Remittance Date"), such Servicing Agreements, with respect to a Series of
Bonds, will require each Servicer to remit to the Bond Trustee (to the extent
not previously remitted) amounts representing scheduled installments of
principal and interest on the Pledged Loans received or advanced by the Servicer
which were due on the first day of such month, principal prepayments, insurance
or guaranty proceeds, and the proceeds of liquidations of mortgaged properties
including funds paid by the Servicer for any such Pledged Loans withdrawn from
the Mortgage Collateral securing such Series of Bonds received in the prior
month, with interest for the entire month of prepayment or liquidation, less
applicable servicing fees, insurance premiums and amounts representing
reimbursement of advances made by the Servicer. Such amounts will be deposited
into the Collection Account for such Series of Bonds maintained with the Bond
Trustee. In addition to the foregoing withdrawals from the Custodial Accounts,
there will be deposited in the Collection Account for such Series of Bonds any
advances of principal and interest made by the Master Servicer pursuant to the
terms of the Master Servicing Agreement, if any, for such Series of Bonds and
any insurance, guaranty or liquidation proceeds (including amounts paid upon the
withdrawal of defective Pledged Loans from the Mortgage Collateral for such
Series of Bonds) to the extent such amounts are not deposited in the related
Custodial Account or received and applied by such Servicer. To the extent that
the amount on deposit in the Collection Account for a Series of Bonds is not
insured by the FDIC, such account will be invested in or collateralized by
Eligible Investments.
With respect to any Series of Bonds, amounts received by the Bond Trustee
as proceeds of any Insurance Policies or in connection with the liquidation of
defaulted Pledged Loans securing such Series of Bonds by foreclosure or
otherwise, net of reimbursable expenses and amounts reimbursable to the Servicer
or Master Servicer, will be deemed to be payments received on the Pledged Loans
securing such Bonds.
The Servicer of each FHA Loan securing a Series of Bonds will be obligated
to purchase any HUD debenture issued in satisfaction of a defaulted FHA Loan
serviced by it for an amount equal to the principal amount of such debenture.
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Not less than five days prior to each Payment Date for a Series of Bonds
(or the next preceding business day if such day is not a business day), the
Master Servicer will furnish to the Bond Trustee and to the Issuer a statement
setting forth certain information with respect to the Pledged Loans securing
such Series of Bonds.
ADVANCES
The Servicing Agreements with respect to a Series of Bonds may require each
Servicer to advance funds to cover, to the extent that such amounts are
recoverable under any Insurance Policies or from proceeds of liquidation of
Pledged Loans securing such Series of Bonds, (i) delinquent payments of
principal and interest on such Pledged Loans, (ii) delinquent payments of taxes,
insurance premiums and other escrowed items, and (iii) foreclosure costs,
including reasonable attorneys' fees. Any such advances by the Servicer must be
deposited into the applicable Custodial Account. Amounts so advanced by the
Servicers will be reimbursable out of the related Insurance Policies or proceeds
of liquidation of the Pledged Loans for which such amounts were advanced. If an
advance made by a Servicer later proves to be unrecoverable, such Servicer will
be entitled to reimbursement from funds in the Collection Account for such
Series of Bonds or the applicable Custodial Account.
If specified in the Prospectus Supplement for a Series of Bonds, the Master
Servicing Agreement with respect to such Series of Bonds will require the Master
Servicer to advance delinquent payments of principal, interest, taxes, insurance
premiums and foreclosure costs including reasonable attorneys' fees, to the
extent that such funds are not advanced by the applicable Servicer and to the
extent that such advances are recoverable under the applicable Insurance
Policies or from the proceeds of liquidation of Pledged Loans securing such
Series of Bonds. Any such advance will be due in immediately available funds at
the principal office of the Bond Trustee not later than the last day of the
month in which such delinquent payment was due. Any advances made by the Master
Servicer will be deposited in the Collection Account for such Series of Bonds
and will be recoverable out of the related Insurance Policies or proceeds of
liquidation of the Pledged Loans for which such amounts were advanced. If an
advance made by the Master Servicer later proves to be unrecoverable, the
Master Servicer will be entitled to reimbursement from funds in such Collection
Account.
Any advances made by the Servicers or the Master Servicer with respect to
Pledged Loans securing any Series of Bonds will be intended to enable the Issuer
to make timely payment of the scheduled principal and interest payments on the
Bonds of such Series. However, neither the Master Servicer nor any Servicer
will insure or guarantee any Series of Bonds or the Pledged Loans securing any
Series of Bonds and their obligations will be limited to the advance of certain
delinquent payments to the extent that such advances, in the judgment of the
Servicer or the Master Servicer, will be recoverable under the related Insurance
Policies or from proceeds of liquidation of the Pledged Loans for which such
amounts were advanced.
COLLECTION AND OTHER SERVICING PROCEDURES.
The Servicing Agreements with respect to a Series of Bonds will require
each Servicer to make reasonable efforts to collect all payments called for
under the Pledged Loans securing the Bonds of such Series and, consistent with
the Servicing Agreement and the applicable Insurance Policies with respect to
each such Pledged Loan, to follow such collection procedures as it normally
would follow with respect to mortgage loans serviced for FNMA except when, in
the case of FHA or VA Loans, the applicable regulations require otherwise.
The note, mortgage or deed of trust used in originating a conventional
Pledged Loan may, contain a "due-on-sale" clause. FHA and VA Loans may not
contain "due-on-sale" clauses. Unless otherwise specified in the Prospectus
Supplement for a Series of Bonds, the Servicing Agreements will require the
Servicers to use reasonable efforts to enforce "due-on-sale" clauses with
respect to any note, mortgage or deed of trust containing such a clause
provided that the coverage of any applicable Insurance Policy will not be
adversely affected thereby and provided that the Servicers obtain the written
approval of the Master Servicer, the Mortgage Insurer and the Pool Insurance
Insurer before instituting any enforcement proceedings. In any case in which
a Mortgaged Property has been or is about to be conveyed by the mortgagor and
the "due-on-sale" clause has not been enforced, the Servicer with respect to
such Mortgaged Property will be authorized to take or enter into an
assumption agreement from or with the person to whom such property has been
or is about to be conveyed only if such person meets the criteria necessary
to maintain the coverage provided by the applicable Mortgage Insurance
Policies or if otherwise required by law. In the event that the Servicer
enters into an assumption agreement in connection with the conveyance of any
such Mortgaged Property, the Servicer will release the original mortgagor
from liability upon the Pledged
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Loan and substitute the new mortgagor as obligor thereon. In the case of a
FHA Loan, such an assumption may occur only with HUD approval of the
substitute mortgagor. In no event can the assumption agreement permit a
decrease in the mortgage interest rate or an increase in the term of the
loan. Fees collected for entering into an assumption agreement will be
retained by the Servicer of the Pledged Loan. See "Certain Legal Aspects of
Mortgage Loans - "Due-on-Sale" Clauses."
Under the Servicing Agreements with respect to a Series of Bonds, each
Servicer, to the extent permitted by law, will establish and maintain a
custodial account for reserves ("Custodial Account for Reserves") into which
mortgagors will be required to deposit amounts sufficient to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
except that certain Servicers may provide insurance coverage acceptable to the
Master Servicer for such Series of Bonds against loss occasioned by the failure
to escrow insurance premiums rather than causing such escrows to be made.
Withdrawals from the Custodial Account for Reserves maintained for mortgagors
may be made to effect timely payment of taxes, assessments, mortgage and hazard
insurance premiums or comparable items, to reimburse the Servicer for
maintaining mortgage and hazard insurance, to refund to mortgagors amounts
determined to be overages, to pay interest to mortgagors on balances in the
Custodial Account for Reserves, if required, to repair or otherwise protect the
Mortgaged Property and to clear and terminate such account. The Servicer will
be responsible for the administration of the Custodial Account for Reserves and
will be obligated to make advances to such account when a deficiency exists
therein.
With respect to Manufactured Housing, Manufactured Housing Contracts in
general prohibit the sale or transfer of the related unit of Manufactured
Housing without the consent of the Master Servicer and permit the acceleration
of the maturity of the Manufactured Housing Contracts by the Master Servicer
upon any such sale or transfer that is not consented to. Unless otherwise
specified in the related Prospectus Supplement, the Issuer or the Master
Servicer expects that it will permit most transfers of units of Manufactured
Housing and not accelerate the maturity of the related Manufactured Housing
Contracts. In certain cases, the transfer may be made by a delinquent obligor
in order to avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a unit of Manufactured Housing after which the
Master Servicer desires to accelerate the maturity of the related Manufactured
Housing Contract, the Master 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 Manufactured Homes. Consequently, in some states the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
MAINTENANCE OF INSURANCE POLICIES; CLAIMS THEREUNDER AND OTHER REALIZATION UPON
DEFAULTED PLEDGED LOANS
With respect to each Pledged Loan securing a Series of Bonds, the Servicer
will be required to maintain each Primary Mortgage Insurance Policy and any FHA
insurance or VA guaranty in full force and effect as long as such coverage is
required under the Servicing Agreement and to pay the premium therefor on a
timely basis. Each Servicing Agreement with respect to a Series of Bonds also
will require the Servicer to maintain a Standard Hazard Insurance Policy for
each Pledged Loan covered thereby.
The Master Servicer with respect to a Series of Bonds will be required to
maintain any Excess Coverage Mortgage Insurance Policy, any Special Hazard
Insurance Policy, any Mortgagor Bankruptcy Bond and any Pool Insurance Policy
for such Series of Bonds in full force and effect throughout the term of the
Master Servicing Agreement, subject to payment of the applicable premiums by the
Bond Trustee. The Master Servicer will be required to notify the Bond Trustee
to pay the premiums for any such Excess Coverage Mortgage Insurance Policy, any
such Special Hazard Insurance Policy, any such Mortgagor Bankruptcy Bond and any
such Pool Insurance Policy for such Series of Bonds on a timely basis. In the
event that such Special Hazard Insurance Policy, such Mortgagor Bankruptcy Bond
or such Pool Insurance Policy for such Series of Bonds is canceled or terminated
for any reason (other than the exhaustion of total policy coverage), the Master
Servicer will be obligated to obtain from another insurer a comparable
replacement policy with a total coverage which is equal to the then existing
coverage of such Special Hazard Insurance Policy, such Mortgagor Bankruptcy Bond
or such Pool Insurance Policy. However, if the cost of any such replacement
policy or bond is greater than the cost of the policy or bond which has been
terminated, then the amount of the coverage will be reduced to a level such that
the applicable premium will not exceed the cost of the premium for the policy or
bond which was terminated.
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Each Servicing Agreement with respect to a Series of Bonds will require the
Servicer (on behalf of itself, the Master Servicer, and the Bond Trustee as
their respective interests may appear) to present claims to the Mortgage Insurer
under any Mortgage Insurance Policy for such Series of Bonds and to HUD or VA
under any FHA insurance or VA guaranty and to take such reasonable steps as are
necessary to permit recovery thereunder with respect to defaulted Pledged Loans
securing such Series of Bonds.
The Master Servicing Agreement with respect to a Series of Bonds will
require the Master Servicer (on behalf of itself, the Bond Trustee and the
holders of Bonds of such Series) to present, or cause to be presented, claims to
the issuer of any Mortgagor Bankruptcy Bond for such Series of Bonds and to take
such reasonable steps as are necessary to permit recovery respecting defaulted
Pledged Loans covered thereunder. The Master Servicer also will be required to
present claims to the Special Hazard Insurer under the Special Hazard Insurance
Policy for such Series of Bonds and to take such reasonable steps as are
necessary to permit recovery under such policy respecting losses on the
mortgaged properties securing the Pledged Loans.
If any Mortgaged Property securing a defaulted Pledged Loan securing a
Series of Bonds is damaged and the proceeds, if any, from the related Standard
Hazard Insurance Policy or the Special Hazard Insurance Policy are insufficient
to restore the damaged property to the condition required to permit recovery
under the related Mortgage Insurance Policy, the Servicer will not be required
to expend its own funds to restore the damaged property unless it determines and
the Master Servicer agrees that such expenses will be recoverable to it through
liquidation proceeds or through insurance proceeds.
If recovery under the applicable Insurance Policy is not available, the
Servicer or the Master Servicer nevertheless will be obligated to follow
standard practices and procedures to realize upon any defaulted Pledged Loan.
In this regard, the Servicer may sell the Mortgaged Property pursuant to
foreclosure, trustee's sale or, in the event a deficiency judgment is available
against the mortgagor or other person, proceed to seek recovery of the
deficiency against the appropriate person. To the extent that the proceeds of
any such liquidation proceedings are less than the outstanding Bond Value of the
defaulted Pledged Loan, there will be a reduction in the value of the Collateral
for the Series of Bonds secured by such Pledged Loan such that the holders of
Bonds of such Series may not receive full interest and principal on the Bonds of
such Series. See "Certain Legal Aspects of Mortgage Loans - Anti-Deficiency
Legislation and Other Limitations on Lenders."
RESIGNATION OF THE MASTER SERVICER
If a Master Servicing Agreement has been entered into with respect to a
Series of Bonds, the Master Servicer for such Series of Bonds may not resign
from its obligations and duties under the Master Servicing Agreement with
respect to such Series of Bonds, except upon a determination that its duties
thereunder are no longer permissible under applicable law. No such resignation
will become effective until a successor Master Servicer has assumed the Master
Servicer's obligations and duties under the Master Servicing Agreement. To the
extent specified in the Prospectus Supplement for a Series of Bonds, the Issuer
will have the right to terminate the Master Servicing Agreement for such Series
of Bonds with the Master Servicer at any time so long as such termination will
not result in a downgrading of the then rating of such Bonds by any rating
agency rating such Bonds.
EVIDENCE AS TO COMPLIANCE
After the Bonds of a Series have been outstanding for more than six months,
the Master Servicer for such Series of Bonds will be required to cause a firm of
independent certified public accountants to furnish to the Bond Trustee within
120 days of the end of each fiscal year of the Master Servicer a statement to
the effect that such firm has examined certain documents and records relating to
the servicing of the Pledged Loans securing such Series of Bonds during the
preceding year and that on the basis of such examination such firm is of the
opinion that the Master Servicer has performed its obligations in compliance
with the Master Servicing Agreement and other relevant documents except for (i)
such exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement. Such statement will be in a form
and provide for such procedures as may be defined by the Issuer and the Bond
Trustee.
The Master Servicer for a Series of Bonds will be required to deliver to
the Bond Trustee an annual statement signed by two of its officers to the effect
that the Master Servicer has fulfilled its obligations in all material respects
under the Master Servicing Agreement with respect to such Series of Bonds
throughout the preceding year. Copies of such
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statements may be obtained by the holders of Bonds of such Series upon
written request addressed to the Issuer at its principal executive offices.
EVENTS OF DEFAULT
Events of default under any Master Servicing Agreement for a Series of
Bonds will consist of (i) any failure to make or cause the deposit with the Bond
Trustee of any required payment as provided by the Master Servicing Agreement
for such Series; (ii) any material failure by the Master Servicer for such
Series to duly observe or perform any other of its covenants or agreements in
the Master Servicing Agreement for such Series which continues unremedied for 15
days after the giving of written notice of such failure by the Bond Trustee;
(iii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by the Master
Servicer for such Series indicating its insolvency, reorganization or inability
to pay its obligations; and (iv) the Rating Agency lowering or threatening to
lower the then rating of the Bonds of such Series due to the unacceptability of
terms in the Master Servicing Agreement for such Series or due to the financial
condition of the Master Servicer for such Series.
RIGHTS UPON EVENT OF DEFAULT
So long as an event of default under a Master Servicing Agreement remains
unremedied, the Bond Trustee may waive any such default under such Master
Servicing Agreement, or terminate all of the rights and obligations of the
Master Servicer under such Agreement, whereupon the Bond Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer under
such agreement and will be entitled to similar compensation arrangements. The
Bond Trustee, with the approval of the Issuer, may appoint a FNMA, FHLMC or HUD
approved servicer to act as successor to the Master Servicer under such Master
Servicing Agreement. The Bond Trustee and such successor will agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation to the Master Servicer under such Master Servicing Agreement.
AMENDMENTS
The Master Servicing Agreement, if any, with respect to any Series of Bonds
may be amended with respect to such Series of Bonds by the Master Servicer and
the Bond Trustee, or by the Master Servicer and the Issuer with the consent of
the Bond Trustee, for the purpose of adding any provisions to, or changing in
any manner, or eliminating any of the provisions of such Master Servicing
Agreement.
FINANCE COMPANIES AND FUNDING AGREEMENTS
The Issuer may choose to obtain Mortgage Collateral securing the Bonds in
part through finance companies ("Finance Companies"). The Finance Companies
will be responsible for identifying, contracting for and purchasing the Mortgage
Collateral for a Series of Bonds. One or more of the Finance Companies
participating in a Series of Bonds may be affiliated with the Issuer. If
Pledged Loans are originated through Finance Companies, such Finance Companies
will not insure or guaranty payment of principal of or interest on the Bonds of
any Series. Such Finance Companies will then assign, sell or lend the
Collateral to the Issuer under a Funding Agreement. The Finance Companies will
be responsible for their own costs and expenses related to this purpose. The
Issuer may elect to work with one or more Finance Companies.
Unless specified otherwise in the related Prospectus Supplement for a
Series of Bonds, the Issuer and each Finance Company participating in the offer
of a Series of Bonds will enter into a separate Funding Agreement pursuant to
which the Finance Company will (i) borrow a portion of the proceeds of the sale
of such Series of Bonds in an amount not to exceed the Aggregate Initial Bond
Value of the Mortgage Collateral pledged under such Funding Agreement; (ii)
repay such loan by causing payments to be made to the Bond Trustee in such
amounts as are necessary (after taking into account any cash available to be
withdrawn from any applicable Security Fund for such Series of Bonds) to pay
accrued interest on such loan and to amortize the entire principal amount of
such loan; and (iii) pledge to the Issuer as security for the loan a portion of
the Pledged Loans having an Aggregate Initial Bond Value equal to at least the
amount of the loan under the Funding Agreement. Each Finance Company also will
provide its required portion of the cash, certificates of deposit, irrevocable
letters of credit or other financial guarantees to fund the applicable Security
Funds under the Indenture. Unless otherwise specified in the Prospectus
Supplement for a Series of Bonds, the security pledged by each Finance Company
under its Funding Agreement will secure only its loan and not the loans made to
the other participating Finance Companies.
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If the Issuer with respect to a Series of Bonds is a Trust, the Issuer will
assign to such Trust its entire right, title and interest in the Collateral and
all proceeds thereof pledged under the Funding Agreements with respect to such
Series of Bonds. The Issuer with respect to a Series of Bonds will assign to
the Bond Trustee, all of its right, title and interest in the Collateral and all
proceeds thereof pledged under the Funding Agreements with respect to such
Series of Bonds except for its rights to receive certain fees and reimbursement
for certain expenses and its right to indemnification.
Unless otherwise specified in the Prospectus Supplement for a Series of
Bonds, the Funding Agreements for a Series of Bonds will not provide for any
prepayments of amounts due by the Finance Companies otherwise than by virtue of
amounts received under the Mortgage Collateral securing such Series of Bonds or,
in certain cases, in connection with or following a redemption pursuant to the
Indenture. However, in the event of certain prepayments in connection with an
event of default under a Funding Agreement, a prepayment penalty will be payable
in an amount equal to the amount by which the market value of the collateral
securing such obligation exceeds the outstanding principal amount of such
obligation, plus accrued interest to the date of such prepayment. The proceeds
of any such prepayment relating to principal and interest will be applied by the
Bond Trustee to interest and as a principal prepayment on the Bonds of such
Series, and any such proceeds constituting a premium will be distributed on a
PRO RATA, random lot or other selection basis specified in the Prospectus
Supplement for such Series of Bonds to holders of Bonds of such Series.
THE INDENTURE
The following summaries describe certain provisions of the forms of
Indenture. The summaries do not purport to be complete. Reference is made to
the provisions of the form of Indenture which has been filed as an Exhibit to
the Registration Statement of which this Prospectus forms a part. When
particular provisions or terms used in the forms of Indenture are referred to,
the actual provisions (including definitions of terms) are incorporated by
reference as part of such summaries.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than a majority in principal
amount of the outstanding Bonds of each Series to be affected, the Bond
Trustee and the Issuer may execute a supplemental indenture to add provisions
to, or change in any manner or eliminate any provisions of, the Indenture
relating to such Series or modify in any manner the rights of the holders of
the Bonds of such Series. (Indenture, Section 10.02.)
Without the consent of the holder of each outstanding Bond affected, no
Supplemental Indenture may (i) change the maturity of the principal of or
interest on any Bond, or reduce the principal amount thereof or the rate of
interest thereon or the redemption price or Special Redemption price with
respect thereto or change the provisions of this Indenture relating to the
application of Collateral securing the Bond's collections to the payment of
principal of Bonds or change in the place of payment where, or the coin or
currency in which, any Bond or interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof, (ii) reduce the percentage of Bonds of
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the affected Series whose consent is required for the authorization of any
Supplemental Indenture or for any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or otherwise adversely affect the Collateral
securing a Series of Bonds, (iv) reduce the percentage of holders of Bonds of
any Series whose consent is required to direct the Bond Trustee to liquidate
the Collateral for such Series of Bonds if the proceeds of such liquidation
would be insufficient to pay the principal amount of and accrued interest on
the outstanding Bonds of that Series, (v) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect
to any part of the Collateral securing the Bonds or terminate the lien of the
Indenture on any property at any time subject thereto or deprive the
Bondholder of the security afforded by the lien of the Indenture, or (vi)
modify any of the provisions of the Indenture with respect to Supplemental
Indentures and waivers of past defaults except to increase the percentage of
outstanding Bonds whose consent is required for any such action or to provide
that other provisions of the Indenture cannot be modified or waived without
the consent of the holders of each outstanding Bond affected thereby.
(Indenture, Section 10.02.)
The Issuer and the Bond Trustee also may enter into Supplemental
Indentures, without obtaining the consent of Bondholders, to cure ambiguities,
to correct or supplement any defective or inconsistent provision or to make any
other provisions with respect to matters or questions arising under the
Indenture or, as required by applicable law, to maintain the REMIC status of a
Series of Bonds with respect to which a REMIC election has been made so long as
the interests of the Bondholders would not be adversely affected thereby.
(Indenture, Section 10.01.)
EVENTS OF DEFAULT
An event of default ("Event of Default") with respect to any Series of
Bonds is defined in the Indenture as being (i) a default for five days or more
in the payment of principal of or interest on any Bond of such Series, (ii) a
default in the performance of any other covenant in the Indenture and the
continuation of such default for a period of 60 days after notice to the Issuer
by the Bond Trustee or to the Issuer and the Bond Trustee by the holders of at
least 25% in principal amount of the Bonds of such Series then outstanding, or
(iii) certain events of bankruptcy, insolvency, receivership or reorganization
of the Issuer. In case an Event of Default with respect to a Series of Bonds
should occur and be continuing and no election to preserve the Collateral
securing such Series of Bonds (pursuant to Section 6.05 of the Indenture, as
discussed below) has been made or, if made, such election has been rescinded,
the Bond Trustee or the holders of at least 25% in principal amount of the Bonds
of such Series then outstanding may declare the principal of the Bonds of such
Series then outstanding to be due and payable. Such declaration may under
certain circumstances be rescinded by the holders of a majority in principal
amount of the Bonds of such Series then outstanding. (Indenture, Sections 6.01
and 6.02.) However, in the event that an Event of Default has occurred as the
result of an order or judgment which prevents the application by the Bond
Trustee, as provided in the Indenture, of the proceeds of any Mortgage
Collateral securing a Series of Bonds, the Indenture allows the Bond Trustee to
declare to be due and payable by lot a portion of the Bonds of such Series then
outstanding in a principal amount equal to the outstanding Bond Values of such
Mortgage Collateral. Such declaration by the Bond Trustee will be the sole
remedy for the holders of Bonds of such Series upon the happening of such
occurrence. (Indenture, Section 6.02.)
An Event of Default with respect to one Series of Bonds will not
necessarily constitute an Event of Default with respect to any other Series of
Bonds.
If, following an Event of Default with respect to a Series of Bonds, the
Bonds of such Series have not been declared to be due and payable or if such
declaration and its consequences are annulled and rescinded, the Bond Trustee
may, if it determines it to be in the best interests of the holders of such
Bonds, or at the request of the holders of a majority in principal amount of the
outstanding Bonds of such Series shall, refrain from liquidating the Collateral
for such Series. (Indenture, Section 6.05.) The Bond Trustee is prohibited from
selling such Collateral unless (a) the proceeds of such sale are sufficient to
pay in full the principal and accrued interest on the outstanding Bonds of such
Series at the date of such sale, or (b) if the proceeds of such sale will not be
sufficient, the Bond Trustee obtains the consent of the holders of the entire
principal amount of the outstanding Bonds. (Indenture, Section 6.04.)
In the event the principal of the Bonds of a Series is declared due and
payable as described above, and the Mortgage Collateral securing such Series of
Bonds is sold, the holders of any such Bonds issued at OID may be entitled to
receive no more than an amount equal to the unpaid principal amount thereof less
unamortized OID. Under the terms of the Indenture, the Issuer agrees to pay the
Bond Trustee from time to time reasonable compensation for all services rendered
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by it, to reimburse the Bond Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made in accordance with any
provision of the Indenture, and to indemnify the Bond Trustee for, and to hold
it harmless against any loss, liability or expense incurred without negligence
or bad faith on its part, arising out of or in connection with the acceptance
and administration of the Trust, including costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its power or duties. The Bond Trustee shall receive
amounts payable to it as compensation, indemnification and reimbursement
pursuant to the Indenture only to the extent that the payment thereof will not
result in an Event of Default and, furthermore, the failure to pay such amounts
to the Bond Trustee will not constitute an Event of Default. (Indenture, Section
7.07.)
Subject to the provisions of the Indenture relating to the duties of the
Bond Trustee in case an Event of Default occurs and continues, the Bond Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any holders of Bonds of a Series,
unless such holders shall have offered to the Bond Trustee reasonable security
or indemnity. (Indenture, Section 7.03.) Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority in principal amount of the outstanding Bonds of a Series will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Bond Trustee or exercising any trust or power
conferred on the Bond Trustee with respect to the Bonds of such Series; and the
holders of a majority in principal amount of the outstanding Bonds of a Series
may, in certain cases, waive any default with respect to such Series except a
default in payment of principal of or interest on the Bonds of such Series and
in respect of certain covenants and provisions requiring the consent of each
Bondholder affected. (Indenture, Sections 6.14 and 6.15.)
No holder of any Bonds of a Series will have the right to institute any
proceeding with respect to the Indenture, unless (1) such holder previously has
given to the Bond Trustee written notice of a continuing Event of Default, (2)
the holders of not less than 25% in principal amount of the outstanding Bonds of
the same Series have made written request upon the Bond Trustee to institute
such proceedings in its own name as Bond Trustee and have offered the Bond
Trustee reasonable indemnity, (3) the Bond Trustee has for 60 days neglected or
refused to institute any such proceeding, and (4) no direction inconsistent with
such written request has been given to the Bond Trustee during such 60-day
period by the holders of a majority in principal amount of the outstanding Bonds
of such Series. (Indenture, Section 6.09.)
LIST OF BONDHOLDERS
Three or more holders of the Bonds of a Series who have held such Bonds for
a period of at least six months may, by written request to the Bond Trustee,
obtain access to the list of all holders of Bonds of such Series maintained by
the Bond Trustee for the purpose of communicating with other Bondholders with
respect to their rights under the Indenture. The Bond Trustee may elect not to
afford the requesting Bondholders access to the list of Bondholders if it agrees
to mail the desired communication or proxy, on behalf of the requesting
Bondholders, to all such Bondholders. (Indenture, Section 8.02.)
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Bond Trustee a
written statement as to fulfillment of its obligations under the Indenture.
(Indenture, Section 9.10.)
REPORTS TO BONDHOLDERS
The Issuer will send to each Bondholder within 120 days after the end of
each fiscal year an annual report containing an audited balance sheet of the
Issuer. For each Series, the Issuer will include with such balance sheet a
statement setting forth the remaining balance of the Bonds held by each
Bondholder on the last day of the preceding fiscal year. (Indenture, Section
8.04.) The fiscal year end of the Issuer is March 31.
BOND TRUSTEE'S ANNUAL REPORT
The Bond Trustee will be required to mail each year to all holders of Bonds
of a Series a brief report relating to its eligibility and qualifications to
continue as the Bond Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by the Issuer to it in the Bond Trustee's individual
capacity, the property and funds relating to such Series physically held by the
Bond Trustee as such, any additional
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issue of Bonds of such Series not previously reported, the release or release
and substitution of any property relating to such Series subject to the lien
of the Indenture, and any action taken by it which materially affects the
Bonds or the Collateral for such Series and which has not been previously
reported. (Indenture, Section 8.03.)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will be discharged as to a Series of Bonds upon the
cancellation of all of the Bonds of such Series or, with certain limitations,
upon deposit with the Bond Trustee of funds sufficient for the payment or
redemption thereof. (Indenture, Section 5.01.)
BOND TRUSTEE
The Bond Trustee for a Series of Bonds will be as specified in the
Prospectus Supplement for such Series of Bonds.
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THE ISSUER
The Issuer was incorporated in the State of California on July 22, 1998
("Inception"), as a limited purpose financing corporation. The Issuer
maintains its principal executive offices at 9665 Wilshire Blvd., Suite 410,
Beverly Hills, California 90212 and its telephone number is (310) 285-7400.
The Issuer will not engage in any activity other than issuing, directly or
through one or more trusts established by it, one or more Series of Bonds and
similar series of bonds collateralized by Mortgage Collateral and Security
Funds and, in connection therewith, acquiring, owning, holding and pledging
Mortgage Collateral. Except as specified in this Prospectus, in the
Prospectus Supplement for a Series of Bonds, or in a report filed with the
Securities and Exchange Commission ("Commission"), the Issuer does not intend
to engage in any transactions with its directors, officers or principal
shareholders (although its Articles of Incorporation and Bylaws would permit
such transactions), to make loans to other persons, to invest in or
underwrite the securities of other issuers, to offer securities in exchange
for property, to engage in the purchase or sale of any investments, to issue
senior securities, or to repurchase or otherwise reacquire its securities.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors of the Issuer are elected for a term of one year or until
the next annual meeting. There are no family relationships between any of
the Issuer's directors. The Officers serve at the discretion of the Board of
Directors. The Officers and Directors of the Issuer are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert S. Manns 57 President and Sole Director
</TABLE>
The Issuer has not paid any remuneration to any of its directors or
officers. The Issuer will not pay any compensation for services as officers
or directors in the future. The stockholders and officers have been
reimbursed for, or are owed, various out-of-pocket expenses incurred on
behalf of the Issuer. The Issuer may in the future pay to one or more of its
directors or officers, or to entities controlled by such directors or
officers, consulting fees or other remuneration. Except as described in this
Prospectus, in the Prospectus Supplement for a Series of Bonds, or in a
report filed with the Commission, the directors and officers do not intend to
have any direct or indirect pecuniary interest in any investment to be
acquired or disposed of by the Issuer or in any transaction to which the
Issuer is a party or has an interest, or to engage for their own account in
business activities of the type conducted or to be conducted by the Issuer.
However, the Articles of Incorporation and Bylaws of the Issuer would permit
the directors and officers to have such interests or to engage in such
business activities.
The Articles of Incorporation and Bylaws of the Issuer provide for the
indemnification of the directors and officers of the Issuer to the fullest
extent permitted by California law. California law generally permits
indemnification of directors and officers against certain costs, liabilities
and expenses which such persons may incur by reason of serving in such
positions as long as such persons acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended ("Securities Act"), may be permitted to
directors, officers or persons controlling the Issuer pursuant to the
foregoing provisions, the Issuer has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficial
ownership of Shareholders owning five percent (5%) or more of the Issuer's
voting securities:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF OWNERSHIP
- ------------------------------------ ------------------------------
<S> <C>
Robert S. Manns 100% of Issued and Outstanding Common Stock
</TABLE>
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LEGAL PROCEEDINGS
None.
THE DEPOSIT TRUST AGREEMENT
Unless specified otherwise in the Prospectus Supplement for a Series of
Bonds, the Issuer thereof will be a trust created by a Deposit Trust
Agreement between the Issuer, acting as depositor, and a bank, trust company
or other fiduciary, which will act not in its individual capacity but solely
as Owner-Trustee under the Deposit Trust Agreement. Unless otherwise
specified in the related Prospectus Supplement for a Series of Bonds, the
Owner-Trustee for such Series is intended to be Wilmington Trust Company
("WTC"), a bank and trust company organized under the laws of the State of
Delaware. Pursuant to the Deposit Trust Agreement, the Issuer anticipates,
for each Series of Bonds, appointing WTC to receive and hold the Collateral
for such Series in trust for the use and benefit of the Issuer pursuant to
the Deposit Trust Agreement. It is the intention of the Issuer and WTC to
create thereby a "business trust" under the Delaware Business Trust Statute
and that the Deposit Trust Agreement constitute the governing instrument of
such business trust. Unless specified otherwise in the Prospectus Supplement
for a Series of Bonds, the Deposit Trust Agreement will provide that the
Issuer thereof will convey or pledge to the Trust the Collateral to secure a
Series of Bonds in return for certificates of beneficial ownership
("Certificates of Beneficial Ownership") of the Trust created under such
agreement and the net proceeds of the sale of the Bonds. The Issuer may sell
or assign such Certificates of Beneficial Ownership to another entity or
entities. A copy of a form Deposit Trust Agreement will be filed as an
exhibit to an amended Registration Statement.
The Trust issuing a Series of Bonds will pledge the Collateral to the
Bond Trustee under the Indenture for such Series of Bonds to secure such
Series of Bonds. Each Indenture will prohibit further debt obligations by
such Trust. The Bond Trustee will hold the Collateral as security for the
Bonds of such Series and holders of the Bonds of such Series will be entitled
to the equal and proportionate benefits of such security as if the same had
been granted by a corporate issuer.
Each Deposit Trust Agreement will provide that the Trust created under
such agreement may not conduct any activities other than those related to the
issuance and sale of Bonds of the particular Series and to such other limited
activities as may be required in connection with reports and distributions to
holders of the Certificates of Beneficial Ownership of such Trust. No such
agreement will be subject to amendment without the prior written consent of
the Owner-Trustee, holders representing 50% of the Certificates of Beneficial
Ownership of the Trust and the Bond Trustee (which consent may not be
unreasonably withheld if such amendment would not adversely affect the
interests of the Bondholders) except that holders of not less than 66 2/3% of
the aggregate principal amount of the Bonds of the related Series outstanding
must consent to any amendment of the provision limiting the Trust's
activities and the provision regarding amendments to the Deposit Trust
Agreement. The holders of Certificates of Beneficial Ownership of a Trust
will not be liable for payment of principal or interest on the Bonds of the
particular Series issued by such Trust and each of the holders of the Bonds
of such Series will be deemed to have released such holders of Certificates
of Beneficial Ownership from any such claim, liability or obligation on or
with respect to such Bonds.
Unless otherwise specified in a particular Deposit Trust Agreement, each
Deposit Trust Agreement will provide that the holders of Certificates of
Beneficial Ownership of the Trust created under such agreement shall
indemnify the Owner-Trustee against all losses and liability suffered by it
in acting upon the holders' instructions, except in the case of willful
misconduct, bad faith or gross negligence on the part of the Owner-Trustee.
The Owner-Trustee will have no liability for action taken by it in good faith
in reliance upon direction to it for the disposition of moneys or the
Collateral pursuant to a Deposit Trust Agreement.
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CERTAIN LEGAL ASPECTS OF PLEDGED LOANS
The following discussion contains summaries of certain legal aspects of
Pledged Loans which are general in nature. Since such legal aspects are
governed 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 Pledged Loans securing a Series of Bonds is situated.
Reference is made to the applicable federal and state laws governing such
Pledged Loans. In this regard, the following discussion does not reflect
federal regulations with respect to FHA and VA Loans. See "Security for the
Bonds-Insurance Policies-Mortgage Insurance on the Pledged Loans," "Security
for the Bonds - Insurance Policies - FHA Insurance and VA Guarantees."
GENERAL
With respect to the Pledged Loans that may be secured by mortgages or
deeds of trust on residential real property, a mortgage creates a lien upon
the real property encumbered by the mortgage. There are two parties to a
mortgage: the mortgagor, who generally is the borrower; and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to
the mortgagee a note or bond and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the borrower called
the trustor (similar to a mortgagor), a lender called the beneficiary
(similar to a mortgagee), and a third-party grantee called the trustee.
Under a deed of trust, the trustor grants the property, irrevocably until the
debt is paid, in trust for the benefit of the beneficiary, generally with a
power of sale granted to the trustee, the effect of which is to create a lien
to secure payment of the obligation. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by law and
may also be governed by the express provisions of the deed of trust or
mortgage, and, in some cases, with respect to the deed of trust by the
directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary party defendants. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming. The court may issue a judgment of foreclosure
and appoint a receiver or other officer to conduct the sale of the property.
In some states, mortgages may also be foreclosed by advertisement, pursuant
to a power of sale provided in the mortgage documents. Foreclosure of a
mortgage by advertisement is essentially similar to foreclosure of a deed of
trust by nonjudicial sale.
Enforcement of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property to a third party upon any
default by the trustor under the note or deed of trust. In certain states,
sale of the property upon any default by the trustor under the note or deed
of trust also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a
notice of default and send a copy to the trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lien holders.
The borrower, or any other person having a junior encumbrance on the
real estate may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in
enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In case of foreclosure under a mortgage or a deed of trust or in case of
a power of sale foreclosure under a deed of trust, the sale by the receiver
or other designated officer, or by the trustee, is a public sale. However,
because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of
the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the
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property at the foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or receiver for an amount equal to the
perceived value of the property. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender commonly will obtain the
services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of
mortgage insurance proceeds. See "Security for the Bonds - Mortgage
Insurance on the Pledged Loans" and "Security for the Bonds - Insurance
Policies - Hazard Insurance on the Pledged Loans."
ENFORCEMENT OF RIGHTS UNDER MANUFACTURED HOUSING CONTRACTS
The method of enforcing the rights of the lender under a Manufactured
Housing Contract varies from state to state depending upon the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the Manufactured Housing Contract strictly according to the terms. The terms
of a Manufactured Housing Contract generally provide that upon a default by
the 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 lender in such a situation does not have to
foreclose in order to obtain title to the property, although in some cases a
quiet title action is in order if the borrower has filed the Manufactured
Housing Contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of a Manufactured Housing 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 Manufactured
Housing Contracts from the harsh consequences of forfeiture. Under such
statutes, a judicial or nonjudicial foreclosure may be required, the lender
may be required to give notice of default and the borrower may be granted
some grace period during which the Manufactured Housing 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 borrower with significant investment in the property
under a contract for the sale of real estate to share in 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
lender's procedures for obtaining possession and clear title under a
Manufactured Housing Contract for the sale of real estate in a given state
are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a Mortgaged Property.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a non-judicial power of sale
under a deed of trust or judicial foreclosure of a mortgage or deed of trust,
the borrower and certain foreclosed junior lienors are given a statutory
period in which to redeem the property from the sale. In certain other
states, this right of statutory redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of
sale. In most states where the right of redemption is available, statutory
redemption may occur upon payment of the purchase price at the sale, accrued
interest and taxes. In some states, the right to redeem is an equitable
right. The effect of a right of redemption is to diminish the ability of the
lender to resell the property. The rights of redemption would defeat the
title of any purchaser at sale, or of any purchaser from the lender
subsequent to judicial foreclosure of a mortgage or deed of trust or sale
pursuant to a non-judicial power of 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 run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage.
With respect to liens on real property, some state statutes may require
the beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure or sale under a deed of trust in an attempt
to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from
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exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that
lenders will usually proceed against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a judicial sale or sale pursuant to the trustee's
power of 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 to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the judicial sale or sale pursuant to the trustee's power of sale.
Some of the loans secured by multifamily residential buildings may be
nonrecourse loans as to which, in the event of default by a borrower,
recourse may be had only against the specific property pledged to secure the
related loan and not against the borrower's other assets. Even when the
terms of a mortgage loan permit recourse against the borrower's assets in
addition to the Mortgaged Property, certain states have imposed statutory
limitations on such recourse. Some state statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the net amount realized
upon the public sale of the real property.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
With respect to cooperative apartments, in the case of foreclosure on a
building which was converted from a rental building to a building owned by a
cooperative under a type of non-eviction plan, some states require that a
purchaser at a foreclosure sale take the property subject to rent control and
rent stabilization laws which apply to certain tenants who elected to remain
in the building but did not purchase shares in the cooperative when the
building was so converted.
Under the terms of the Relief Act, an obligor who enters military
service after the origination of such obligor's mortgage loan or Manufactured
Housing Contract (including an obligor who is a member of the National Guard
or is in reserve status at the time of the origination of the mortgage loan
and is later called to active duty) may not be charged interest above an
annual rate of 6% during the period of such obligor's active duty status,
unless a court orders otherwise upon application of the lender. It is
possible that such action could have an effect, for an indeterminate period
of time, on the ability of the Master Servicer to collect full amounts of
interest on certain of the mortgage loans. Any shortfall in interest
collections resulting from the application of the Relief Act, to the extent
not covered by the subordination of a Class of Bonds, could result in losses
to the holders of a Series of Bonds. In addition, the Relief Act imposes
limitations which would impair the ability of the Master Servicer to
foreclose on an affected mortgage loan during the obligor's period of active
duty status. Thus, in the event that such a mortgage loan goes into default,
there may be delays and losses occasioned by the inability to realize upon
the Mortgaged Property or Manufactured Home, respectively, in a timely
fashion.
The laws of some states provide priority to certain tax liens over the
lien of the mortgage or deed of trust. Numerous federal and some state
consumer protection laws impose substantive requirements upon mortgage
lenders in connection with the origination, servicing and the enforcement of
mortgage loans. These laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Reporting Act, Federal Trade Commission Rule - Credit Practices, and related
statutes and regulations. These federal laws and state laws impose specific
statutory liabilities upon lenders who originate or service 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.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Pledged Loans securing a Series of Bonds may contain a "due-on-sale" clause
permitting acceleration of the maturity of a loan if the borrower transfers
its interest in the property. In recent years, court decisions and
legislative actions placed substantial restrictions on the right of lenders
to enforce such clauses in many states. However, effective October 15, 1982,
Congress enacted the Garn-St. Germain Depository Institutions Act of 1982
("Depository Act") which purports to preempt state laws which prohibit the
enforcement
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of "due-on-sale" clauses by providing among other matters that "due-on-sale"
clauses in certain loans (which loans include the conventional Pledged Loans)
made after the effective date of the Depository Act are enforceable, within
certain limitations as set forth in the Depository Act and the regulations
promulgated thereunder.
By virtue of the Depository Act, the Servicer may generally be permitted
to accelerate any conventional Pledged Loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage
or deed of trust. With respect to any Pledged Loan secured by a residence
occupied or to be occupied by the borrower, this ability to accelerate will
not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer, in which the transferee is a
person who occupies or will occupy the real property, which is a transfer to
a relative resulting from the death of a borrower, or a transfer where the
spouse or children becomes an owner of the property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation
agreement or from an incidental property settlement agreement by which the
spouse becomes an owner of the property, (iv) the creation of a lien or other
encumbrance subordinate to the lender's security interest which does not
relate to a transfer of rights of occupancy in the property (provided that
such lien or encumbrance is not created pursuant to a contract for deed), (v)
a transfer by devise, descent or operation of law on the death of a joint
tenant or tenant by the entirety, and (vi) others as set forth in the
Depository Act and the regulations thereunder. As a result, a lesser number
of the Pledged Loans which contain "due-on-sale" clauses may extend to full
maturity than recent experience would indicate with respect to single-family
mortgage loans. The extent of the impact of the Depository Act on the
average lives and delinquency rates of the Pledged Loans, however, cannot be
predicted. See "Description of the Bonds - Maturity and Prepayment
Considerations for Certain First Mortgages on Single-Family Residences."
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 shall not apply to any loan which is
secured by a first lien on certain kinds of Manufactured Housing. The
Manufactured Housing Contracts would be covered if they were to satisfy
certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The Master Servicer will represent that all of the Manufactured
Housing Contracts comply with applicable usury law.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is present
in many building materials, including some components used in Manufactured
Housing such as plywood flooring and wall paneling. Some of these lawsuits
were brought against manufacturers of Manufactured Housing, suppliers of
component parts and related persons in the distribution process. The Issuer
is aware of a limited number of cases in which plaintiffs have won judgments
in these lawsuits.
The holder of any Manufactured Housing Contract with respect to which a
formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Manufactured
Housing Contract and may be unable to collect amounts still due under the
Manufactured Housing Contract. The successful assertion of such claim
constitutes a breach of a representation or warranty of the person specified
in the related Prospectus Supplement, and the Bondholders would suffer a loss
only to the extent that (i) such person breached its obligation to repurchase
the Manufactured Housing Contract in the event an obligor is successful in
asserting such a claim, and (ii) such person, the Servicer or the Bond
Trustee were unsuccessful in asserting any claim of contribution or
subrogation on behalf of the Bondholders against the manufacturer or other
persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of Manufactured Homes may not cover liabilities arising from
formaldehyde in Manufactured Housing, with the result that recoveries from
such manufacturers, suppliers or other persons may be limited to their
corporate assets without the benefit of insurance.
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ENVIRONMENTAL CONSIDERATIONS
Under CERCLA, and under certain state laws, a secured party that takes a
deed-in-lieu of foreclosure, purchases a Mortgaged Property at a foreclosure
sale or operates a Mortgaged Property may become liable in certain
circumstances for Remedial Action Costs if hazardous wastes or hazardous
substances have been released or disposed of on the property. Such Remedial
Action Costs could subject the Mortgage Collateral to a lien and reduce the
amounts otherwise available to pay to the holders of the Bonds if a Mortgaged
Property was acquired by the Bond Trustee through foreclosure or deed-in-lieu
of foreclosure and if such Remedial Action Costs were incurred. Moreover,
certain state laws impose a lien for any Remedial Action Costs incurred by
such states on the property that is the subject of such Remedial Action Costs.
While representations or warranties from the Originator or any other
party related to the Originator as to the absence or effect of hazardous
wastes or hazardous substances on any of the mortgaged properties may be
obtained, there can be no assurance that such representations or warranties
will actually be obtained with respect to the Mortgage Collateral or, if
obtained, that the Originator can honor such warranties. None of the Issuer,
the Bond Trustee nor the Owner-Trustee will make any representations or
warranties or assume any liability with respect to the absence or effect of
hazardous wastes or hazardous substances on any Mortgaged Property or any
casualty resulting from the presence or effect of hazardous wastes or
hazardous substances. None of the Issuer, the Bond Trustee nor the
Owner-Trustee will make any independent investigation of Mortgaged Property
to ascertain whether hazardous wastes or substances have been stored or
released on Mortgaged Property prior to transferring the Collateral to the
Bond Trustee. Any loss or liability resulting from the presence or effect of
such hazardous wastes or hazardous substances may reduce the value of the
Collateral securing the Bonds.
The Servicer or other agent on behalf of the Bond Trustee will not be
permitted to foreclose on any Mortgaged Property which it knows or has reason
to know is contaminated with or affected by hazardous wastes or hazardous
substances. If a Mortgaged Property securing a defaulted mortgage loan is
not foreclosed, the amount of Mortgage Collateral otherwise available may be
reduced. The Servicer or other agent will not be liable to the Bond Trustee
or the Bondholders if it fails to foreclose on a Mortgaged Property that it
reasonably believes may be so contaminated or affected. Conversely, the
Servicer or other agent will not be liable to the Bond Trustee or the holders
of the Bonds if based on its reasonable belief that no such contamination or
effect exists, a Mortgaged Property is foreclosed and the Bond Trustee takes
title to such Mortgaged Property, and thereafter such Mortgaged Property is
determined to be so contaminated or affected.
UNINSURED HAZARD LOSSES
Standard Hazard Insurance Policies typically will not cover any physical
damage to the mortgaged properties resulting from war, revolution,
governmental actions, floods and other water-related causes, earth movement,
nuclear reaction, wet or dry rot, vermin, rodents, insects or domestic
animals, theft or, in certain cases, vandalism. Although the Special Hazard
Insurance for a Series of Bonds will, unless other specified in the related
Prospectus Supplement, insure against certain hazards not insured against
under the Standard Hazard Insurance Policies covering Pledged Loans securing
such Series, the Special Hazard Insurance Policy generally will not cover
losses occasioned by infidelity, conversion or other dishonest act on the
part of any insured or an insured's agent or employee, war, warlike action in
time of peace or war, insurrection, rebellion, nuclear reaction, certain
governmental actions or certain other risks. Any losses incurred with
respect to Pledged Loans securing a Series of Bonds due to uninsured risks or
insufficient hazard insurance proceeds will reduce the value of the Mortgage
Collateral, and thus may adversely affect payments to holders of Bonds of
such Series. See "Security for the Bonds - Insurance Policies - Hazard
Insurance on the Pledged Loans."
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of note, mortgage and deed of trust used by the
Servicers generally contain provisions obligating the borrower to pay a late
charge if payments are not timely made and in some circumstances may provide
for prepayment fees or penalties if the obligation is paid prior to maturity.
In certain states, there are or may be specific limitations upon late
charges which a lender may collect from a borrower in the event payments are
not made on time. Certain states also limit the amounts which a lender may
collect from a borrower as an additional charge if the loan is prepaid.
Under the Servicing Agreements, late charges and prepayment fees (to the
extent permitted by law and not waived by the Servicers) will be retained by
the Servicers as additional servicing compensation.
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Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower
from the legal effect of defaults under the loan documents. Examples of
judicial remedies that may be fashioned include judicial requirements that
the lender undertake affirmative and expensive actions to determine the
causes for the borrower's default and the likelihood that the borrower will
be able to reinstate the loan. In some cases, courts have substituted their
judgment for the lender's judgment and have required lenders to reinstate
loans or recast payment schedules to accommodate borrowers who are suffering
from temporary financial disability. In some cases, courts have limited the
right of lenders to foreclose if the default under the mortgage instrument is
not monetary, such as the borrower failing to adequately maintain the
property or the borrower executing a second mortgage or deed of trust
affecting the property. In other cases, some courts have been faced with the
issue of whether or not federal or state constitutional provisions reflecting
due process concerns for adequate notice require that borrowers under the
deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under
a deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material U.S.
federal income tax consequences of the purchase, ownership and disposition of
the Bonds offered hereunder. This discussion is directed solely to
Bondholders that hold the Bonds as capital assets within the meaning of Code
Section 1221 and does not consider all federal income tax consequences that
may be applicable to other categories of investors, some of which (such as
banks, insurance companies and investors who are non-U.S. persons ("Foreign
Bondholders") may be subject to special rules. 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.
Taxpayers and preparers of tax returns (including those filed by any REMIC or
other issuer) should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice is (i) given with regard to events that
have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. This discussion is
no substitute for the consideration by a Bondholder's own tax advisors and
tax return preparers regarding any tax planning and the preparation of any
item on a tax return, even where the anticipated tax treatment has been
discussed herein. In particular, Bondholders are advised to consult their own
tax advisors concerning the federal state, local or other tax consequences to
them of the purchase, ownership and disposition of the Bonds offered
hereunder.
ELECTION OF REMIC STATUS
If, with respect to a Series of Bonds, the Issuer elects to treat as a
REMIC the trust or other arrangement by which the Collateral secures that
Series, such Bonds would be considered to be "regular interests" (as defined
in Treasury Regulation Section 1.860G-1(a) and referred to herein as "Regular
Bonds") or "residual interests" (as defined in Treasury Regulation Section
1.860G-1(c) and referred to herein as "Residual Bonds") in such REMIC. With
respect to each Series of Bonds for which the Issuer intends to make a REMIC
election, Matthias & Berg LLP, legal counsel to the Issuer, will deliver its
opinion generally to the effect that, assuming (i) the proper filing of an
election to be treated as a REMIC pursuant to the Code and (ii) continuing
compliance with the Indenture and the other governing agreements and (iii)
compliance with the requirements of Code Section 860D and Treasury Regulation
Section 1.860D-1(c), the arrangement by which the Collateral will secure that
Series of Bonds will qualify as a REMIC under current law. The following
discussion assumes that all requirements for REMIC qualification will be
satisfied by the REMIC while there are any Bonds outstanding. The Prospectus
Supplement for each Series of Bonds will specify whether the Issuer intends
to make a REMIC election for that Series of Bonds.
For any Series of Bonds for which the Issuer elects REMIC status,
Regular Bonds generally will be treated as debt instruments. Except as
stated below, a Residual Bond will not be treated as a debt instrument for
federal income tax purposes; rather the holder thereof will recognize taxable
income equal to its PRO RATA share of the net income of the REMIC, as
described below. The Regular Bonds of a Series will constitute one or more
classes of Regular Bonds, and either the
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Residual Bonds or the privately placed class of residual certificates
relating to that Series, if any, will constitute a single class of Residual
Bonds which distributions are made PRO RATA.
If the Issuer makes a REMIC election with respect to a Series of Bonds,
then (i) Bonds of that Series held by a thrift institution taxed as a "mutual
savings bank" or "domestic building and loan association" will constitute
"qualifying real property loans" within the meaning of Code Section 593(d) in
the same proportion that the Collateral securing the Bonds of that Series
would be so treated; (ii) Bonds of that Series held by a thrift institution
taxed as a domestic building and loan association will constitute a "regular
. . . interest in a REMIC" or a "residual interest in a REMIC," as the case
may be, within the meaning of Code Section 7701(a)(19)(C)(xi), in the
proportion that the Collateral securing the Bonds of that Series would be
treated as loans described in Code Section 7701(a)(19)(C)(i)-(x); (iii) Bonds
of that Series held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c)(5)(A) and income on
the Bonds will be considered "interest on obligations secured by mortgages on
real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that the Collateral securing the Bonds would be treated as
"interests in real property" as defined in Code Section 856(c)(6)(C); (iv)
Bonds of that Series held by certain financial institutions will constitute
"evidences of indebtedness" within the meaning of Code Section 582(c)(1).
Generally, if at all times during the calendar year 95% or more of the
Collateral securing Bonds qualifies for the status described in (i), (ii) or
(iii), the Bonds of that Series will so qualify in their entirety for that
calendar year.
If a REMIC election is made but the entity fails to comply with one or
more of the ongoing requirements of the Code for REMIC status during any
taxable year, the Code provides that the entity will cease to be a REMIC as
of the beginning of the tax year in which the failure to comply occurred. In
general, such entity would be treated as a separate association taxable as a
corporation, in which case the net income realized from the Mortgage
Collateral would be taxable at regular corporate rates. Payments made on the
Residual Bonds would not be deductible.
NO REMIC ELECTION
If the Issuer does not make a REMIC election with respect to Mortgage
Collateral securing a Series of Bonds, then such Bonds may not be treated as
"real estate assets" or "Government securities" within the meaning of Code
Section 856(c)(5)(A), and interest on those Non-REMIC Bonds will not be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). Non-REMIC Bonds of a Series
owned by domestic building and loan associations and other thrift
institutions will not be considered as "loans secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or as
"qualifying real property loans" within the meaning of Code Section 593(d).
In addition, Non-REMIC Bonds of a Series held by a regulated investment
company will not constitute "Government securities" within the meaning of
Code Section 851(b)(4)(A)(i).
TAXATION OF REGULAR BONDS
GENERAL
Except as other stated in this discussion, interest paid or accrued,
OID, and market discount on a Regular Bond will be treated as interest income
to the Bondholder. Principal payments on a Regular Bond will be treated as a
return of capital to the extent of the Bondholder's basis in the Regular Bond
allocable to such payments. Bondholders must use the accrual method of
accounting with regard to Regular Bonds, regardless of their usual method of
accounting.
ORIGINAL ISSUE DISCOUNT
Certain Regular Bonds may be issued with OID within the meaning of Code
Section 1273(a). Any holders of Regular Bonds issued with OID generally will
be required to include OID in income as it accrues, in accordance with the
method described below, in advance of the receipt of the cash attributable to
such income. In addition, Code Section 1272(a)(6) provides special rules
applicable to Regular Bonds and certain other debt instruments issued with
OID.
The Code requires that a Prepayment Assumption ("Prepayment Assumption")
be used with respect to mortgage loans used by a REMIC to secure bonds in
computing the accrual of OID such bonds, and that adjustments be made in the
amount and rate of accrual of such OID to reflect differences between the
actual prepayment rate and the Prepayment
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Assumption. The Prepayment Assumption will be determined on the basis of (i)
the assumed rate of prepayments on qualified mortgages held by the REMIC and
(ii) the assumed rate of earnings on the temporary investment of payments on
such mortgages to the extent that such notes of earnings would have an effect
on the timing of payments on Regular Bonds. Prospective Bondholders should
note that since the Treasury has not yet issued complete regulations on
determination of present value in this context, no assurance can be given
that the discussion contained herein describes the correct method of
calculating OID.
The OID, if any, on a Regular Bond will be the excess of its redemption
price over its issue price. The issue price of a particular Series of
Regular Bonds offered hereunder will be the initial offering price at which a
substantial amount of Regular Bonds of that Series are first sold to the
public (excluding bond houses and brokers). In the case of Regular Bonds
bearing adjustable or variable interest rates, the determination of the total
amount of OID and the timing of the inclusion thereof is not entirely clear.
If the OID rules apply to such Bonds, the related Prospectus Supplement will
describe the manner in which such rules will be applied with respect to those
Bonds by the Bond Trustee in preparing information returns to the Bondholders
and the Internal Revenue Service ("Service").
Certain of the Regular Bonds will provide for the first interest payment
with respect to such Bond to be made more than one month after the closing
date ("Closing Date"), a period that is longer than the subsequent monthly
intervals between interest payments. As a consequence of this long first
accrual period, the Service might take the position that all or a portion of
each interest payment must be included in the stated redemption price of the
Regular Bonds and accounted for as OID. Because interest on Regular Bonds
must in any event be accounted for under an accrual method, applying this
analysis would result in only a slight difference in the timing of the
inclusion in income of the yield on the Regular Bonds.
In addition, if the accrued interest to be paid on the first Payment
Date is to be computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a Regular Bond will
reflect such accrued interest. If applicable, information returns to the
Bondholders and the Service will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods
prior to the Closing Date is treated as part of the overall cost of such
Regular Bond (and not as a separate asset the cost of which is recovered
entirely out of interest received on the next Payment Date) and the portion
of the interest paid on the first Payment Date in excess of interest accrued
for a number of days corresponding to the number of days from the Closing
Date to the first Payment Date should be included in the stated redemption
price of such Regular Bond.
Notwithstanding the general definition of OID, OID on a Regular Bond
will be considered to be DE MINIMIS if such OID is less than 0.25% of the
stated redemption price of the Regular Bond multiplied by its weighted
average life. For this purpose, the weighted average life of a Regular Bond
is computed as the sum, for all payments of amounts included in the stated
redemption price of such Regular Bond, of the amounts determined by
multiplying (i) the number of complete years from the Closing Date (rounding
down for partial years) until each payment is expected to be made (presumably
taking into account the Prepayment Assumption) by (ii) a fraction, the
numerator of which is the amount of such payment and the denominator of which
is the stated redemption price of such Regular Bond. OID of only a DE
MINIMIS amount will be included in income in the same manner as market
discount of only a DE MINIMIS amount. See "Taxation of Regular Bonds --
Market Discount."
If OID on a Regular Bond is in excess of a DE MINIMIS amount, the holder
of such Bond must include in gross income the sum of the "daily portions" of
OID for each day during its taxable year on which it hold such Regular Bond,
including the purchase date but excluding the disposition date. In the case
of an original holder of a Regular Bond, the daily portions of OID will be
determined as follows.
As to each "accrual period," that is, each period that ends on a date
that corresponds to a Payment Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such
period, that begins on the Closing Date), a calculation will be made of the
portion of the OID that accrued during such accrual period. The portion of
OID that accrues in any accrual period will equal the excess, if any, of (i)
the sum of (A) the present value, as of the end of the accrual period, of all
of the distributions remaining to be made on the Regular Bond, if any, in
future periods and (B) the distributions made on such Regular Bond during the
accrual period of amounts included in the stated redemption price, over (ii)
the adjusted issue price of such Regular Bond at the beginning of the accrual
period. The present value of the
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remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the Regular Bond will be
received in future periods based on the Pledged Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to
the original yield to maturity of the Bond. For these purposes, the original
yield to maturity of the Bond will be calculated based on its issue price and
on the assumption that distributions on the Bond will be made in all periods
based on the Pledged Loans being prepaid at a rate equal to the Prepayment
Assumption. The adjusted issue price of a Regular Bond at the beginning of
any accrual period will equal the issue price of such Bond, increased by the
aggregate amount of OID with respect to such Regular Bond that accrued in
prior accrual periods, and reduced by the amount of any distributions made on
such Regular Bond in prior accrual periods of amounts included in its stated
redemption price. The OID accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the period to
determine the daily portion of OID for such day.
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A subsequent purchaser of a Regular Bond that purchases such Regular
Bond at a cost less than its remaining stated redemption price will also be
required to include in gross income the daily portions of any with respect to
such Regular Bond. However, each such daily portion will be reduced, if the
cost of such Regular Bond to such subsequent purchaser is in excess of its
"revised issue price," in proportion to the ratio such excess bears to the
aggregate OID remaining to be accrued on such Regular Bond. The "revised
issue price" of a Regular Bond on any given day equals the sum of (i) the
adjusted issue price of the Regular Bond at the beginning of the accrual
period which includes such day and (ii) the daily portions of OID for all
days during such accrual period prior to such day.
SPECIAL RULES AND CONSIDERATIONS.
The OID Regulations provide that a Bondholder generally may make an
election (a "Constant Yield Election") to include in gross income all current
income on the Regular Bond, including market discount (as described below
under "Market Discount") (as reduced by any premium, as described below)
under the constant yield method used to account for OID. To make the Constant
Yield Election, the Bondholder of the Regular Bond must attach a statement to
its timely filed federal income tax return for the taxable year in which the
Bondholder acquired the Regular Bond. The statement must identify the
instruments to which the election applies. A Constant Yield Election is
irrevocable unless the Bondholder obtains the consent of the Service. In
general, the Constant Yield Election may be made on an obligation-by-obligation
basis. If, however a Constant Yield Election is made for a debt instrument with
market discount, the Bondholder is deemed to have made an election to include in
income currently the market discount on all of the Bondholder's other debt
instruments with market discount, as described in "Market Discount" below.
In view of the complexities and current uncertainties as to the manner
of inclusion in income of OID on Regular Bonds, each investor should consult
his own tax advisor to determine the appropriate amount and method of
inclusion in income of OID on such Bonds for federal income tax purposes.
SALE OR REDEMPTION
If a Bondholder sells or exchanges a Regular Bond, or receives a
principal payment with respect to a Regular Bond (or any payment with respect
to a Compound Interest Bond), the Bondholder will recognize gain or loss
equal to the difference, if any, between the amount received and the
Bondholder's adjusted basis in the Regular Bond. Such adjusted basis
generally will equal the cost of the Regular Bond to the seller, increased by
any OID or market discount (that the seller has previously elected to accrue)
included in the seller's gross income with respect to the Regular Bond, and
reduced by the portion of the adjusted basis in the Regular Bond allocable to
principal payments on the Regular Bond (or any payment on a Compound Interest
Bond) previously received by the seller and by any amortized premium. Except
as described under "Taxation of Regular Bonds - Market Discount" below, with
respect to partial payments of principal, a portion of the Bondholder's basis
in the Regular Bond will be allocated to those payments on a fair market
value basis, taking into account prior accrual of OID. A holder of a Regular
Bond, however, should be aware that gain from the disposition of a Regular
Bond that might otherwise be gain from the disposition of a capital asset
will be treated as ordinary income to the extent that the gain does not
exceed the excess, if any, of (i) the amount that would have been included in
the Bondholder's income had income accrued at a rate equal to 110% of a
specified United States Treasury borrowing rate as of the date of purchase
over (ii) the amount actually included in that Bondholder's income.
MARKET DISCOUNT
A Bondholder that purchases a Regular Bond at a market discount, that is,
in the case of a Regular Bond issued without OID, at a purchase price less than
its remaining stated redemption price, or in the case of a Regular Bond issued
with OID, at a purchase price less than its revised issue price (defined as the
sum of (i) the adjusted issue price of the Regular Bond at the beginning of the
accrual period which includes such day and (ii) the daily portions of OID for
all days during such accrual period prior to such day), will recognize gain upon
receipt of the portion of each distribution representing stated redemption
price. In particular, under Code Section 1276, such Bondholder will generally
be required to allocate the portion of each such distribution representing
stated redemption price first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent. A Bondholder may
elect to include market discount in income currently as it accrues rather than
including it on a deferred basis in accordance with the foregoing. If made,
such election
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will apply to all market discount bonds acquired by such Bondholder on or
after the first day of the first taxable year to which such election applies.
To the extent that Regular Bonds provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to
require market discount to be includable in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were OID. Moreover, a purchaser generally will be required to treat a portion
of any gain on sale or exchange of a Regular Bond 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.
Under Code Section 1277, a purchaser may be required to defer a portion
of its interest deductions for the taxable year attributable to any
indebtedness incurred or continued to purchase or carry a Regular Bond
purchased with market discount. For these purposes, the DE MINIMIS rule
referred to above applies. Any such deferred interest expense would not
exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includable in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
PREMIUM
A Regular Bond purchased at a cost greater than its remaining, stated
redemption price will be considered to be purchased at a premium. The holder
of such a Regular Bond may elect under Code Section 171 to amortize such
premium under the constant yield method over the life of the Bond.
Amortizable premium will be treated as an offset to interest income on the
related Regular Bond, rather than as a separate interest deduction.
TAXATION OF RESIDUAL BONDS
GENERAL
An original holder of a Residual Bond ("Residual Bondholder") generally
will be required to report its daily portion of the taxable income or,
subject to the limitations noted in this discussion, the net loss of the
REMIC for each day during a calendar quarter that the Residual Bondholder
holds such Residual Bond. For this purpose, that taxable income or net loss
of the REMIC will be allocated to each day in the calendar quarter ratably
based on a 90 days per quarter counting convention. The amount so allocated
will then be allocated among the Residual Bondholders in proportion to their
respective ownership interests on such day. Any amount included in the gross
income or allowed as a loss of any Residual Bondholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of
the REMIC will be determined under the rules described below in "TAXABLE
INCOME OF THE REMIC" and will be taxable to the Residual Bondholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from Residual Bonds will be "portfolio income" for purposes of
the taxation of taxpayers subject to limitations under Code Section 469 on
the deductibility of "passive losses."
A subsequent owner of a Residual Bond ("Transferee") also will be
required to report on its federal income tax return amounts representing its
daily portion of the taxable income of the REMIC for each day that it holds
such Residual Bond. Those daily portions generally would equal the amounts
that would have been reported for the same days by an original Residual
Bondholder, as described above.
The amount of income Residual Bondholders and Transferees will be
required to report (or the tax liability associated with such income) may
exceed the amount of cash distributions received from the REMIC for the
corresponding period. Consequently, Residual Bondholders should have other
sources of funds sufficient to pay any federal income taxes due as a result
of their ownership of Residual Bonds or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interest without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with
the income allocated to Residual Bondholders may exceed the cash
distributions received by such Residual Bondholders for the corresponding
period may significantly adversely affect such Residual Bondholders'
after-tax rate of return.
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TAXATION OF REMIC INCOME
The taxable income of the REMIC will equal the income from the Mortgage
Collateral and other assets of the REMIC less the deductions allowed to the
REMIC for interest (including OID) on any Regular Bonds, amortization of any
premium on the Mortgage Collateral and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the mortgage loans as being
equal to the aggregate issue prices of the Regular and Residual Bonds. Such
aggregate basis will be allocated among the individual Pledged Loans and other
assets of the REMIC in proportion to their respective fair market values. The
issue price of any in a class that is not publicly offered will equal the price
paid by the first purchaser of such Bond or, in the case of received in exchange
for an interest in the Mortgage Collateral or other property, the fair market
value of such interests in the Mortgage Collateral or other property.
Accordingly, if one or more class of Bonds are retained initially rather than
sold, the Master Servicer may be required to estimate the fair market value of
such interests in order to determine the basis of the REMIC in the Pledged Loans
and other property held by the REMIC.
A Pledged Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includable in the income of the REMIC as its
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing OID on the Regular
Bonds. The REMIC expects to elect under Code Section 171 to amortize any premium
on the Pledged Loans. Premium on any Pledged Loan to which such election
applies may be amortized under a constant yield method presumably taking into
account a Prepayment Assumption.
The REMIC will be allowed deductions for interest (including OID) on the
Regular Bonds equal to the deductions that would be allowed if the Regular Bonds
were indebtedness of the REMIC.
If a class of Regular Bonds is issued at a price in excess of the stated
redemption price of such class the net amount of interest deductions that are
allowed the REMIC in each taxable year with respect to the Regular Bonds of such
class will be reduced by an amount equal to the portion of such issue premium
that is considered to be amortized or repaid in that year.
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual reporting on a calendar year
basis and using the accrual method of accounting. However, no item of income,
gain, loss or deduction allocable to a prohibited transaction will be taken into
account. The limitation on miscellaneous itemized deductions imposed on
individuals by Code Section 67 (which allows such deductions only to the extent
they exceed in the aggregate two percent (2%) of the individual taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the Bondholders subject to the limitation of Code Section
67. If the deductions allowed to the REMIC exceed its gross income for a
calendar quarter, such excess will be the net loss for the REMIC for that
calendar quarter.
BASIC RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a Residual Bond will be equal to the amount paid for
such Residual Bond, increased by amounts included in the income of the Residual
Bondholder and decreased (but not below zero) by distributions made, and by net
losses allocated, to such Residual Bondholder.
A Residual Bondholder is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual
Bondholder's adjusted basis in its Residual Bond as of the close of such
calendar quarter (determined without regard to such net loss). Any loss that is
not currently deductible by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income
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from the Residual Bonds. The ability of Residual Bondholders to deduct net
losses may be subject to additional limitations under the Code, as to which
Residual Bondholders should consult their tax advisors.
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a Residual Bond will, with an
exception discussed below for certain Residual Bonds held by thrift
institutions, be subject to federal income tax in all events. In general, the
"excess inclusion" with respect to a Residual Bond for any calendar quarter will
be the excess, if any, of (i) the sum of the daily portions of REMIC taxable
income allocable to such Residual Bond over (ii) the sum of the "daily accruals"
(defined below) for each day during such quarter that such Residual Bond was
held by such Residual Bondholder. The daily accruals of a Residual Bondholder
will be determined by allocating to each day during a calendar quarter its
ratable portion of the product of the "adjusted issue price" of the Residual
Bond at the beginning of the calendar quarter and 120% of the "Federal long-term
rate" in effect on the Closing Date. For this purpose, the adjusted issue price
of a Residual Bond as of the beginning of any calendar quarter will be equal to
the issue price of the Residual Bond, increased by the sum of the daily accruals
for all prior quarters and decreased (but not below zero) by any distributions
made with respect to such Residual Bond before the beginning of such quarter.
The issue price of Residual Bonds is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the
Residual Bonds were sold. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the Service.
In general, for Residual Bondholders, an excess inclusion (i) will not be
permitted to be offset by losses or loss carryovers from the activities, except
generally in the case of taxpayers that are thrift institutions described in
Code Section 593, (ii) will be treated as "unrelated business taxable income"
("UBTI") to an otherwise tax-exempt organization and (iii) will not be eligible
for any rate reduction or exemption under any applicable tax treaty with respect
to the 30% United States withholding tax imposed on distributions to Residual
Bondholders that are foreign investors. The above-described exception for
thrift institutions applies only to those Residual Bonds held directly by such
institutions (and not by other members of any affiliated group of corporations
filing a consolidated income tax return) or certain wholly owned direct
subsidiaries of such institutions formed and operated exclusively in connection
with the organization and operation of one or more REMICs.
In the case of any Residual Bond held by a real estate investment trust,
the aggregate excess inclusions with respect to such Residual Bonds, reduced
(but not below zero) by the real estate investment trust taxable income (within
the meaning of Code Section 857(b)(2), excluding any net capital gain), will be
allocated among the shareholders of such trust in proportion to the dividends
received by such shareholders from such trust, and any amount so allocated will
be treated as an excess inclusion with respect to a Residual Bond as if held
directly by such shareholder.
The amount of any taxable loss of the REMIC that may be taken into account
by the Residual Bondholder is limited to the adjusted basis of the Residual Bond
as of the close of the quarter (or time of disposition of the interest, if
earlier), determined without taking into account the net loss for the quarter.
The initial adjusted basis of a purchaser of a Residual Bond is the amount paid
for such Residual Bond. Such adjusted basis will be increased by the amount of
net income of the REMIC reportable by the Residual Bondholder and decreased by
the amount of taxable loss of the REMIC reportable by the Residual Bondholder.
A cash distribution from the REMIC also will reduce that adjusted basis (but not
below zero). Any loss that is disallowed on account of this limitation may be
carried over indefinitely by the Residual Bondholder for which such loss was
disallowed but may be used by that Residual Bondholder only to offset any income
generated by the same REMIC.
DISTRIBUTIONS
A distribution by a REMIC to a Residual Bondholder will not be taxable to
the Residual Bondholder if the amount of the distribution does not exceed the
adjusted basis of the Residual Bondholder in its Residual Bonds on that
distribution date. A Residual Bondholder, however, will have taxable income to
the extent that any cash distribution it receives from the REMIC exceeds that
Residual Bondholder's adjusted basis in its Residual Bonds on that distribution
date. Such income will be treated as gain from the sale or exchange of Residual
Bonds.
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PROHIBITED TRANSACTIONS
Income and losses from certain "prohibited transactions" (as defined in
Code Section 860F (a)(2)) by a REMIC will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual
Bondholders. Income from prohibited transactions will be taxed directly to
the REMIC at a 100% rate. Losses from prohibited transactions may not be
used to offset income from other prohibited transactions. Prohibited
transactions generally include (i) the disposition of mortgage collateral
other than for (a) substitution of a qualified mortgage for a defective
mortgage within two years of the Closing Date or for any mortgage loan within
three months of the Closing Date, (b) foreclosure, default or imminent
default of a mortgage loan, (c) bankruptcy or insolvency of the REMIC, or (d)
a qualified (complete) liquidation, (ii) the receipt of income from assets
that are not the type of investments that the REMIC is permitted to hold,
(iii) the receipt of compensation for services or (iv) the receipt of gain
from disposition of cash-flow investments other than pursuant to a qualified
liquidation. The disposition of an item of Mortgage Collateral will not be a
prohibited transaction if the disposition is required to prevent default on a
Regular Bond that might otherwise result from a default on one or more items
of Mortgage Collateral.
SALE OR EXCHANGE OF A RESIDUAL BOND
Upon the sale or exchange of a Residual Bond, a Residual Bondholder 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 Residual Bonds -
Taxation of REMIC Income") of that Residual Bondholder in that Residual Bond at
the time of the sale or exchange. Unlike provisions in the Code dealing with
partnerships, there is no specific method of adjusting the basis of the items of
Mortgage Collateral of the REMIC if a Residual Bondholder sells its Residual
Bonds for a gain or loss.
If the Residual Bondholder holds its Residual Bond as a capital asset, the
gain or loss on the sale or exchange should be characterized as capital gain or
loss. In the case of a Residual Bondholder that is a bank, mutual savings bank,
cooperative bank, domestic building and loan association, savings and loan
association or similar institution, the gain or loss on the sale or exchange
should be characterized as ordinary income or loss. Termination of the REMIC
may be treated as a sale or exchange of a Residual Bondholder's Residual Bond,
in which case, if the Residual Bondholder has an adjusted basis in its Residual
Bond remaining when that Residual Bondholder's interest in the REMIC terminates,
and if that Residual Bondholder holds that Residual Bond as a capital asset,
that Residual Bondholder will recognize a capital loss at that time in the
amount of his remaining adjusted basis.
The wash sale rules of Code Section 1091 will apply to dispositions of
Residual Bonds if the seller of the Residual Bond, during the period beginning
six months before the sale or disposition and ending six months after that sale
or disposition, acquires (or enters into any other transaction that results in
the application of Code Section 1091) any Residual Bond or any interest in a
"taxable mortgage pool" (such as a non-REMIC owner trust) that is economically
comparable to a Residual Bond. If the wash sale rules of Code Section 1091 are
applicable to a Residual Bondholder that has sold Residual Bonds, any losses
incurred on that sale will be disallowed.
GENERAL REMIC MATTERS
LIQUIDATION OF THE REMIC
If a REMIC adopts a plan of complete liquidation and sells all of its
noncash assets within 90 days of the adoption of that plan of liquidation, the
REMIC will recognize no prohibited transaction income on the sale of its assets,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than amounts retained to meet claims) to holders
of all Bonds within that 90-day period. A Residual Bondholder should recognize
either gain or loss on the liquidation of the REMIC. An early termination of
the REMIC effected by the redemption of the Regular Bonds when the outstanding
principal amounts thereof have declined to the percentage specified for a
particular Series, and the distribution to Residual Bondholders of the excess,
if any, of the fair market value of the Collateral at the time of that
redemption over the sum of unpaid principal balance of the Regular Bonds and the
total of other liabilities of the REMIC, should constitute a complete
liquidation as described in the preceding sentence.
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ADMINISTRATIVE MATTERS
The books for a REMIC must be maintained on a calendar year basis, and the
federal information returns for a REMIC must be filed as if the REMIC were a
partnership for federal income tax purposes. The REMIC also will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination at the REMIC entity level in a unified
administrative proceeding of any adjustments to items of REMIC income, gain,
loss or deduction.
Unless otherwise required by the Code or Treasury Regulations promulgated
thereunder, the Issuer will sign the REMIC's federal income tax returns. The
Residual Bondholder who owns the largest residual interest (or, if no one
Residual Bondholder owns the largest residual interest, a Residual Bondholder
designated by the Issuer) will act as "tax matters partner," as defined in Code
Section 6231(a)(7), for the REMIC. Generally, the Residual Bondholder who acts
as tax matters partner for the REMIC will sign the REMIC's federal income tax
returns if the Issuer is not permitted to do so.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR BONDS
In general, interest (including OID) from United States sources paid to
non-U.S. persons is not taxed by the United States unless such person holds an
interest of at least ten percent (10%) of the equity of the debtor, or the
holder is engaged during the tax year in a trade or business and the interest
income is effectively connected with that trade or business. Foreign Bondholders
may be required to provide certain information concerning their qualification
for this exclusion and should consult their own tax advisors regarding the
specific tax consequences of owning a Regular Bond.
RESIDUAL BONDS
In general, amounts paid on Residual Bonds to nonresident aliens or foreign
corporations will be taxed by the United States as "fixed or determinable,
annual or periodical" income. The current rate is 30% of gross income. If the
holder is engaged in a trade or business in the United States during the tax
year and if the payments are effectively connected with that trade or business,
then the Residual Bondholder will be taxable at regular (corporate or
individual) rates on net income. The Issuer will be required in certain
circumstances to withhold 30% of each payment and remit it to the Service,
either in satisfaction of the Foreign Bondholder's tax liability or as an
estimated payment pending determination of such tax liability.
BACKUP WITHHOLDING
Payments of interest, OID, or other reportable payments made on Regular
Bonds, and proceeds from the sale of Regular Bonds to or through certain
brokers, may be subject to a "backup" withholding tax of 31% of "reportable
payments" (including interest payments, OID, and, under certain circumstances,
principal payments) unless the Bondholder complies with certain reporting and/or
certification procedures. Any amounts so withheld should be refunded or allowed
as a credit against the holder's federal income tax.
REMIC RESTRICTIONS ON PURCHASE AND TRANSFER OF RESIDUAL BONDS
Residual Bonds will not be offered for sale to, and may not be owned by, a
"Disqualified Organization." A "Disqualified Organization" is defined in Code
Section 860E(e)(5) as (i) the United States, any state or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, (ii) any organization (other than a
cooperative described in Code Section 521) which is exempt from the tax imposed
by Chapter 1 of the Code unless that organization is subject to the tax on
unrelated business taxable income, and (iii) certain rural electrical or
telephone cooperatives. Certain instrumentalities of the United States or a
state or political subdivision thereof that are subject to tax under Chapter 1
of the Code are excluded from the definition of Disqualified Organization. Any
Transferee will be required to furnish the Issuer with an affidavit certifying
that the transferee is not a Disqualified Organization. Any purported transfer
of a Residual Bond in violation of the foregoing restrictions will be null and
void.
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ERISA CONSIDERATIONS
ERISA imposes certain requirements on those employee benefit plans to which
it applies ("Plans") and on those persons who are fiduciaries with respect to
such Plans. In accordance with ERISA's general fiduciary standards, before
investing in the Bonds of a Series, a Plan fiduciary should determine whether
such investment is permitted under the governing Plan instruments and is
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio. Other provisions of ERISA
prohibit certain transactions involving the assets of a Plan and persons who
have certain specified relationships to the Plan (so-called "parties in
interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code). Thus, a Plan fiduciary considering an investment in the
Bonds of a Series also should consider whether such an investment might
constitute or give rise to a prohibited transaction under ERISA or the Code.
On November 13, 1986, the United States Department of Labor ("DOL")
published final regulations ("DOL Regulations") defining the circumstances
under which the assets of a Plan covered under ERISA will be deemed to
include the underlying assets of an entity for purposes of the fiduciary
responsibility and certain other provisions of ERISA when a Plan acquires an
equity interest in such entity. The Residual Bonds could be deemed under the
DOL Regulations to be equity interests. Although the Regular Bonds of each
Series should be treated as debt, not equity, for ERISA purposes and,
consequently, the Collateral securing each Series of Bonds should not be
deemed to be assets of Plans holding Regular Bonds of such Series, the DOL
could take the position that the Regular Bonds of a Series should be treated
as equity interests for ERISA purposes. If the Regular or Residual Bonds of
a Series are treated as equity interests for ERISA purposes, the DOL
Regulations would apply to investments in Bonds of that particular type by
Plans. The DOL Regulations set forth the general rule that if a Plan invests
in another entity, its assets include the investment, but do not, solely by
reason of such investment, include any of the underlying assets of the
entity. However, a special rule set forth therein provides that if a Plan
acquires an equity interest in an entity that is neither a "publicly-offered
security" nor a security issued by certain registered investment companies,
the Plan's assets include both the equity interest and an undivided interest
in each of the underlying assets of the entity unless (i) the entity is an
operating company or (ii) Plans and certain other "benefit plan investors"
hold less than 25% of the value of all classes of equity in the entity. No
Series of Bonds will be issued by a prescribed investment company and, as it
is not anticipated that the Bonds of any Series will be registered under the
Securities Exchange Act of 1934, they should not constitute "publicly-offered
securities." Furthermore, the Issuer should not be deemed to be an operating
company. Thus, if the Regular Bonds or Residual Bonds of a Series are deemed
to be equity instruments for ERISA purposes and if Plans and certain other
"benefit plan investors," including individual retirement accounts, hold 25%
or more of any Class of the Bonds of such Series that are deemed to
constitute equity interests, the underlying Collateral securing the Bonds
will constitute plan assets of Plans holding any Bonds deemed to be equity
interests in the REMIC.
If assets of a Plan are deemed to include Collateral securing a Series
of Bonds, the acquisition by such Plan of a Bond of such Series secured
thereby or the operation of the Collateral securing such Series of Bonds
could result in prohibited transactions or other violations of Title I of
ERISA and Code Section 4975. However, depending in part upon the type and
circumstances of the Plan making the decision to acquire a Bond of such
Series, certain exemptions from the prohibited transaction rules could be
applicable, even if the Plan's assets are deemed to include the Collateral
securing such Series of Bonds. Included among these exemptions are DOL
Prohibited Transaction Exemptions 88-59 (Class Exemption to Include Certain
Mortgage Loan Transactions Involving Multifamily Housing and to Permit
Additional Single Family Residential Mortgage Loans), 86-128 (Class Exemption
for Certain Securities Transactions by Plan Fiduciaries), 84-14 (Class
Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers), 80-51 (Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds) and 78-19 (Class Exemption for
Certain Transactions Involving Insurance Company Pooled Separate Accounts).
Furthermore, DOL Prohibited Transaction Exemption 83-1 (Class Exemption for
Certain Transactions Involving Mortgage Pool Investment Trusts), which
exempts from the prohibited transaction rules certain transactions relating
to the origination, maintenance and termination of mortgage pool investment
trusts, and the acquisition and holding of certain mortgage-backed
pass-through certificates of mortgage pools by Plans, may be applicable to
the Collateral securing a Series of Bonds.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors consult with their counsel regarding the consequences under ERISA of
their acquisition and ownership of Bonds.
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PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or to
underwriters for public offering by them. The Prospectus Supplement for each
Series of Bonds will set forth the terms of the offering of such Series of
Bonds, including the name or names of the underwriters, the purchase price of
the Bonds of such Series, the proceeds to the Issuer from such sale, and, in the
case of an underwritten fixed price offering, the initial public offering price,
the discounts and commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers.
The Bonds of a Series may be acquired by underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any underwriters will be
subject to certain conditions precedent, including, among other conditions, the
accuracy of representations and warranties made by the Issuer, the performance
by the Issuer of all actions required to be taken by it under the Securities
Act, and of its obligations under the underwriting agreement, and the delivery
to the underwriters of certificates, letters and opinions from the Issuer, the
Issuer's legal counsel and accountants, and other persons. Such underwriters
will be severally obligated to purchase all the Bonds of a Series described in
the related Prospectus Supplement, if any are purchased. If Bonds of a Series
are offered other than through underwriters, the related Prospectus Supplement
will contain information regarding the nature of such offering and any
agreements to be entered into between the Issuer and purchasers of Bonds of such
Series.
A portion of the Bonds of a Series may be acquired by the companies (or
their affiliates) from which the Issuer purchased a portion of the Pledged
Loans.
The place and time of delivery for the Bonds of a Series in respect of
which this Prospectus is delivered will be set forth in the Prospectus
Supplement.
LEGAL INVESTMENT
If Bonds of a Series are considered "mortgage related securities" under
SMMEA, then they will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
whose authorized investments are subject to state regulation to the same extent
as, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any such entities. However, only Bonds
secured by certain types of mortgage collateral so qualify under SMMEA, and the
Issuer may issue Bonds secured by types of Mortgage Collateral that would not
permit bonds secured thereby so to qualify. Thus, the Prospectus Supplement for
each Series of Bonds will specify whether the Bonds of such Series will
constitute "mortgage related securities" for purposes of SMMEA. Moreover, no
assurance can be given that any Series of Bonds will constitute "mortgage
related securities" under SMMEA.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Bonds or to purchase Bonds
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Bonds constitute legal investments for such investors.
LEGALITY OF BONDS
The legality of the Bonds and certain tax matters related to the ownership of
the Bonds will be passed upon for the Issuer by Matthias & Berg LLP, Attorneys
at Law, 1990 South Bundy Drive, Suite 790, Los Angeles, California 90025.
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EXPERTS
[TO BE COMPLETED IN AN AMENDED REGISTRATION STATEMENT]
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission upon
request to the Commission and inspected, without charge, at the offices of the
Commission. The Issuer is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith will
file reports and other information with the Commission. Such reports and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Room 1204, 219 South
Dearborn Street, Chicago, Illinois 60604; and Room 1100, 26 Federal Plaza, New
York, New York 10007. Copies of such material can also be obtained from the
Commission at prescribed rates through its Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement, any supplement to such Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the office of the Treasurer of FHLMC at P.O. Box 37248, 1776
G Street, N.W., Washington, D.C. 20013 (202-789-4787).
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information relating to FNMA are available from the Director of Investor
Relations, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-537-7115).
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<TABLE>
INDEX OF DEFINED TERMS
<S> <C>
"100% Mortgage Insurance Policies" . . . . . . . . . . . . . . . . . . . . .33
"Aggregate Initial Bond Value" . . . . . . . . . . . . . . . . . . . . . . .19
"Aggregate Initial Overcollateralization Amount" . . . . . . . . . . . . . . 8
"Aggregate Loan Losses". . . . . . . . . . . . . . . . . . . . . . . . . . .20
"Assumed Reinvestment Rates" . . . . . . . . . . . . . . . . . . . . . . . .19
"Balloon Loans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
"Bond Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Bond Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Buy-Down Fund". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Buy-Down Pledged Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Cede Bond". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
"CERCLA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
"Certificates of Beneficial Ownership" . . . . . . . . . . . . . . . . . . .52
"Class". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
"Collateral" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
"Compound Interest Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Cooperative Loans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"CPR". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
"Custodial Account for Reserves" . . . . . . . . . . . . . . . . . . . . . .44
"Custodial Account". . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
"Cut-off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
"Definitive Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
"Deposit Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Depository Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
"DOL Regulations". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
"DOL". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
"DTC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
"Duff & Phelps". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
"Eligible Investments" . . . . . . . . . . . . . . . . . . . . . . . . . . .40
"ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
"Excess Cash". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Excess Coverage Mortgage Insurance Policies". . . . . . . . . . . . . . . . 9
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
"FHA Loans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"FHA Prepayment Experience". . . . . . . . . . . . . . . . . . . . . . . . .22
"FHLMC Act". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
"FHLMC Certificate group". . . . . . . . . . . . . . . . . . . . . . . . . .27
"FHLMC Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"FHLMC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Finance Companies". . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
"Floating Rate Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . .17
"FNMA Certificates". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"FNMA MBS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
71
<PAGE>
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Foreign Bondholders". . . . . . . . . . . . . . . . . . . . . . . . . . . .58
"Funding Agreements" . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
"GNMA Certificates". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"GNMA Issuer". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
"GNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"GPM Collateral" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"GPM GNMA Certificates". . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"GPM Pledged Loans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Growing Equity Pledged Loans" . . . . . . . . . . . . . . . . . . . . . . .30
"Guaranty Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
"Housing Act". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
"HUD". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
"Inception". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
"Indenture". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Indirect Participant" . . . . . . . . . . . . . . . . . . . . . . . . . . .25
"Initial Bond Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Insurance Policies" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Insured". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
"Issue Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Manufactured Homes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Manufactured Housing Contracts" . . . . . . . . . . . . . . . . . . . . . . 5
"Manufactured Housing" . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Master Servicer". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Master Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . 9
"Moody's". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
"Mortgage Certificates". . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Mortgage Collateral". . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Mortgage Insurance Policies". . . . . . . . . . . . . . . . . . . . . . . .33
"Mortgage Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
"Mortgage Repurchase Bond" . . . . . . . . . . . . . . . . . . . . . . . . .39
"Mortgaged Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Mortgagor Bankruptcy Bond". . . . . . . . . . . . . . . . . . . . . . . . . 9
"Non-REMIC Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
"OID". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
"Originators". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
"Other Funds". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
"Other Mortgage Certificates". . . . . . . . . . . . . . . . . . . . . . . . 6
"Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . . . . .20
"Overcollateralization Fund" . . . . . . . . . . . . . . . . . . . . . . . . 8
"Owner-Trustee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
"Payment Dates". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Planned Amortization Class Bonds,". . . . . . . . . . . . . . . . . . . . .17
"Plans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
"Pledged Loans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"PMA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
"Pool Insurance Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . .33
"Pool Insurance Policy". . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Prepayment Assumption". . . . . . . . . . . . . . . . . . . . . . . . . . .61
"Primary Mortgage Insurance Policies". . . . . . . . . . . . . . . . . . . . 9
72
<PAGE>
"Principal Only Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . .17
"Prospectus Supplement". . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Rating Agency". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Redemption Fund". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Regular Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
"Reinvestment Agreements". . . . . . . . . . . . . . . . . . . . . . . . . .40
"Reinvestment Income". . . . . . . . . . . . . . . . . . . . . . . . . . . .19
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
"Remedial Action Costs". . . . . . . . . . . . . . . . . . . . . . . . . . .16
"REMIC Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
"REMIC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Remittance Date". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
"Required Principal Payment" . . . . . . . . . . . . . . . . . . . . . . . . 3
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Residual Bondholder". . . . . . . . . . . . . . . . . . . . . . . . . . . .63
"Residual Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
"Rules". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
"Scheduled Amortization Yield Bonds,". . . . . . . . . . . . . . . . . . . .17
"Second Mortgage Loans". . . . . . . . . . . . . . . . . . . . . . . . . . .14
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
"Security Funds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
"Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Service". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Servicing Agreements" . . . . . . . . . . . . . . . . . . . . . . . . . . .10
"Sinker Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
"SMM". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
"SMMEA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Special Hazard Insurance Policy". . . . . . . . . . . . . . . . . . . . . . 9
"Special Hazard Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . .38
"Special Redemption Dates" . . . . . . . . . . . . . . . . . . . . . . . . .21
"Special Redemption" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Stabilized Mortgage Reduction Term Bonds". . . . . . . . . . . . . . . . .17
"Standard & Poor's". . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
"Standard Hazard Insurance Policies" . . . . . . . . . . . . . . . . . . . . 9
"Stated Maturity". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Super Planned Amortization Class Bonds,". . . . . . . . . . . . . . . . . .17
"Supplemental Custodial Reserve Fund". . . . . . . . . . . . . . . . . . . . 8
"Supplemental Debt Service Fund" . . . . . . . . . . . . . . . . . . . . . . 7
"Supplemental Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . .48
"Targeted Planned Amortization Class Bonds," . . . . . . . . . . . . . . . .17
"Title V". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
"Transferee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
"Trusts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"UBTI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
"UCC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
"VA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"VA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
"Variable Rate Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . .17
"WTC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
"Zero Coupon Bonds". . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
</TABLE>
73
<PAGE>
FINANCIAL STATEMENTS AND INFORMATION
[TO BE ADDED IN THE PROSPECTUS SUPPLEMENT]
F 1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Not Applicable
SALES TO SPECIAL PARTIES.
Not Applicable
RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Six of the Articles of Incorporation of Registrant provides for the
indemnification of the Officers and Directors of Registrant to the fullest
extent permitted by California Law.
FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
To be provided in the Prospectus Supplement
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Prospectus.
(b) EXHIBITS
<TABLE>
<S> <C>
3(a) Articles of Incorporation of CRSM Securities, Inc.***
3(b) Bylaws of CRSM Securities, Inc.***
4(a) Form of Prospectus Supplement to this Prospectus***
4(b) Form of Standard Provisions Indenture***
4(c) Form of Terms Indenture between Owner-Trustee and Bond Trustee.**
5 Opinion of Matthias & Berg LLP, Attorneys at Law*
10(a) Form of Deposit Trust Agreement*
10(b) Form of Funding Agreement*
10(c) Form of Master Servicing Agreement*
10(d) Form of Servicing Agreement*
27 Financial Data Schedule*
</TABLE>
* To be filed by amendment.
** To be filed with Each Prospectus Supplement.
*** Filed as part of the Company's S-3 on September 30, 1998.
ITEM 36. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendments to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(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 in the Registration
Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective
II-1
<PAGE>
amendment is contained in periodic reports filed by the Issuer pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The 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 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 bonafide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the"Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Beverly Hills, State of California, on October 13,
1998.
CRSM Securities, Inc.
a California Corporation
By /s/ Robert S. Manns
--------------------------------
Robert S. Manns, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert S. Manns
- ---------------------------
Robert S. Manns President and Director October 13, 1998
