<PAGE>
As filed with the Securities and Exchange Commission on January 5, 2001
Registration No. 333-47798
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 2 to
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
__________________
FIRST HORIZON ASSET SECURITIES INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2808384
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Horizon Way
Irving, Texas 75063
(214) 441-4000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
______________________
Gerald L. Baker
4000 Horizon Way
Irving, Texas 75063
(214) 441-4000
(Name, address, including zip code, and telephone number
including area code, of agent for service)
______________________
The Commission is requested to send copies of all communication to:
<TABLE>
<S> <C> <C>
David Barbour Clyde A. Billings, Jr. John Arnholz
Andrews & Kurth L.L.P. Vice President and Counsel Brown & Wood LLP
1717 Main Street First Tennessee National Corporation 1666 K Street, N.W.
Suite 3700 165 Madison Avenue Washington, DC 20006
Dallas, Texas 75201 Memphis, Tennessee 38103 (202) 533-1300
(214) 659-4400 (901) 523-5679
</TABLE>
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement, as determined
by market conditions.
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
reinvestment plans, please check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Proposed maximum Proposed maximum Amount of
Title of each class of securities to Amount to be offering price aggregate registration
be registered registered(1) per unit(2) offering price(2) fee(2)(3)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage and Asset Backed Securities $1,000,000,000 100% $1,000,000,000 $250,000
======================================================================================================================
</TABLE>
(1) This Registration Statement relates to the offering from time to time of up
to $1,000,000,000 aggregate principal amount of Asset Backed Securities and
to any resales of them in market making transactions by First Tennessee
Securities Corporation or First Tennessee Capital Markets, each an
affiliate of the Registrant, to the extent required.
(2) Estimated for the purpose of calculating the registration fee pursuant to
Rule 457(o).
(3) $264.00 of which was previously paid to the Commission on October 12, 2000
in connection with the filing of the Registration Statement and $249,736 of
which was previously paid to the Commission on December 22, 2000 in
connection with the Filing of Amendment No. 1 to the Registration
Statement.
__________________
Pursuant to Rule 429 under the Securities Act, the Prospectus which is part
of this Registration Statement is a combined Prospectus that also relates to
$213,732,964 of Asset Backed Certificates registered under the Registrant's
Registration Statement No. 333-74467 and remaining unissued as of the date
hereof.
<PAGE>
SUBJECT TO COMPLETION; DATED JANUARY 5, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus dated [ ], 200[ ]-[ ])
$[ ]
[LOGO] FIRST
HORIZON
Home Loan Corporation
Seller and Master Servicer
First Horizon Mortgage Pass-Through Trust 200[ ]-[ ]
Issuer
Mortgage Pass-Through Certificates, Series 200[ ]-[ ]
Distributions payable monthly commencing in [ ] 200[ ]
You should carefully consider the risk factors beginning on page S-12 of this
prospectus supplement and on page 6 of the accompanying prospectus.
The trust will issue:
. ten classes of senior certificates; and
. six classes of subordinated certificates.
For a description of the classes of certificates offered by this
prospectus, see "Summary -- Offered Certificates" on page S-5. Credit
enhancement for the certificates will be provided by subordination. The Class
A-5 Certificates will have the benefit of a financial guaranty insurance policy
issued by Financial Securities Assurance Inc.
The assets of the trust will include a pool of conventional, fixed rate,
first lien, fully amortizing, one- to four-family residential mortgage loans.
The stated maturities of the mortgage loans will range from 29 to 30 years.
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus supplement or the prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
[Underwriter] will purchase the offered certificates (other than the Class
PO Certificates) and[, together with [ ] and [ ] (solely
with respect to the Class A-5 Certificates),] will sell them to investors at
varying prices to be determined at the time of sale. The proceeds to the
depositor from the sale of the certificates will be approximately [ ] of the
total principal balance of those certificates, plus accrued interest, before
deducting expenses. The underwriter's commission will be the difference between
the price it pays for the certificates and the amount it receives from their
sale to the public. The certificates will be available for delivery to investors
on or about [ ], 200[ ].
[UNDERWRITERS]
[ ], 200[ ]
<PAGE>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
After the initial distribution of the certificates offered hereby, this
prospectus and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets, Inc.], an affiliate of the
depositor, the seller and the master servicer, in connection with market making
transactions in such certificates. [First Tennessee Securities
Corporation][First Tennessee Capital Markets, Inc.] may act as principal or
agent in these transactions. These transactions will be at market prices at the
time of sale and not at the prices of the initial offering. Certain information
in this prospectus supplement will be updated from time to time.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.............................................................................. S-6
The Issuer...................................................................... S-6
Offered Certificates............................................................ S-6
The Mortgage Loans.............................................................. S-8
Cut-off Date.................................................................... S-8
Closing Date.................................................................... S-8
Depositor....................................................................... S-8
Seller and Master Servicer...................................................... S-8
Trustee......................................................................... S-8
Distributions on the Certificates............................................... S-8
Optional Termination............................................................ S-10
Advances........................................................................ S-10
Credit Enhancement.............................................................. S-10
Tax Status...................................................................... S-11
ERISA Considerations............................................................ S-11
Legal Investment................................................................ S-11
Ratings......................................................................... S-11
RISK FACTORS......................................................................... S-13
FORWARD LOOKING STATEMENTS........................................................... S-19
THE MORTGAGE POOL.................................................................... S-19
General......................................................................... S-19
Assignment of the Mortgage Loans................................................ S-26
SERVICING OF MORTGAGE LOANS.......................................................... S-28
General......................................................................... S-28
The Master Servicer............................................................. S-28
Foreclosure, Delinquency and Loss Experience.................................... S-28
Servicing Compensation and Payment of Expenses.................................. S-32
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans.... S-32
Advances........................................................................ S-33
Unanticipated Recoveries of Losses on the Mortgage Loans........................ S-33
DESCRIPTION OF THE CERTIFICATES...................................................... S-33
General......................................................................... S-33
Book-Entry Certificates......................................................... S-34
Payments on Mortgage Loans; Accounts............................................ S-35
Distributions on the Certificates............................................... S-35
Principal Distributions on the Class A-5 Certificates........................... S-39
Allocation of Realized Losses on the Certificates............................... S-43
Voting Rights................................................................... S-45
Additional Rights of the Residual Certificateholders............................ S-46
Subordination................................................................... S-46
Structuring Assumptions......................................................... S-48
Optional Purchase of Defaulted Loans............................................ S-50
Optional Termination............................................................ S-50
The Trustee..................................................................... S-50
Restrictions on Transfer of the Residual Certificates........................... S-50
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS........................................ S-51
General......................................................................... S-51
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
General Prepayment Considerations and Risks..................................... S-51
Prepayment Considerations and Risks for the Class A-6 Certificates.............. S-53
Prepayment Considerations and Risks for the Class B Certificates................ S-53
Yield Sensitivity of Class PO Certificates...................................... S-55
Additional Information.......................................................... S-56
Weighted Average Lives of the Offered Certificates.............................. S-56
Decrement Tables................................................................ S-56
Last Scheduled Distribution Date................................................ S-67
THE POLICY........................................................................... S-67
[THE INSURER......................................................................... S-68
General......................................................................... S-68
Reinsurance..................................................................... S-69
Ratings......................................................................... S-69
Capitalization.................................................................. S-69
Incorporation of Certain Documents by Reference................................. S-70
Insurance Regulation............................................................ S-70
EXPERTS.............................................................................. S-70
USE OF PROCEEDS...................................................................... S-71
MATERIAL FEDERAL INCOME TAX CONSEQUENCES............................................. S-71
ERISA CONSIDERATIONS................................................................. S-72
UNDERWRITING......................................................................... S-74
LEGAL MATTERS........................................................................ S-75
RATINGS.............................................................................. S-75
GLOSSARY OF TERMS.................................................................... S-76
</TABLE>
S-4
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the
certificates, you should read carefully this entire document and the
accompanying prospectus.
For the definitions of certain capitalized terms used in this prospectus
supplement, see "Glossary of Terms" on page S-75.
The Issuer
The Issuer of the certificates will be First Horizon Mortgage Pass-Through
Trust 200[ ]-[ ]. The trust was created for the sole purpose of issuing the
certificates.
Offered Certificates
On the closing date, the trust will issue sixteen classes of certificates,
thirteen of which are being offered by this prospectus supplement and the
accompanying prospectus. The assets of the trust that will support both the
offered certificates and the non-offered certificates will consist of a pool of
mortgage loans with a principal balance of approximately $[ ] as of [ ],
200[ ].
The following table shows the approximate initial principal balance, annual
pass-through rate and type of each class of offered certificates:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Class Certificate Pass-Through
Class Balance Rate Type
----- ------- ---- ----
----------------------------------------------------------------------
<S> <C> <C> <C>
Class A-1 $ % senior/sequential pay
----------------------------------------------------------------------
Class A-2 $ % senior/sequential pay
----------------------------------------------------------------------
Class A-3 $ % senior/sequential pay
----------------------------------------------------------------------
Class A-4 $ % senior/sequential pay
----------------------------------------------------------------------
Class A-5 $ % senior/retail/insured
----------------------------------------------------------------------
Class A-6 $ % senior/lockout
----------------------------------------------------------------------
Class A-7 (1) % senior/interest only
----------------------------------------------------------------------
Class PO $ (2) senior/principal only
----------------------------------------------------------------------
Class A-RU $ % senior/residual
----------------------------------------------------------------------
Class A-RL $ % senior/residual
----------------------------------------------------------------------
Class B-1 $ % subordinated
----------------------------------------------------------------------
Class B-2 $ % subordinated
----------------------------------------------------------------------
Class B-3 $ % subordinated
----------------------------------------------------------------------
</TABLE>
S-5
<PAGE>
(1) The Class A-7 Certificates are interest only certificates and will
accrue interest during each interest accrual period based on a notional
principal amount. The initial notional principal amount will be $4,050,000.
Reductions in the notional principal amount of the Class A-7 Certificates will
occur concurrently with certain reductions in the class certificate balance of
the Class A-5 Certificates. See "Yield, Prepayment and Maturity Considerations
-- Yield Sensitivity of Class A-7 Certificates" in this prospectus supplement.
(2) The Class PO Certificates are principal only certificates and will not
accrue interest.
The trust will also issue Class B-4, Class B-5 and Class B-6 Certificates
which are not offered by this prospectus supplement.
Depending on the final composition of the pool of mortgage loans sold to
the trust, the principal balance of each class of certificates may increase or
decrease from the amount listed above. Any difference between the total
principal amount of the certificates on the date they are issued and the
approximate total principal amount of the certificates on the date of this
prospectus supplement will not exceed 5%.
All classes of the offered certificates, other than the Class PO, Class A-
RU and Class A-RL Certificates, will be book-entry certificates.
The trust will issue the certificates in the following minimum
denominations:
<TABLE>
<CAPTION>
-------------------------------------------
Class Minimum Denomination
----- --------------------
-------------------------------------------
<S> <C>
Class A-1 $
-------------------------------------------
Class A-2 $
-------------------------------------------
Class A-3 $
-------------------------------------------
Class A-4 $
-------------------------------------------
Class A-5 $
-------------------------------------------
Class A-6 $
-------------------------------------------
Class A-7 $
-------------------------------------------
Class PO $
-------------------------------------------
Class A-RU $
-------------------------------------------
Class A-RL $
-------------------------------------------
Class B-1 $
-------------------------------------------
Class B-2 $
-------------------------------------------
Class B-3 $
-------------------------------------------
</TABLE>
Certificates with principal balances (or notional principal amounts) in
excess of these amounts, other than the Class A-RU and Class A-RL Certificates,
will be issued in multiples of $1,000 above the minimum denomination.
S-6
<PAGE>
See "The Mortgage Pool," "Description of the Certificates -- General" and
"--Book-Entry Certificates" in this prospectus supplement and "Loan Program" and
"Description of the Securities" in the prospectus.
The Mortgage Loans
First Horizon Home Loan Corporation originated or acquired all of the
mortgage loans. The mortgage loans expected to be sold to the trust have the
following characteristics as of [ ], 200[ ]:
. Total original principal balance/(1)/: $[ ]
. Original terms to maturity: 29 to 30 years
. Range of maturities: between [ ] and [ ] months
. Range of annual interest rates: between [ ]% and [ ]%
. Largest geographic concentration: [ ]% of the mortgage loans are
secured by property located in [California]
___________
/(1)/ Approximate, after deducting payments of principal due on or before[ ],
200[ ], and subject to the variance described in this prospectus supplement.
See "The Mortgage Pool -- General".
Cut-off Date
[ ], 200[ ], the date as of which the aggregate principal balance
of the mortgage loans is determined for purposes of this prospectus supplement,
unless a different date is specified.
Closing Date
On or about [ ], 200[ ].
Depositor
First Horizon Asset Securities Inc.
Seller and Master Servicer
First Horizon Home Loan Corporation
Trustee
[The Bank of New York]
Distributions on the Certificates
The trustee will make distributions on the certificates on the 25th day of
each month. If the 25th is not a business day, the trustee will make
distributions on the next business day. The first distribution date will be
[ ], 200[ ].
On each distribution date, the trustee will first pay to the senior
certificates the amounts of interest and principal distributable to them from
available funds. The trustee will then pay interest and principal to the
subordinated certificates from the remaining available funds.
S-7
<PAGE>
Interest Payments
. The actual amount of interest you receive on your certificates (if your
certificates are interest bearing) on each distribution date will depend
on:
- the amount of interest accrued on your certificates;
- the total amount of funds available for distribution; and
- the amount of any accrued interest not paid on your certificates on
earlier distribution dates.
. If you are the holder of a senior certificate, the amount of interest
payable to you will be in proportion to the interest payable on all of
the senior certificates together. All of the senior certificates
entitled to interest payments will receive these payments at the same
time.
. If you are the holder of a subordinated certificate, you will receive
interest payments only after the trustee has paid interest and principal
to:
- all of the senior certificates; and
- each class of subordinated certificates that ranks higher than your
certificates.
. The holders of the Class PO Certificates are not entitled to any
interest distributions.
. The trustee will calculate interest on the basis of a 360-day year
consisting of twelve 30-day months.
Principal Payments
. After interest payments have been made on all senior certificates
entitled to interest, each class of senior certificates entitled to
principal distributions will also receive a payment of principal. If you
are the holder of subordinated certificates, you will receive principal
payments after (1) interest and principal have been paid on all the
senior certificates and the subordinated certificates ranking senior to
yours (if any) and (2) interest has been paid on your certificates. You
should refer to "Description of the Certificates --Distributions on the
Certificates" for a description of the amount of principal payable to
you and the priority in which it will be paid.
. The amount and timing of principal you receive on your certificates
will depend on:
- the various priorities and formulas described in this prospectus
supplement that determine the allocation of principal payments to your
certificates; and
- the amounts actually available for distribution as principal.
. Because of the principal allocation formulas described in this
prospectus supplement, the senior certificates entitled to principal
distributions -- other than the Class PO Certificates -- will receive
principal payments at a faster rate than the subordinated certificates
for at least the first nine years after the issuance of the
certificates. The Class A-6 Certificates will not necessarily benefit
from this accelerated repayment.
. If you are the holder of a Class A-5 Certificate, you will have the
option to request redemption of all or any part of your certificate, in
any amount that is a multiple of $[ ]. However, in certain instances,
you may receive principal payments by
S-8
<PAGE>
random lottery regardless of whether you have submitted a request for
redemption. Accordingly, the timing of the principal payments you
receive will be determined by whether your redemption request is honored
and whether your certificates are selected for payment. You should refer
to "Description of the Certificates -- Principal Distributions on the
Class A-5 Certificates" for a description of how principal payments will
be made on these certificates. You should also see the risk factor
relating to these certificates on page S-15.
. The holders of the Class A-7 Certificates are not entitled to any
principal distributions.
You should refer to "Description of the Certificates -- Distributions on the
Certificates -- Allocation of Available Funds."
Optional Termination
The master servicer may purchase all of the remaining assets of the trust
after the principal balance of the mortgage loans and real estate owned by the
trust declines below 10% of the principal balance of the mortgage loans on
[ ], 200[ ].
See "Description of the Certificates -- Optional Termination".
Advances
The master servicer will make cash advances with respect to delinquent
payments of principal and interest on the mortgage loans to the extent the
master servicer reasonably believes that the cash advances can be repaid from
future payments on the mortgage loans. These cash advances are only intended to
maintain a regular flow of scheduled interest and principal payments on the
certificates and are not intended to guarantee or insure against losses.
See "Servicing of Mortgage Loans -- Advances".
Credit Enhancement
If you are the holder of a senior certificate, your certificate will
benefit from the credit enhancement provided by the subordination of the
subordinated certificates.
This subordination will benefit the senior certificates in two ways:
. The senior certificates will have a preferential right over the
subordinated certificates to receive funds available for interest and
principal distributions.
. The subordinated certificates will absorb all losses on the mortgage
loans up to the level described in this prospectus supplement.
If you are the holder of a senior certificate, you should keep in mind,
however, that the subordination of the subordinated certificates offers only
limited protection against the loss of your investment. If you are the holder
of a subordinated certificate, your certificate will benefit from the credit
enhancement provided by the subordination of any lower-ranking classes of
subordinated certificates. This subordination will, however, offer only limited
protection against the loss of your investment.
In addition, losses on mortgage loans that are allocated to the Class A-5
Certificates will be covered by the certificate guaranty insurance policy
provided by Financial Security Assurance Inc., as described in this prospectus
supplement. Additionally, some interest shortfalls allocated to the Class A-5
Certificates will be offset to the extent that funds are available in the
reserve
S-9
<PAGE>
fund and, to the extent that funds are not so available, by the certificate
guaranty insurance policy. See "Description of the Certificates -- Interest
Distributions," "The Policy" and "The Insurer" in this prospectus supplement.
Tax Status
The trust will elect to be treated, for federal income tax purposes as two
separate REMICs. The classes of certificates that are designated as the regular
certificates will represent regular interests in the upper REMIC. The Class A-RU
Certificates will represent the sole class of residual interests in the upper
REMIC and the Class A-RL Certificates will represent the sole class of residual
interests in the lower REMIC.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus.
ERISA Considerations
A pension or other employee benefit plan subject to the Employee Retirement
Income Security Act of 1974 or Section 4975 of the Internal Revenue Code of 1986
may purchase the Class A Certificates, other than the Class A-RU and Class A-RL
Certificates, so long as the conditions described under "ERISA Considerations"
are met.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment
The senior certificates and the Class B-1 Certificates will be mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement Act
of 1984 as long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The Class B-
2 and Class B-3 Certificates will not be mortgage related securities for
purposes of that act.
See "Legal Investment" in the prospectus.
Ratings
The classes of certificates listed below will not be offered unless they
are assigned the following ratings by Fitch and S&P.
<TABLE>
<CAPTION>
-------------------------------------------------------------
Class Fitch Rating S&P Rating
----- ------------ ----------
-------------------------------------------------------------
<S> <C> <C>
Class A-1 AAA AAA
-------------------------------------------------------------
Class A-2 AAA AAA
-------------------------------------------------------------
Class A-3 AAA AAA
-------------------------------------------------------------
Class A-4 AAA AAA
-------------------------------------------------------------
Class A-5 AAA AAA
-------------------------------------------------------------
Class A-6 AAA AAA
-------------------------------------------------------------
Class A-7 AAA AAA
-------------------------------------------------------------
Class PO AAA AAA
-------------------------------------------------------------
Class A-RU AAA AAA
-------------------------------------------------------------
Class A-RL AAA AAA
-------------------------------------------------------------
Class B-1 AA N/A
-------------------------------------------------------------
Class B-2 A N/A
-------------------------------------------------------------
Class B-3 BBB N/A
-------------------------------------------------------------
</TABLE>
S-10
<PAGE>
A rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by either of the rating
agencies. You should refer to "Ratings" in this prospectus supplement to learn
more about the significance and limitations of ratings.
[remainder of page intentionally left blank]
S-11
<PAGE>
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth
under "Risk Factors" on page 6 of the prospectus.
Certificates may not be
appropriate investments
for some investors................... The certificates may not be an
appropriate investment for you if you do
not have sufficient resources or
expertise to evaluate the particular
characteristics of the applicable class
of certificates. This may be the case
because, among other things:
. if you purchase your certificates
at a price other than par, your
yield to maturity will be sensitive
to the uncertain rate and timing of
principal prepayments on the
mortgage loans;
. the certificates may be
inappropriate investments for you
if you require a distribution of a
particular amount of principal on a
specific date or an otherwise
predictable stream of distributions
because the rate of principal
distributions on, and the weighted
average lives of, the certificates
will be sensitive to the uncertain
rate and timing of principal
prepayments on the mortgage loans
and the priority of principal
distributions among the classes of
certificates;
. you may not be able to reinvest the
principal amounts distributed on
your certificates, which in general
are expected to be greater during
periods of relatively low interest
rates, at a rate that is as high as
the applicable pass-through rate or
your expected yield;
. unless a secondary market for the
certificates develops, the
certificates may be illiquid
investments; and
. you must report interest as well as
original issue discount, if any, on
the accrual method of accounting,
even if you are otherwise using the
cash method of accounting.
You should also carefully consider the
further risks discussed below and under
the heading "Yield, Prepayment and
Maturity Considerations" in this
prospectus supplement and under the
heading "Risk Factors" in the
prospectus.
S-12
<PAGE>
Prepayments are unpredictable
and will affect the yield on
your certificates.................... Borrowers may prepay their mortgage
loans in whole or in part at any time.
We cannot predict the rate at which
borrowers will repay their mortgage
loans. A prepayment of a mortgage loan,
however, will usually result in a
prepayment on the certificates and will
affect the yield to maturity on your
certificates. In addition, you will be
subject to any reinvestment risks
resulting from faster or slower
prepayments of mortgage loans.
The rate of principal payments on the
mortgage loans will be affected by,
among other things:
. the amortization schedules of the
mortgage loans;
. the rate of principal prepayments,
including partial prepayments and
those resulting from refinancing,
by mortgagors;
. liquidations of defaulted mortgage
loans;
. repurchases of mortgage loans by
the seller as a result of defective
documentation or breaches of
representations and warranties;
. optional purchase by the master
servicer of defaulted mortgage
loans; and
. the optional purchase by the seller
of all of the mortgage loans in
connection with the termination of
the trust.
The rate of payments, including
prepayments, on the mortgage loans may
be influenced by a variety of economic,
geographic, social and other factors,
including the following:
. If prevailing rates for similar
mortgage loans fall below the
mortgage rates on the mortgage
loans owned by the trust, we would
expect the rate of prepayment to
increase. Increased prepayments
could result in a faster return of
principal to you at a time when you
may not be able to reinvest the
principal at an interest rate as
high as the pass-through rate or
expected yield on your
certificates.
. If interest rates on similar
mortgage loans rise above the
mortgage rates on the mortgage
loans owned by the trust, we would
expect the rate of prepayment to
decrease. Reduced prepayments could
result in a slower return of
principal to you at a time when
S-13
<PAGE>
you may be able to reinvest the
principal at a higher rate of
interest than the pass-through rate
or expected yield on your
certificates.
. Refinancing programs, which may
involve soliciting all or some of
the mortgagors to refinance their
mortgage loans, may increase the
rate of prepayments on the mortgage
loans. The master servicer or its
affiliates may offer these
refinancing programs from time to
time, including streamlined
documentation programs as well as
programs under which a mortgage
loan is modified to reduce the
interest rate.
See "Yield, Prepayment and Maturity
Considerations" and "Description of the
Certificates -- Optional Termination" in
this prospectus supplement and "The
Agreements -- Assignment of the Trust
Fund Assets," and "-- Termination;
Optional Termination" in the prospectus.
The effect of prepayments on
principal only certificates,
interest only certificates and
certificates purchased at a
premium or discount
may be severe........................ The rate of payments, including
prepayments, on the mortgage loans owned
by the trust can adversely affect the
yield you receive on your certificates.
For example:
. If you purchase principal only
certificates or if you purchase
your certificates at a discount and
principal is repaid slower than you
anticipate, then your yield may be
lower than you anticipate.
. If you purchase interest only
certificates (e.g., the Class A-7
Certificates) or if you purchase
your certificates at a premium and
principal is repaid faster than you
anticipate, then your yield may be
lower than you anticipate and, in
the case of the Class A-7
Certificates, you could lose your
entire investment.
See "Yield, Prepayment and Maturity
Considerations".
We cannot guarantee
you regular payments
on your certificates................. The amounts you receive on your
certificates will depend on the amount
of the payments borrowers make on the
mortgage loans. Because we cannot
predict the rate at which borrowers will
repay their loans, you may receive
distributions on your certificates in
amounts that are larger or smaller than
you expect. In addition, the life of
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<PAGE>
your certificates may be longer or
shorter than anticipated. Because of
this, we cannot guarantee that you will
receive distributions at any specific
future date or in any specific amount.
Principal payments on the
Class A-5 Certificates may be
less predictable than on other
classes because of special
rules for distributing
principal............................ As described in this prospectus
supplement, special rules apply to
determining which holders receive
principal distributions on the Class A-5
Certificates and when these
distributions are made. Amounts
available for principal on the Class A-5
Certificates will first be paid to
holders who have submitted requests for
principal payments in the order
submitted and with certain priorities
given to holders who have died. Any
amounts not paid to these requesting
holders will be paid by random lot to
other holders of the Class A-5
Certificates. If you submitted a request
for principal payments, you may not
receive the amount requested, either
because other requests had priority over
yours or because the amount available
for principal payments on your Class A-5
Certificate was insufficient to honor
your request. If the amount available
for principal distributions on the Class
A-5 Certificates exceeds the amount
requested by all holders of the Class A-
5 Certificates, you may receive
distributions in excess of the amount
you requested or, even if you did not
make a request, you may receive
distributions.
As a result, holders may not receive
principal payments when they are
expecting them, and may receive
principal payments when they are not
expecting them. In addition to making
distributions on the Class A-5
Certificates somewhat unpredictable,
your yield may be affected by the timing
of these payments, as described in some
of the other risk factors in this
prospectus supplement.
Investors in the Class A-5 Certificates
should pay particular attention to the
risk that they may be less likely to
receive principal payments when
prevailing interest rates available for
reinvestment are high, and may be more
likely to receive principal payments
when prevailing interest rates available
for reinvestment are low. See
"Description of the Certificates --
Distributions on the Certificates --
Principal Distributions on the Class A-5
Certificates."
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<PAGE>
Subordination may not be
sufficient to protect senior
certificates from losses ..... Credit enhancement will be provided for the
certificates, first, by the right of the
holders of certificates to receive payments
of principal before the classes subordinate
to them and, second, by the allocation of
realized losses to junior classes in the
inverse order of their subordination. This
form of credit enhancement is provided by
using collections on the mortgage loans
otherwise payable to holders of junior
classes to pay amounts due on more senior
classes. Collections otherwise payable to
junior classes comprise the sole source of
funds from which this type of credit
enhancement is provided. Realized losses are
allocated to the subordinated certificates,
beginning with the subordinated certificates
with the lowest payment priority, until the
principal amount of that class has been
reduced to zero. Subsequent realized losses
will be allocated to the next most
subordinate classes of subordinated
certificates sequentially, until the class
certificate balances of each succeeding class
has been reduced to zero.
Accordingly, if the class certificate balance
of each junior class were to be reduced to
zero, delinquencies and defaults on the
mortgage loans would reduce the amount of
funds available for monthly distributions to
holders of the senior certificates.
Furthermore, the junior classes will provide
only limited protection against some
categories of losses such as special hazard
losses, bankruptcy losses and fraud losses in
excess of the amounts specified in this
prospectus supplement. Any losses in excess
of those amounts will be allocated pro rata
to each class, even if the class certificate
balance of each junior class has not been
reduced to zero. Among the subordinated
certificates the Class B-1 Certificates are
the least subordinated, that is, they have
the highest payment priority. Then come the
Class B-2, Class B-3, Class B-4, Class B-5
and Class B-6 Certificates, in that order.
See "Credit Enhancement -- Subordination of
Certain Classes".
In addition, the Class A-5 Certificates will
be entitled to the benefits of a certificate
guaranty insurance policy to be issued by
Financial Security Assurance Inc., referred
to in this prospectus supplement as the
insurer. See "The Policy" and "The Insurer"
in this prospectus supplement.
Concentration of California
mortgage loans may increase
risk of losses on your
certificates ................. Approximately [ ]% of the mortgage loans
expected to be in the trust on the cut-off
date are secured by property in California.
Accordingly, you should consider
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<PAGE>
the following risks associated with property
located in California:
. Property in California may be more
susceptible than homes located in other
parts of the country to certain types of
uninsurable or uninsured hazards, such
as earthquakes, floods, mudslides and
other natural disasters.
. Economic conditions in California, which
may or may not affect real property
values, may affect the ability of
borrowers to repay their loans on time.
. California's economic condition and
housing market may be adversely affected
by a variety of events, including
natural disasters such as earthquakes,
hurricanes, floods and eruptions,
mudslides and brushfires and civil
disturbances such as riots. If these
occur, the rates of delinquency,
foreclosure, bankruptcy and loss on the
mortgage loans may increase.
. Declines in the California residential
real estate market may reduce the values
of properties located in California,
which would result in an increase in the
loan-to-value ratios.
. Any increase in the market value of
properties located in California would
reduce the loan-to-value ratios and
could, therefore, make alternative
sources of financing available to the
borrowers at lower interest rates, which
could result in an increased rate of
prepayment of the mortgage loans.
Residual Certificates have
adverse tax consequences ..... The Class A-RU Certificates will be the sole
class of "residual interests" in the upper
REMIC and the Class A-RL Certificates will be
the sole class of "residual interests" in the
lower REMIC for federal income tax purposes.
Holders of Class A-RU or Class A-RL
Certificates must report as ordinary income
or loss their pro rata share of the net
income or the net loss of the related REMIC
whether or not any cash distributions are
made to them. This allocation of income or
loss may result in a zero or negative after-
tax return. No cash distributions are
expected to be made with respect to the Class
A-RU or Class A-RL Certificates, except for
the initial principal balance for each such
class of $[ ] and related interest.
Due to their tax consequences, the Class A-RU
and Class A-RL Certificates will be subject
to restrictions on
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<PAGE>
transfer that may affect their liquidity. In
addition, the Class A-RU and Class A-RL
Certificates may not be acquired by employee
benefit plans subject to ERISA.
See "Description of the Certificates --
Restrictions on Transfer of the Residual
Certificates," "ERISA Considerations" and
"Material Federal Income Tax Consequences" in
this prospectus supplement.
FORWARD LOOKING STATEMENTS
We caution you that certain statements contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus consist
of forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by the
use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words. Forward-
looking statements are subject to a variety of risks and uncertainties that
could cause actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences, effects of prepayments, changes in interest rates and various other
matters, many of which are beyond our control. Because we cannot predict the
future, what actually happens may be very different from what we predict in our
forward-looking statements.
THE MORTGAGE POOL
General
The depositor will purchase mortgage loans in the mortgage pool from the
seller pursuant to a mortgage loan purchase agreement between the seller and the
depositor. The seller will have acquired approximately 33% of the mortgage
loans in the mortgage pool from one unaffiliated third party and will have
directly originated or acquired the remainder of the mortgage loans from various
unaffiliated third parties. All of the mortgage loans were underwritten
substantially in accordance with the seller's underwriting standards. See "Loan
Program -- Underwriting Standards" in the prospectus. The depositor will cause
the mortgage loans to be assigned to the trustee for the benefit of the
certificateholders pursuant to a pooling and servicing agreement among the
depositor, First Horizon, as seller and master servicer, and [The Bank of New
York], as trustee.
Under the pooling and servicing agreement, the seller will make certain
representations, warranties and covenants to the depositor relating to, among
other things, the due execution and enforceability of the pooling and servicing
agreement and certain characteristics of the mortgage loans and, subject to the
limitations described under "-- Assignment of the Mortgage Loans," will be
obligated to repurchase or substitute a similar mortgage loan for any mortgage
loan as to which there exists deficient documentation or as to which there has
been an uncured breach of any representation or warranty relating to the
characteristics of the mortgage loans that materially and adversely affect the
interests of the certificateholders in the mortgage loan. The seller will
represent and warrant to the depositor in the pooling and servicing agreement
that the mortgage loans were selected from among the outstanding one- to four-
family mortgage loans in the seller's portfolio as to which the representations
and warranties set forth in the pooling and servicing agreement can be made and
that the selection was not made in a manner intended to adversely affect the
interests of the certificateholders. See "Loan Program -- Representations by
Sellers; Repurchases" in the prospectus. Under the pooling and servicing
agreement, the
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<PAGE>
depositor will assign all its interest in the representations, warranties and
covenants, including the seller's repurchase obligation, to the trustee for the
benefit of the certificateholders. The depositor will make no representations or
warranties with respect to the mortgage loans and will have no obligation to
repurchase or substitute mortgage loans with deficient documentation or which
are otherwise defective. The seller is selling the mortgage loans to the
depositor without recourse and will have no obligation with respect to the
certificates in its capacity as seller other than the repurchase and
substitution obligations described above. The obligations of the master servicer
with respect to the certificates are limited to the master servicer's
contractual servicing obligations under the pooling and servicing agreement.
Information with respect to the mortgage loans expected to be included in
the mortgage pool is set forth under this heading. Before the closing date,
mortgage loans may be removed from the mortgage pool and other mortgage loans
may be substituted for them. The depositor believes that the information set
forth in this prospectus supplement with respect to the mortgage pool as
presently constituted is representative of the characteristics of the mortgage
pool as it will be constituted at the closing date, but some characteristics of
the mortgage loans in the mortgage pool may vary. Unless otherwise indicated,
information presented in this prospectus supplement expressed as a percentage,
other than rates of interest, are approximate percentages based on the aggregate
Stated Principal Balances of the mortgage loans as of the cut-off date. No more
than 5% of the mortgage loans relative to the cut-off date pool principal
balance will deviate from the mortgage loan characteristics described under this
heading.
As of the cut-off date, the aggregate of the Stated Principal Balances of
the mortgage loans is expected to be approximately $[ ], which is referred to as
the cut-off date pool principal balance. The mortgage loans provide for the
amortization of the amount financed over a series of substantially equal monthly
payments. The due date for each mortgage loan is the first day of each calendar
month. At origination, substantially all of the mortgage loans had stated terms
to maturity of 30 years. Scheduled monthly payments made by the mortgagors on
the mortgage loans either earlier or later than their scheduled due dates will
not affect the amortization schedule or the relative application of the payments
to principal and interest. The mortgagors may prepay their mortgage loans at any
time without penalty.
Substantially all of the mortgage loans are jumbo mortgage loans that have
principal balances at origination that exceed the then applicable limitations
for purchase by Fannie Mae and Freddie Mac. Substantially all of the mortgage
loans were underwritten pursuant to full/alternative documentation loan
programs. See "Loan Program -- Underwriting Standards -- Guide Standards" in the
prospectus.
Each mortgage loan was originated after [ ].
The latest stated maturity date of any mortgage loan is [ ]. The earliest
stated maturity date of any mortgage loan is [ ]..
As of the cut-off date, no mortgage loan was delinquent more than 30 days.
Substantially all of the mortgage loans will not be subject to buydown
agreements. No mortgage loan provides for deferred interest or negative
amortization.
No mortgage loan has a loan-to-value ratio at origination of more than 95%.
Generally, each mortgage loan with a loan-to-value ratio at origination of
greater than 80% is covered by a primary mortgage guaranty insurance policy
issued by mortgage insurance company acceptable to Fannie Mae or Freddie Mac.
The primary mortgage guaranty insurance policy provides coverage in an amount
equal to a specified percentage times the sum of the Stated Principal Balance of
the related mortgage loan, the accrued interest on the related mortgage loan and
the
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<PAGE>
related foreclosure expenses. The specified percentage is generally 12% for
loan-to-value ratios between 80.01% and 85.00%, 25% for loan-to-value ratios
between 85.01% and 90.00%, and 30% for loan-to-value ratios between 90.01% and
95.00%.
No primary mortgage guaranty insurance policy will be required with respect
to any mortgage loan
. after the date on which the related loan-to-value ratio is 80% or less
or, based on a new appraisal, the Stated Principal Balance of the
mortgage loan represents 80% or less of the new appraised value or
. if maintaining the primary mortgage guaranty insurance policy is
prohibited by applicable law.
The loan-to-value ratio of a mortgage loan at any given time is a fraction,
expressed as a percentage, the numerator of which is the Stated Principal
Balance of the related mortgage loan at the date of determination and the
denominator of which is
. in the case of a purchase, the lesser of the selling price of the
mortgaged property or its appraised value at the time of sale, or
. in the case of a refinancing, the appraised value of the mortgaged
property at the time of refinancing, except in the case of a mortgage
loan underwritten pursuant to First Horizon's Streamlined
Documentation Program as described in the prospectus under "Loan
Program -- Underwriting Standards."
For mortgage loans originated pursuant to First Horizon's Streamlined
Documentation Program
. if the loan-to-value ratio at the time of the origination of the
mortgage loan being refinanced was 90% or less, the loan-to-value
ratio will be the ratio of the principal amount of the mortgage loan
outstanding at the date of determination divided by the appraised
value of the related mortgaged property at the time of the origination
of the mortgage loan being refinanced or
. if the loan-to-value ratio at the time of the origination of the
mortgage loan being refinanced was greater than 90%, then the loan-to-
value ratio will be the ratio of the principal amount of the mortgage
loan outstanding at the date of determination divided by the appraised
value as determined by a limited appraisal report at the time of the
origination of the mortgage loan.
See "Loan Program -- Underwriting Standards" in the prospectus.
No assurance can be given that the value of any mortgaged property has
remained or will remain at the level that existed on the appraisal or sales
date. If residential real estate values generally or in a particular geographic
area decline, the loan-to-value ratios might not be a reliable indicator of the
rates of delinquencies, foreclosures and losses that could occur with respect to
the affected mortgage loans.
The following information sets forth in tabular format certain information,
as of the cut-off date, as to the mortgage loans. Other than with respect to
rates of interest, percentages (approximate) are reported by aggregate Stated
Principal Balance of the mortgage loans as of the cut-off date and have been
rounded in order to total 100%.
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<PAGE>
MORTGAGE RATES
--------------
Aggregate
Number of Principal Balance Percentage of
Mortgage Rates (%) Mortgage Loans Outstanding Mortgage Pool
----------------- -------------- ----------- -------------
......................... $ %
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
......................... --
TOTAL: ....... ==== $ %
As of the cut-off date, the weighted average mortgage rate of the mortgage
loans, as so adjusted, is expected to be approximately [ ]%.
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<PAGE>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percentage of
Current Mortgage Loan Amounts Mortgage Loans Outstanding Mortgage Pool
----------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$ $ %
$
$
$
$
$
$
$
$
TOTALS: ........ $ %
=========== =============
</TABLE>
As of the cut-off date, the average principal balance of the mortgage loans
is expected to be approximately $[ ].
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
Original Aggregate
Loan-to-Value Number of Principal Balance Percent of
Ratios (%) Mortgage Loans Outstanding Mortgage Pool
--------- -------------- ----------- -------------
<S> <C> <C> <C>
............................. $ %
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
TOTALS: ....... $ %
</TABLE>
The weighted average original loan-to-value ratio of the mortgage loans is
expected to be approximately [ ]%.
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<PAGE>
STATE DISTRIBUTION
OF MORTGAGE PROPERTIES
Aggregate
Number Of Principal Balance Percent Of
State Mortgage Loans Outstanding Mortgage Pool
----- -------------- ----------- -------------
Arizona.................. $ %
Arkansas.................
California...............
Colorado.................
Connecticut..............
Delaware.................
District Of Columbia.....
Florida..................
Georgia..................
Idaho....................
Illinois.................
Indiana..................
Kansas...................
Kentucky.................
Louisiana................
Maine....................
Maryland.................
Massachusetts............
Michigan.................
Minnesota................
Missouri.................
Nebraska.................
Nevada...................
New Hampshire............
New Jersey...............
New York.................
North Carolina...........
Ohio.....................
Oregon...................
Pennsylvania.............
Rhode Island.............
South Carolina...........
Tennessee................
Texas....................
Utah.....................
Virginia.................
Washington...............
West Virginia............
TOTALS.............. $ %
No more than approximately [ ]% of the mortgage loans are secured by
mortgaged properties located in an y one postal zip code area.
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<PAGE>
PURPOSE OF MORTGAGE LOANS
Aggregate
Number of Principal Balance Percent of
Loan Purpose Mortgage Loans Outstanding Mortgage Pool
------------ -------------- ----------- -------------
Purchase...................
Refinance (rate/term)......
Refinance (cash out).......
TOTALS:...............
TYPES OF MORTGAGED PROPERTIES
Aggregate
Number of Principal Balance Percent of
Property Type Mortgage Loans Outstanding Mortgage Pool
------------- -------------- ----------------- -------------
Single Family*.............
Attached Planned Unit......
Condominium................
2-4 Family.................
TOTALS:...............
*Includes detached units within planned unit developments.
OCCUPANCY TYPES
Aggregate
Number of Principal Balance Percent of
Occupancy Type Mortgage Loans Outstanding Mortgage Pool
-------------- -------------- ----------------- -------------
Primary Residence..........
Second Residence...........
Investor Property..........
TOTALS:...............
The information shown in the above table is based upon representations of
the mortgagor at the time of origination of the mortgage loans.
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<PAGE>
REMAINING TERMS TO MATURITY
Aggregate
Remaining Term to Number of Principal Balance Percent of
Maturity (Months) Mortgage Loans Outstanding Mortgage Pool
---------------- -------------- ----------- -------------
325 - 336 ...........
337 - 348 ...........
349 - 360 ...........
TOTALS:..............
As of the cut-off date, the weighted average remaining term to maturity of
the mortgage loans is expected to be approximately [ ] months.
Assignment of the Mortgage Loans
Pursuant to the pooling and servicing agreement and on the closing date,
the depositor will sell, without recourse, all of its interest in the mortgage
loans and the other assets included in the trust fund, including all principal
and interest received on the mortgage loans after the cut-off date, to the
trustee in trust for the benefit of the certificateholders.
In connection with the sale, the depositor will deliver or cause to be
delivered to the trustee, or a custodian for the trustee, the mortgage file for
each mortgage loan, which contains, among other things,
. the original mortgage note, including any modifications or amendments,
endorsed in blank without recourse, except that the depositor may
deliver or cause to be delivered a lost note affidavit in lieu of any
original mortgage note that has been lost,
. the original mortgage creating a first lien on the related mortgaged
property with evidence of recording,
. an assignment of the mortgage in blank in recordable form,
. either the title policy with respect to the related mortgaged
property, if available, or if the title policy is not available, a
written commitment or interim binder or preliminary report of title
issued by the title insurance or escrow company with respect to the
mortgaged property, provided that the title policy will be delivered
as soon as it becomes available, and
. if applicable, all recorded intervening assignments of the mortgage
and any riders or modifications to the mortgage note and mortgage,
except for any documents not returned from the public recording office or an
original or certified copy of the applicable title policy, to the extent
unavailable, each of which will be delivered to the trustee as soon as the same
is available to the depositor.
With respect to up to 25% of the mortgage loans, the depositor may deliver
all or a portion of each related mortgage file to the trustee (or the custodian,
as applicable) not later than thirty days after the closing date. Assignments of
the mortgage loans to the trustee or its nominee will be recorded in the
appropriate public office for real property records in each state where
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<PAGE>
recording is required in order to protect the trustee's interests in the
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor or the seller.
The trustee (or the custodian, as applicable) will review each mortgage
file within 90 days of the closing date, or promptly after the trustee's (or
custodian's) receipt of any document permitted to be delivered after the closing
date, and if any document in a mortgage file is found to be missing or
materially defective and the seller does not cure the defect within 90 days
after receiving notice of the defect from the trustee (or custodian), or within
such longer period not to exceed 720 days after the closing date as provided in
the pooling and servicing agreement in the case of missing documents not
returned from the public recording office or in the case of the original or
certified copy of the applicable title policy, the seller will be obligated to
repurchase the affected mortgage loan from the trust fund. Rather than
repurchase the mortgage loan as provided above, the seller may, at its option,
remove the affected mortgage loan (referred to as a deleted mortgage loan) from
the trust fund and substitute in its place another mortgage loan (referred to as
a replacement mortgage loan); however, a substitution will only be permitted
within two years of the closing date and may not be made unless an opinion of
counsel is provided to the trustee to the effect that the substitution will not
disqualify the REMIC or result in a prohibited transaction tax under the Code.
On the date of substitution, any replacement mortgage loan will
. have a principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of, and not more than
10% less than, the principal balance of the deleted mortgage loan,
provided that the seller will deposit a Substitution Adjustment Amount
into the Certificate Account for distribution to the
certificateholders on the related distribution date,
. have a mortgage rate not lower than, and not more than one percentage
point per annum higher than, that of the deleted mortgage loan,
. have a loan-to-value ratio not higher than that of the deleted
mortgage loan,
. have a remaining term to maturity not greater than, and not more than
one year less than, the remaining term to maturity of the deleted
mortgage loan, and
. comply with all of the representations and warranties set forth in
the pooling and servicing agreement as of the date of substitution.
This cure, repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the trustee for omission of, or a material
defect in, a mortgage loan document.
SERVICING OF MORTGAGE LOANS
General
The master servicer will service the mortgage loans in accordance with the
terms set forth in the pooling and servicing agreement. See "The Agreements" in
the prospectus. The master servicer may perform any of its obligations under
the pooling and servicing agreement through one or more subservicers.
Notwithstanding any subservicing arrangement, the master servicer will remain
liable for its servicing duties and obligations under the pooling and servicing
agreement as if the master servicer alone were servicing the mortgage loans.
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<PAGE>
The Master Servicer
First Horizon will act as master servicer for the mortgage loans pursuant
to the pooling and servicing agreement. First Horizon is engaged primarily in
the mortgage banking business, and as such, originates, purchases, sells and
services mortgage loans. First Horizon originates mortgage loans through a
retail branch system and through mortgage loan brokers and correspondents
nationwide. First Horizon's mortgage loans are principally first-lien, fixed or
adjustable rate mortgage loans secured by single-family residences.
At [ ], 200[ ], First Horizon provided servicing for approximately $1[ ]
billion aggregate principal amount of mortgage loans, including certain mortgage
loans for which the servicing rights have been sold by the master servicer but
not yet transferred. Substantially all of these mortgage loans are being
serviced for unaffiliated persons.
The principal executive offices of First Horizon are located at 4000
Horizon Way, Irving, Texas 75063.
First Horizon initially services substantially all of the mortgage loans it
originates or acquires. In addition, First Horizon has purchased in bulk the
rights to service mortgage loans originated by other lenders. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, holding escrow (impound) funds for payment of taxes and insurance,
making inspections as required of the mortgaged premises, contacting delinquent
mortgagors, supervising foreclosures in the event of unremedied defaults and
generally administering the loans, for which First Horizon receives servicing
fees. First Horizon has in the past and may in the future sell to other
mortgage bankers a portion of its portfolio of loan servicing rights. In
addition, see "The Agreements -- Evidence as to Compliance" in the prospectus
for a description of the annual servicing report and the report of the
independent public accountants required to be provided by First Horizon in its
capacity as master servicer under the pooling and servicing agreement.
Foreclosure, Delinquency and Loss Experience
Historically, a variety of factors, including the appreciation of real
estate values, have limited the master servicer's loss and delinquency
experience on its portfolio of serviced mortgage loans. There can be no
assurance that factors beyond the master servicer's control, such as national or
local economic conditions or downturns in the real estate markets of its lending
areas, will not result in increased rates of delinquencies and foreclosure
losses in the future.
A general deterioration of the real estate market in regions where the
Mortgaged Properties are located may result in increases in delinquencies of
loans secured by real estate, slower absorption rates of real estate into the
market and lower sales prices for real estate. A general weakening of the
economy may result in decreases in the financial strength of borrowers and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy were to decline, the master servicer may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
The master servicer generally follows the guidelines established by Fannie
Mae with respect to foreclosure and liquidation of mortgage loans. These
guidelines provide for the commencement of foreclosure proceedings when a
scheduled monthly payment has become 90 days past due.
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, on the dates indicated, of all jumbo first lien
mortgage loans serviced or master serviced by the master servicer. The
delinquency, foreclosure and loss percentages may be
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<PAGE>
affected by the size and relative lack of seasoning of the master servicer's
jumbo loan servicing portfolio which increased from approximately $[ ] billion
at [ ], to approximately $[ ] billion at [ ], to approximately $[ ]
billion at [ ], and to approximately $[ ] billion at [ ]. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquency or losses on the mortgage loans and no
assurances can be given that the foreclosure, delinquency and loss experience
presented in the table below will be indicative of the experience on the
mortgage loans underlying the certificates:
[remainder of page intentionally left blank]
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<PAGE>
Delinquency and Foreclosure Experience in First Horizon's Portfolio
of One-to-Four Family, Jumbo Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31,
-----------------
[____] [____[ [____]
No. No. No.
Of % Of Principal % Of Of % Of Principal % Of Of % Of Principal % Of
Loans Loans Balance($) Balance Loans Loans Balance($) Balance Loans Loans Balance($) Balance
----- ----- ---------- ------- ----- ----- ---------- ------- ----- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JUMBO LOAN
PORTFOLIO
Total Portfolio
Period of Delinquency
30-59 Days
60-89 Days
90 Days or more
Foreclosures Pending
Total Delinquencies
As of [ ]
--------------
No.
of % of Principal % of
Loans Loans Balance($) Balance
----- ----- ---------- -------
JUMBO LOAN
PORTFOLIO
Total Portfolio
Period of Delinquency
30-59 Days
60-89 Days
90 Days or more
Foreclosures Pending
Total Delinquencies
</TABLE>
The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All
dollar amounts are reported in thousands. As used in this table, the term "Net
Gains (Losses)" refers to actual gains or losses incurred on liquidated
properties which are calculated as net liquidation proceeds, less book value,
excluding loan purchase premium or discount.
S-29
<PAGE>
The delinquency levels for the master servicer's jumbo loan servicing
portfolio have declined over the years shown in the above tables. This decline
is attributable primarily to the growth and relative lack of seasoning in the
master servicer's jumbo loan servicing portfolio and to generally favorable and
improving economic conditions over this time period. There can be no assurance
that the experience shown in the above tables will be indicative of future loss
and delinquency experience of the master servicer's jumbo loan servicing
portfolio or of the mortgage loans in the trust.
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of all mortgage loans serviced or master
serviced by the master servicer, including certain mortgage loans for which the
servicing rights have been sold by the master servicer but not yet transferred.
These mortgage loans have a variety of underwriting, payment and other
characteristics, many of which differ from those of the mortgage loans, and no
assurances can be given that the delinquency and foreclosure experience
presented in the table below will be indicative of the experience of the
mortgage loans underlying the certificates.
Delinquency and Foreclosure Experience in First Horizon's Total Portfolio
of One-to-Four Family, Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31, As of December 31,
------------------ ------------------
[_] [_]
No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance($) Balance Loans Loans Balance Balance
------ ----- --------- ------- ------ ----- --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL SERVICING
PORTFOLIO
Total Portfolio
Period of Delinquency
30-59 Days
60-89 Days
90 Days or more
Foreclosures Pending
Total Delinquencies
</TABLE>
[___]
[_]
No. of % of Principal % of
Loans Loans Balance($) Balance
------ ----- --------- -------
TOTAL SERVICING
PORTFOLIO
Total Portfolio
Period of Delinquency
30-59 Days
60-89 Days
90 Days or more
Foreclosures Pending
Total Delinquencies
The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands.
S-30
<PAGE>
There can be no assurance that factors beyond the master servicer's
control, such as weakening national or local economic conditions, higher
interest rates, higher unemployment rates, a decline in the availability of
refinancing, or downturns in real estate markets, will not result in increased
rates of delinquencies and foreclosure losses in the future.
Servicing Compensation and Payment of Expenses
The master servicing fee with respect to the mortgage pool is payable out
of the interest payments on each mortgage loan. The master servicing fee will be
equal to 0.244% per annum of the Stated Principal Balance of each such mortgage
loan. The master servicer is obligated to pay some, but not all, of the ongoing
expenses associated with the trust fund and incurred by the master servicer in
connection with its responsibilities under the pooling and servicing agreement.
Those amounts will be paid by the master servicer out of its master servicing
fee. The amount of the master servicing fee is subject to adjustment with
respect to prepaid mortgage loans, as described under "--Adjustment to Master
Servicing Fee in Connection with Certain Prepaid Mortgage Loans." The master
servicer is also entitled to receive, as additional servicing compensation, any
Prepayment Interest Excess, all late payment fees, assumption fees and other
similar charges and all reinvestment income earned on amounts on deposit in the
Certificate Account.
In addition to the master servicing compensation described above, First
Horizon, in its individual capacity, will be entitled to receive excess spread
with respect to each Non-Discount mortgage loan on each distribution date in an
amount equal to the product of (i) the excess of the mortgage rate thereof over
8.00% per annum, and (ii) the Stated Principal Balance thereof.
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans
When a borrower prepays a mortgage loan between due dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except for the month of the cut-off date, principal
prepayments by borrowers received by the master servicer from the first day
through the fifteenth day of a calendar month will be distributed to
certificateholders on the distribution date in the same month in which the
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans results. Conversely, principal prepayments by borrowers received
by the master servicer from the sixteenth day or, in the case of the first
distribution date, from the cut-off date through the last day of a calendar
month will be distributed to certificateholders on the distribution date in the
month after the month of receipt and, accordingly, a shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans would result. Pursuant to the pooling and servicing agreement,
the master servicing fee for any month will be reduced, but not by more than
0.0083% of the Pool Principal Balance as of the related determination date, by
an amount sufficient to pass through to certificateholders the full amount of
interest to which they would be entitled in respect of each such prepaid
mortgage loan on the related distribution date. If shortfalls in interest as a
result of prepayments in full during the period from the sixteenth day of the
month prior to a distribution date through the last day of such month exceed an
amount equal to 0.0083% of the Pool Principal Balance as of the related
determination date, the amount of interest available to be distributed to
certificateholders will be reduced by the amount of the excess. See "Description
of the Certificates -- Interest". Notwithstanding the foregoing, the master
servicer will not be required to pass-through interest to the certificateholders
in respect of partial principal prepayments.
Advances
Subject to the following limitations, the master servicer will be required
to advance before each distribution date, from its own funds or funds in the
Certificate Account that do not constitute Available Funds for the distribution
date, an amount equal to the aggregate of payments of principal and interest on
the mortgage loans (net of the master servicing fee with
S-31
<PAGE>
respect to the related mortgage loans) which were due on the related due date
and which were delinquent on the related determination date, together with an
amount equivalent to interest on each mortgage loan as to which the related
mortgaged property has been acquired by the trust fund through foreclosure or
deed-in-lieu of foreclosure. The determination date will be the third business
day after the 15th day of each month; provided that the determination date in
each month will always be at least two business days before the related
distribution date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates rather than to guarantee or insure
against losses. The master servicer is obligated to make advances with respect
to delinquent payments of principal of or interest on each mortgage loan to the
extent that advances are, in its reasonable judgment, recoverable from future
payments and collections or insurance payments or proceeds of liquidation of the
related mortgage loan. If the master servicer determines on any determination
date to make an advance, the advance will be included with the distribution to
certificateholders on the related distribution date. Any failure by the master
servicer to make a deposit in the Certificate Account as required under the
pooling and servicing agreement, including any failure to make an advance, will
constitute an Event of Default under the pooling and servicing agreement if the
failure remains unremedied for five days after written notice thereof. If the
master servicer is terminated as a result of the occurrence of an Event of
Default, the trustee or the successor master servicer will be obligated to make
advances in accordance with the terms of the pooling and servicing agreement.
Unanticipated Recoveries of Losses on the Mortgage Loans
Holders of certificates that had previously been allocated a Realized Loss
in respect of a mortgage loan -- which holders may, in the event of a transfer
of any such certificate, be different from the holders at the time the Realized
Loss was allocated -- may receive distributions if the servicer subsequently
makes an Unanticipated Recovery in respect of such mortgage loan as a result of
events such as an unanticipated insurance settlement, tax refund or mortgagor
bankruptcy distribution. In such event, the trustee will distribute to the
holders of each outstanding class to which such Realized Loss had previously
been allocated its share of such Unanticipated Recovery in an amount not to
exceed the amount of such loss previously allocated to such class. This
distribution will be made on the distribution date in the calendar month
following receipt of the Unanticipated Recovery. Any distributions of
Unanticipated Recoveries will not reduce the principal balances of the class of
certificates receiving such recoveries. The Class PO Certificates will be
allocated a percentage of any Unanticipated Recovery equal to the percentage of
the loss previously allocated to it in respect of the related mortgage loans,
and the other classes of certificates that were allocated a portion of such loss
will receive a pro rata share of the balance. Notwithstanding the foregoing, no
certificateholder will be entitled to receive any share of an Unanticipated
Recovery following the distribution date on which the principal balance of its
certificates has been reduced to zero, including following the termination of
the trust.
DESCRIPTION OF THE CERTIFICATES
General
The certificates will be issued pursuant to the pooling and servicing
agreement. The following summaries of the material terms pursuant to which the
certificates will be issued do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
pooling and servicing agreement. When particular provisions or terms used in the
pooling and servicing agreement are referred to, the actual provisions,
including definitions of terms, are incorporated by reference.
The certificates will have the respective initial class certificate
balances, subject to a variance of 5%, and pass-through rates set forth on page
S-5.
S-32
<PAGE>
The class certificate balance of any class of certificates, other than the
Class A-7 Certificates, as of any distribution date is the initial class
certificate balance of the class, as reduced by:
. all amounts previously distributed to certificateholders of the class
as payments of principal,
. the amount of Realized Losses, including Excess Losses, allocated to
the class, and
. in the case of any class of subordinated certificates, any amounts
allocated to the class in reduction of its class certificate balance
in respect of payments of Class PO Deferred Amounts, as described
under "--Allocation of Losses."
The Class A-7 Certificates are interest only certificates and will have no
class certificate balance.
In addition, the class certificate balance of the class of subordinated
certificates then outstanding with the highest numerical class designation will
be reduced if and to the extent that the aggregate of the class certificate
balances of all classes of the certificates, following all distributions and the
allocation of Realized Losses on a distribution date, exceeds the Pool Principal
Balance as of the due date occurring in the month of the distribution date.
The senior certificates will have an initial aggregate class certificate
balance of approximately $[ ] and will evidence in the aggregate an initial
beneficial ownership interest of approximately [ ]% in the trust fund. The
Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates
will each evidence in the aggregate an initial beneficial ownership interest of
approximately[ ]%, [ ]%, [ ]%, [ ]%, [ ]%% and [ ]%%, respectively,
in the trust fund.
The Class A-5 Certificates will be entitled to the benefits of a
certificate guaranty insurance policy, or the policy, to be issued by Financial
Security Assurance Inc., referred to in this prospectus supplement as the
insurer. The insurer shall be subrogated to the rights of each holder of a Class
A-5 Certificate to receive distributions, as applicable, on those Class A-5
Certificates to the extent of any payment by the insurer under the policy. See
"The Policy" and "The Insurer" in this prospectus supplement.
The Class PO, Class A-RU and Class A-RL Certificates will be issued in
fully registered certificated form. All of the other classes of offered
certificates will be represented by book-entry certificates. The book-entry
certificates will be issuable in book-entry form only. The Class A-RU and Class
A-RL Certificates will each be issued as a single certificate in a denomination
of $[ ].
Book-Entry Certificates
Each class of book-entry certificates will be issued in one or more
certificates which equal the aggregate initial class certificate balance of the
class of certificates and which will be held by a depository, initially a
nominee of The Depository Trust Company. Beneficial interests in the book-entry
certificates will be held indirectly by investors through the book-entry
facilities of the depository, as described in this prospectus supplement.
Investors may hold beneficial interests in the book-entry certificates in the
minimum denominations set forth on page S-6 and integral multiples of $[ ] in
excess thereof. One investor of each class of book-entry certificates may hold a
beneficial interest in a book entry certificate that is not an integral multiple
of $[ ]. The depositor has been informed by the depository that its nominee
will be CEDE & Co. Accordingly, CEDE & Co. is expected to be the holder of
record of the book-entry certificates. Except as described in the prospectus
under "Description of the Securities -- Book-Entry Securities," no beneficial
owner of a book-entry certificate will be entitled to receive a physical
certificate.
S-33
<PAGE>
Unless and until definitive certificates are issued, it is anticipated that
the only certificateholder of the book-entry certificates will be CEDE & Co., as
nominee of the depository. Beneficial owners of the book-entry certificates will
not be certificateholders, as that term is used in the pooling and servicing
agreement. Beneficial owners are only permitted to exercise the rights of
certificateholders indirectly through financial intermediaries and the
depository. Monthly and annual reports on the trust fund provided to CEDE & Co.,
as nominee of the depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the financial intermediaries to whose
depository accounts the book-entry certificates of the beneficial owners are
credited.
For a description of the procedures generally applicable to the book-entry
certificates, see "Description of the Securities -- Book-Entry Securities" in
the prospectus.
Payments on Mortgage Loans; Accounts
On or before the closing date, the master servicer will establish a
Certificate Account, which will be maintained in trust for the benefit of the
certificateholders. Funds credited to the Certificate Account may be invested
for the benefit and at the risk of the master servicer in Permitted Investments,
as defined in the pooling and servicing agreement, that are scheduled to mature
on or before the business day preceding the next distribution date. On or before
the business day before each distribution date, the master servicer will
withdraw from the Certificate Account the amount of Available Funds and will
deposit the Available Funds into the Distribution Account. The trustee will be
entitled to withdraw its fee from the amounts on deposit in the Distribution
Account each month immediately prior to making the distributions on the
Certificates.
Distributions on the Certificates
Allocation of Available Funds
Interest and principal on the certificates will be distributed monthly on
the 25th day of each month or, if such 25th day is not a business day, on the
succeeding business day, commencing in [ ]. These distributions will be in an
aggregate amount equal to the Available Funds for the related distribution date.
Distributions will be made to holders of record on the close of business on the
last business day of the month prior to the month in which the related
distribution date occurs.
On each distribution date, the Available Funds will be distributed in the
following order of priority among the certificates:
first, to the classes of senior certificates entitled to distributions
of interest, the Accrued Certificate Interest on each such class for such
distribution date, any shortfall in available amounts being allocated among
such classes in proportion to the amount of Accrued Certificate Interest
otherwise distributable thereon;
second, to the classes of senior certificates entitled to
distributions of interest, any Accrued Certificate Interest thereon
remaining undistributed from previous distribution dates, to the extent of
remaining Available Funds, any shortfall in available amounts being
allocated among such classes in proportion to the amount of such Accrued
Certificate Interest remaining undistributed for each such class for such
distribution date;
third, to the classes of senior certificates entitled to principal
distributions, in reduction of the class certificate balances thereof, to
the extent of remaining Available Funds, concurrently, as follows:
S-34
<PAGE>
(1) to the classes of senior certificates, other than the Class
PO Certificates, the Senior Optimal Principal Amount for such
distribution date, in the order of priority set forth below; and
(2) to the Class PO Certificates, the Class PO Principal
Distribution Amount for such distribution date;
fourth, to the Class PO Certificates, to the extent of remaining
Available Funds, the Class PO Deferred Amount for such distribution date,
until the class certificate balance thereof has been reduced to zero;
provided that, (1) on any distribution date, distributions pursuant to this
priority fourth shall not exceed the Subordinated Optimal Principal Amount
for such distribution date, (2) such distributions shall not reduce the
class certificate balance of the Class PO Certificates and (3) no
distribution will be made in respect of the Class PO Deferred Amount after
the Cross Over Date;
fifth, to the Class B-1 Certificates, to the extent of remaining
Available Funds, in the following order: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued Certificate
Interest thereon remaining undistributed from previous distribution dates
and (3) such class's Allocable Share for such distribution date;
sixth, to the Class B-2 Certificates, to the extent of remaining
Available Funds, in the following order: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued Certificate
Interest thereon remaining undistributed from previous distribution dates
and (3) such class's Allocable Share for such distribution date;
seventh, to the Class B-3 Certificates, to the extent of remaining
Available Funds, in the following order: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued Certificate
Interest thereon remaining undistributed from previous distribution dates
and (3) such class's Allocable Share for such distribution date; and
eighth, to the Class B-4, Class B-5 and Class B-6 Certificates, to the
extent of remaining Available Funds: (1) the Accrued Certificate Interest
thereon for such distribution date, (2) any Accrued Certificate Interest
thereon remaining undistributed from previous distribution dates and (3)
such class's Allocable Share for such distribution date.
The trustee will distribute to the insurer the applicable premium payable
in respect of the policy for the Class A-5 Certificates concurrently with the
distribution of interest in respect of the Class A-5 Certificates pursuant to
priority first above.
Amounts allocated to the senior certificates (other than the Class PO
Certificates) pursuant to priority third above will be distributed in the
following order of priority:
(a) to the Class A-6 Certificates, in an amount equal to the Class A-
6 Principal Distribution Amount for such distribution date, until the class
certificate balance thereof has been reduced to zero; and
(b) to the classes of senior certificates, other than the Class A-6
and Class A-7 Certificates, the Senior Optimal Principal Amount, less the
Class A-6 Principal Distribution Amount, in the following order of
priority:
(i) concurrently, to the Class A-RU and Class A-RL Certificates,
until the respective class certificate balances thereof have been
reduced to zero;
(ii) commencing on the distribution date in [ ], an amount
equal to approximately [ ] to the Class A-5 Certificates, until the
class certificate balance thereof has been reduced to zero;
S-35
<PAGE>
(iii) sequentially, to the Class A-1 and Class A-2 Certificates,
in that order, until the respective class certificate balances thereof
have been reduced to zero;
(iv) concurrently until the class certificate balances of the
Class A-3 and Class A-4 Certificates have been reduced to zero, (A)
approximately [ ]% to the Class A-5 Certificates, until the class
certificate balance thereof has been reduced to zero, and (B)
approximately [ ]% sequentially to the Class A-3 and Class A-4
Certificates, in that order, until the respective class certificate
balances thereof have been reduced to zero; and
(v) the remaining amount, to the Class A-5 Certificates, until
the class certificate balance thereof has been reduced to zero.
On each distribution date after the Cross-Over Date, distributions of
principal on the outstanding senior certificates entitled to principal
distributions (other than the Class PO Certificates) will be made pro rata among
all such certificates, regardless of the allocation, or sequential nature, of
principal payments described above.
Interest
Interest will accrue on the class certificate balances (or the Notional
Amount, in the case of the Class A-7 Certificates) of the certificates offered
hereby at the respective pass-through rates set forth in the table on page S-5
during each interest accrual period. The interest accrual period for each class
of certificates entitled to distributions of interest will be the one-month
period ending on the last day of the month preceding the month in which a
distribution date occurs. Interest will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
The Notional Principal Amount of the Class A-7 Certificates will be
determined by reference to the class certificate balances of the Class A-3,
Class A-4 and Class A-5 Certificates. See "Yield, Prepayment and Maturity
Considerations -- Yield Sensitivity of Class A-7 Certificates" in this
prospectus supplement.
The Class PO Certificates are principal only certificates and will not
accrue interest.
As to any distribution date and any mortgage loan with respect to which a
prepayment in full has occurred during the period from the sixteenth day of the
month preceding the distribution date through the last day of such month, the
resulting "Interest Shortfall" generally will equal the difference between (a)
one month's interest at the Net Mortgage Rate on the Stated Principal Balance of
such mortgage loan, and (b) the amount of interest at the Net Mortgage Rate
actually received with respect to such mortgage loan during such period. In the
case of a partial prepayment, the resulting "Interest Shortfall" will equal one
month's interest at the applicable Net Mortgage Rate on the amount of such
prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
through the Cross-Over Date and, after the Cross-Over Date, the interest portion
of any Realized Losses (see "-- Allocation of Realized Losses on the
Certificates" below) will, on each distribution date, be allocated among all the
outstanding certificates entitled to distributions of interest in proportion to
the amount of Accrued Certificate Interest that would have been allocated
thereto in the absence of such shortfall and losses. See "Servicing of the
Mortgage Loans -- Adjustment to Master Servicing Fee in Connection with Prepaid
Mortgage Loans" herein. Notwithstanding the foregoing, any Net Interest
Shortfalls in respect of the Class A-5 Certificates will be covered by the
Reserve Fund described below (to the extent of funds on deposit in the Reserve
Fund) or the policy (if there are no amounts remaining on deposit in the Reserve
Fund). However, the policy will not cover any interest shortfalls resulting from
Relief Act Reductions. See "The Policy" in this prospectus supplement.
S-36
<PAGE>
[Underwriter] will establish the Reserve Fund with the trustee on the
closing date and will deposit approximately $10,000 into the Reserve Fund on
such date. The Reserve Fund will be maintained by the trustee in a separate
account. The Reserve Fund will be beneficially owned by [Underwriter] and will
not be an asset of the trust. The trustee will make withdrawals of amounts on
deposit in the Reserve Fund, to the extent funds are available in the Reserve
Fund, on each distribution date to cover any Net Interest Shortfalls allocated
to the Class A-5 Certificates. Once the amounts on deposit in the Reserve Fund
have been reduced to zero, the policy will cover any Net Interest Shortfalls,
other than interest shortfalls resulting from Relief Act Reductions, allocated
to the Class A-5 Certificates. Any amount remaining on deposit in the Reserve
Fund on the distribution date on which the class certificate balance of the
Class A-5 Certificates has been reduced to zero will be distributed to
[Underwriter]
The interest portion of any Realized Losses (other than Excess Losses)
occurring prior to the Cross-Over Date will not be allocated among any
certificates, but will reduce the amount of Available Funds on the related
distribution date. As a result of the subordination of the subordinated
certificates in right of distribution, such losses will be borne first by the
outstanding subordinated certificates in inverse order of priority.
If Available Funds are insufficient on any distribution date to distribute
the aggregate Accrued Certificate Interest on the senior certificates entitled
to distributions of interest to their certificateholders, any shortfall in
available amounts will be allocated among such classes of senior certificates in
proportion to the amounts of Accrued Certificate Interest otherwise
distributable thereon. The amount of any such undistributed Accrued Certificate
Interest will be added to the amount of interest to be distributed on the senior
certificates entitled to distributions of interest on subsequent distribution
dates in accordance with priority second of the second paragraph under "--
Allocations of Available Funds" above. No interest will accrue on any Accrued
Certificate Interest remaining undistributed from previous distribution dates.
Principal
Distributions in reduction of the class certificate balance of each class
of certificates entitled to principal distributions will be made on each
distribution date.
The Class A-7 Certificates are interest only certificates and will not
receive distributions of principal.
All payments and other amounts received in respect of principal of the
mortgage loans will be allocated between (1) the senior certificates entitled to
principal distributions (other than the Class PO Certificates) and the
subordinated certificates, on the one hand, and (2) the Class PO Certificates,
on the other, in each case based on the applicable Non-PO Percentage and the
applicable PO Percentage, respectively, of such amounts.
The initial class certificate balance of the Class PO Certificates will be
approximately $[ ].
Distributions in reduction of the class certificate balance of each class
of senior certificates entitled to principal distributions will be made on each
distribution date as described under "-- Allocation of Available Funds" above.
In accordance with priority third of the Available Funds Allocation, the
Available Funds remaining after the distribution of interest will be allocated
to such senior certificates in an aggregate amount not to exceed the sum of the
Senior Optimal Principal Amount and the Class PO Principal Distribution Amount
for such distribution date. Distributions in reduction of the class certificate
balances of the Class B-1, Class B-2 and Class B-3 Certificates will be made
pursuant to priorities fifth, sixth and seventh, respectively, of the Available
Funds Allocation. In accordance with each such priority, the Available Funds, if
any, remaining after distributions of principal and interest on the senior
certificates and payments in respect of the Class PO Deferred Amount on such
distribution date will be allocated to each class of the Class B Certificates in
an amount equal to each such class's Allocable Share for such distribution date,
provided that no distribution of principal will be made
S-37
<PAGE>
on any such class until any class ranking prior thereto has received
distributions of interest and principal, and such class has received
distributions of interest, on such distribution date. The Class A-6 Certificates
will not receive any distributions in respect of scheduled payments of principal
and prepayments or certain other unscheduled recoveries of principal on the
mortgage loans during the first five years after the date of initial issuance of
the certificates, except as otherwise described herein on or following the
earlier of the Group I Final Distribution Date and the Cross-Over Date.
If, on any distribution date, the class certificate balance of any class of
Class B Certificates for which the related Class Prepayment Distribution Trigger
was satisfied on such distribution date is reduced to zero, any amounts
distributable to such class under clauses (2), (3) and (5) of the definition of
Subordinated Optimal Principal Amount, to the extent of such class's remaining
Allocable Share, will be distributed to the remaining classes of subordinated
certificates in reduction of their respective class certificate balances in
order of priority. If the Class Prepayment Distribution Trigger is not satisfied
for any class of Class B Certificates (other than the Class B-1 Certificates, to
which it is not applicable) on any distribution date, this may have the effect
of accelerating the amortization of more senior ranking classes of subordinated
certificates because the amount otherwise distributable to such class under
clauses (2), (3) and (5) of the definition of Subordinated Optimal Principal
Amount will be distributable among the outstanding classes of the Class B
Certificates as to which the related Class Prepayment Distribution Trigger has
been satisfied on a pro rata basis subject to the priority of payments described
herein. On any distribution date, any reduction in funds available for
distribution to the classes of subordinated certificates resulting from a
distribution of the Class PO Deferred Amount to the Class PO Certificates will
be allocated to the classes of subordinated certificates, in reduction of the
Allocable Shares thereof, in inverse order of priority.
Principal Distributions on the Class A-5 Certificates
General. Beneficial owners of the Class A-5 Certificates have the right to
request that distributions of principal be made with respect to their
certificates on any distribution date on which that class of certificates is
entitled to receive distributions of principal. As to distributions of principal
among holders of the Class A-5 Certificates, Deceased Holders who request
distributions will be entitled to first priority, and Living Holders who request
distributions will be entitled to a second priority.
Prospective certificateholders in the Class A-5 Certificates should be
aware that distributions of principal on those certificates may be significantly
earlier or later than the date that may be desired by that certificateholder.
All such requested distributions are subject to the priorities described below
under "-- Priority of Requested Distributions" and are further subject to the
limitation that they be made (i) only in lots equal to integral multiples of
$1,000 of initial class certificate balance, each such certificate referred to
as an "Individual Class A-5 Certificate" and (ii) only to the extent that the
portion of the Senior Optimal Principal Amount allocated to the Class A-5
Certificates on the applicable distribution date (plus any amounts available
from the Rounding Account) provides sufficient funds for such requested
distributions. To the extent that amounts available for distributions in respect
of principal on the Class A-5 Certificates on any distribution date exceed the
aggregate amount of the requests made by Deceased Holders and Living Holders for
principal distributions applicable to that distribution date, such excess
amounts will be distributed to the beneficial owners of Class A-5 Certificates
by random lot, as described below under "-- Mandatory Distributions of Principal
on the Class A-5 Certificates."
On each distribution date on which amounts are available for distributions
in reduction of the class certificate balance of the Class A-5 Certificates, the
aggregate amount allocable to such distributions for that class will be rounded,
as necessary, to an amount equal to an integral multiple of $1,000, except as
provided below, in accordance with the limitations set forth in this prospectus
supplement. Such rounding will be accomplished on the first distribution date on
which distributions of principal on the Class A-5 Certificates are made by
withdrawing from the
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Rounding Account the amount of funds, if any, needed to round the amount
otherwise available for that distribution with respect to the Class A-5
Certificates upward to the next higher integral multiple of $1,000. On each
succeeding distribution date on which distributions of principal on the Class A-
5 Certificates are to be made, the aggregate amount allocable to the Class A-5
Certificates will be applied first to repay any funds withdrawn from the
Rounding Account on the prior distribution date, and then the remainder of such
allocable amount, if any, will be similarly rounded upward through another
withdrawal from the Rounding Account and distributed in reduction of the class
certificate balance of the Class A-5 Certificates. This process will continue on
succeeding distribution dates until the class certificate balance of the Class
A-5 Certificates has been reduced to zero. Thus, the aggregate distribution made
in reduction of the class certificate balance of the Class A-5 Certificates on
each distribution date may be slightly more or less than would be the case in
the absence of such rounding procedures, but such difference will be no more
than $999.99 on any distribution date. Under no circumstances will the sum of
all distributions made in reduction of the class certificate balance of the
Class A-5 Certificates, through any distribution date, be less than the sum of
such distributions that would have resulted in the absence of such rounding
procedures. The Class A-RL Certificates will be entitled to any amount remaining
in the Rounding Account after the class certificate balance of the Class A-5
Certificates has been reduced to zero.
Notwithstanding any provisions in this prospectus supplement to the
contrary, on each distribution date following the first distribution date on
which any Realized Losses are allocated to the Class A-5 Certificates for which
payment is not made under the policy, distributions in reduction of the class
certificate balance of the Class A-5 Certificates will be made pro rata among
the holders of the Class A-5 Certificates and will not be made in integral
multiples of $1,000 or pursuant to requested distributions or mandatory
distributions by random lot.
There is no assurance that a beneficial owner of a Class A-5 Certificate
who has submitted a request for a distribution will receive the distribution at
any particular time after the distribution is requested, since there can be no
assurance that funds will be available for making those distributions on any
particular distribution date, or, even if funds are available for making
principal distributions on the Class A-5 Certificates, that such distributions
will be made to any particular beneficial owner whether that beneficial owner is
a Deceased Holder or a Living Holder. Also, due to the procedure for mandatory
distributions described below under "--Mandatory Distributions of Principal on
the Class A-5 Certificates," there can be no assurance that on any distribution
date on which the funds available for distribution in respect of principal of
the Class A-5 Certificates exceed the aggregate amount of distributions
requested by beneficial owners of certificates of that class, any particular
beneficial owner will receive a principal distribution from those excess funds.
Thus, the timing of distributions in reduction of the class certificate balance
for any particular Class A-5 Certificate, whether or not the subject of a
request for distribution by a Deceased Holder or a Living Holder, is highly
uncertain and may be made earlier or later than the date that may be desired by
a beneficial owner of that certificate.
Priority of Requested Distributions. Subject to the limitations described
in this prospectus supplement, including the timing and the order of the receipt
of the request for distributions as described below under "-- Procedure for
Requested Distributions," beneficial owners of the Class A-5 Certificates have
the right to request that distributions be made in reduction of the class
certificate balance of those certificates. On each distribution date on which
distributions in reduction of the class certificate balance of the Class A-5
Certificates are made, those distributions will be made in the following order
of priority: (i) any request by a Deceased Holder, in an amount up to but not
exceeding $100,000 per request; and (ii) any request by a Living Holder, in an
amount up to but not exceeding $10,000 per request. Thereafter, distributions
will be made as provided in clauses (i) and (ii) above up to a second $100,000
and $10,000, respectively. This sequence of priorities will be repeated for each
request for principal distributions made by the beneficial owners of those Class
A-5 Certificates until all such requests have been honored.
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<PAGE>
Procedure for Requested Distributions. Under the current procedures of DTC,
a beneficial owner may request that distributions in reduction of the class
certificate balance of its Class A-5 Certificates be made on a distribution date
by delivering a written request for those distributions to the participant or
indirect participant that maintains the beneficial owner's account with respect
to the Class A-5 Certificates so that such request is received by the trustee
from DTC on DTC's "participant terminal system" on or before the close of
business on the last business day of the month next preceding the month in which
the related distribution date occurs, or the record date for such distribution
date. In the case of a request on behalf of a Deceased Holder, appropriate
evidence of death and any tax waivers are required to be forwarded to the
participant under separate cover. Furthermore, those requests of Deceased
Holders that are incomplete may not be honored by the participant. The
participant shall forward a certification satisfactory to the trustee certifying
the death of the beneficial owner and the receipt of the appropriate death and
tax waivers. The participant should in turn make the request of DTC (or, in the
case of an indirect participant, such firm must notify the related participant
of such request, which participant should make the request of DTC) on DTC's
participant terminal system. The trustee will not accept a request from a person
other than DTC. DTC may establish such procedures as it deems fair and equitable
to establish the order of receipt of requests for those requests for
distributions received by it on the same day. None of the master servicer, the
depositor or the trustee shall be liable for any delay by DTC, any participant
or any indirect participant in the delivery of requests for distributions or
withdrawals of those distributions to the trustee or for any changes made to the
procedures described herein by DTC, any participant or any indirect participant.
Requests for distributions are to be honored in the order of their receipt
(subject to the priorities described in the previous paragraph). The exact
procedures to be followed by the trustee for purposes of determining the order
of receipt of such requests will be those established from time to time by DTC.
Requests for distributions of principal received by DTC and forwarded to the
trustee on DTC's participant terminal system after the record date for such
distribution date and requests for principal distributions received in a timely
manner but not accepted with respect to a given distribution date, will be
treated as requests for distributions on the next succeeding distribution date
and each succeeding distribution date thereafter until each request is accepted
or is withdrawn as described below. Each request for distributions in reduction
of the class certificate balance of a Class A-5 Certificate submitted by a
beneficial owner of that certificate will be held on DTC's participant terminal
system until such request has been accepted by the trustee or has been withdrawn
by the participant in writing. Each Individual Class A-5 Certificate covered by
that request will continue to bear interest at the related pass-through rate
through the interest accrual period related to such distribution date.
In the case of a request on behalf of a Deceased Holder, the related
participant shall forward certification satisfactory to the trustee certifying
the death of the beneficial owner and the receipt of the appropriate death and
tax waivers. Class A-5 Certificates beneficially owned by tenants by the
entirety, joint tenants or tenants in common will be considered to be
beneficially owned by a single owner. The death of a tenant by the entirety,
joint tenant or tenant in common will be deemed to be the death of the
beneficial owner, and the Class A-5 Certificates so beneficially owned will be
eligible to request priority with respect to distributions in reduction of the
class certificate balance of those certificates, subject to the limitations
stated in this prospectus supplement. The Class A-5 Certificates beneficially
owned by a trust will be considered to be beneficially owned by each beneficiary
of the trust to the extent of such beneficiary's beneficial interest in that
trust, but in no event will a trust's beneficiaries collectively be deemed to be
beneficial owners of a number of Individual Class A-5 Certificates greater than
the number of Individual Class A-5 Certificates of which such trust is the
owner. The death of a beneficiary of a trust will be deemed to be the death of a
beneficial owner of the Class A-5 Certificates beneficially owned by the trust
but only to the extent of such beneficiary's beneficial interest in that trust.
The death of an individual who was a tenant by the entirety, joint tenant or
tenant in common in a tenancy which is the beneficiary of a trust will be deemed
to be the death of the beneficiary of the trust. The death of a person who,
during his or her lifetime, was entitled to substantially all of the beneficial
ownership interests in Class A-5 Certificates will be deemed to be the death of
the beneficial owner of those certificates regardless of the registration of
ownership, if that beneficial interest can be established to the satisfaction of
the participant. Such beneficial interest will be deemed to exist in typical
cases of street name or
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<PAGE>
nominee ownership, ownership by a trustee, ownership under the applicable
Uniform Gift to Minors Act or Uniform Transfers to Minors Act and community
property or other joint ownership arrangements between a husband and wife.
Beneficial interest shall include the power to sell, transfer or otherwise
dispose of a Class A-5 Certificate and the right to receive the proceeds
therefrom, as well as interest and distributions of principal with respect
thereto. As used in this prospectus supplement, a request for a distribution in
reduction of the class certificate balance of a Class A-5 Certificate by a
Deceased Holder shall mean a request by the personal representative, surviving
tenant by the entirety, surviving joint tenant or a surviving tenant in common
of the Deceased Holder.
With respect to Class A-5 Certificates as to which beneficial owners have
requested distributions to be made on a particular distribution date and on
which distributions of principal are being made, the trustee will notify DTC
prior to that distribution date whether, and the extent to which, those
certificates have been accepted for distributions. Participants and indirect
participants holding Class A-5 Certificates are required to forward such notices
to the beneficial owners of those certificates. Individual Class A-5
Certificates that have been accepted for a distribution will be due and payable
on the applicable distribution date and will cease to bear interest after the
interest accrual period related to such distribution date.
Any beneficial owner of a Class A-5 Certificate who has requested a
distribution may withdraw its request by so notifying in writing the participant
or indirect participant that maintains that beneficial owner's account. In the
event that such account is maintained by an indirect participant, the indirect
participant must notify the related participant which in turn must forward the
withdrawal of such request, on DTC's participant terminal system. If that notice
of withdrawal of a request for distribution has not been received on DTC's
participant terminal system on or before the record date for such distribution
date, the previously made request for distribution will be irrevocable with
respect to the making of distributions in reduction of the class certificate
balance of that Class A-5 Certificate on the applicable distribution date.
Mandatory Distributions of Principal on the Class A-5 Certificates. To the
extent, if any, that distributions in reduction of the class certificate balance
of the Class A-5 Certificates on a distribution date exceed the outstanding
class certificate balance of Class A-5 Certificates with respect to which
distribution requests have been received by the applicable record date,
additional Class A-5 Certificates in lots equal to Individual Class A-5
Certificates will be selected to receive principal distributions in accordance
with the then-applicable established random lot procedures of DTC, and the then-
applicable established procedures of the participants and indirect participants,
which may or may not be by random lot. No prior notice will be provided by the
depositor, the master servicer or the trustee to the beneficial owners of the
Class A-5 Certificates for those distributions made by random lot. Investors may
ask those participants or indirect participants what allocation procedures they
use. Participants and indirect participants holding Class A-5 Certificates
selected for mandatory distributions of principal are required to provide notice
of those mandatory distributions to the affected beneficial owners.
Allocation of Realized Losses on the Certificates
Losses Allocable to the Class PO Certificates
On each distribution date, the applicable PO Percentage of the principal
portion of any Realized Loss (including any Excess Loss) on a Discount mortgage
loan will be allocated to the Class PO Certificates until the class certificate
balance thereof is reduced to zero.
To the extent funds are available therefor on any distribution date through
the Cross-Over Date, distributions in respect of the Class PO Deferred Amount
will be made on the Class PO Certificates in accordance with priority fourth of
the second paragraph under "-- Distributions on the Certificates -- Allocation
of Available Funds" above. Any distribution of Available Funds in respect of the
Class PO Deferred Amount will not reduce the class certificate balance of
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the Class PO Certificates. No interest will accrue on the Class PO Deferred
Amount. On each distribution date through the Cross-Over Date, the class
certificate balance of the lowest ranking class of subordinated certificates
then outstanding will be reduced by the amount of any distributions made to the
Class PO Certificates in respect of the Class PO Deferred Amount on such
distribution date, through the operation of the Class PO Deferred Payment
Writedown Amount. After the Cross-Over Date, no distributions will be made in
respect of the Class PO Deferred Amount and Realized Losses allocated to the
Class PO Certificates will be borne by them without a right of reimbursement
from any other class of certificates. Any distribution of Unanticipated
Recoveries on the Class PO Certificates will be adjusted to take into account
the Class PO Deferred Amount previously paid to such class as specified in the
Agreement. See "Servicing of the Mortgage Loans -- Unanticipated Recoveries of
Losses on the Mortgage Loans."
Losses Allocable to Certificates other than the Class PO Certificates
Prior to the Cross-Over Date (and on such date under certain
circumstances), the applicable Non-PO Percentage of the principal portion of any
Non-Excess Loss will be allocated among the outstanding classes of subordinated
certificates, in inverse order of priority, until the class certificate balance
of each such class has been reduced to zero (i.e., Non-Excess Losses will be
allocated first to the Class B-6 Certificates while such certificates are
outstanding, second to the Class B-5 Certificates, and so on). The Non-PO
Percentage of the principal portion of any Fraud Losses, Special Hazard Losses
and Bankruptcy Losses occurring prior to the reduction of the Fraud Loss
Coverage Amount, the Special Hazard Loss Coverage Amount and the Bankruptcy Loss
Coverage Amount, respectively, to zero will also be allocated to the
subordinated certificates in the manner described in the preceding sentence.
Commencing on the Cross-Over Date, the applicable Non-PO Percentage of the
principal portion of any Realized Loss will be allocated among the outstanding
classes of senior certificates entitled to principal distributions (other than
the Class PO Certificates) pro rata based upon their class certificate balances.
As indicated above, Fraud Losses, Special Hazard Losses and Bankruptcy
Losses occurring after the Fraud Loss Coverage Amount, Special Hazard Loss
Coverage Amount and the Bankruptcy Loss Coverage Amount, respectively, have been
reduced to zero will be Excess Losses. The applicable Non-PO Percentage of the
principal portion of any Excess Loss on a mortgage loan for any distribution
date (whether occurring before, on or after the Cross-Over Date) will be
allocated pro rata among all outstanding classes of certificates entitled to
principal distributions (other than the Class PO Certificates) based on their
class certificate balances.
Upon the initial issuance of the certificates, the Fraud Loss Coverage
Amount will equal approximately $[ ] (approximately 1.0% of the aggregate
Stated Principal Balances of the mortgage loans as of the Cut-off Date). As of
any distribution date prior to the third anniversary of the Cut-off Date, the
Fraud Loss Coverage Amount will equal approximately $[ ] minus the aggregate
amount of Fraud Losses that would have been allocated to the subordinated
certificates in the absence of the Loss Allocation Limitation since the Cut-off
Date. As of any distribution date from the third to the fifth anniversaries of
the Cut-off Date, the Fraud Loss Coverage Amount will equal (1) the lesser of
(a) the Fraud Loss Coverage Amount as of the most recent anniversary of the Cut-
off Date and (b) 0.5% of the aggregate outstanding principal balance of all of
the mortgage loans as of the most recent anniversary of the Cut-off Date minus
(2) the Fraud Losses that would have been allocated to the subordinated
certificates in the absence of the Loss Allocation Limitation since the most
recent anniversary of the Cut-off Date. As of any distribution date on or after
the earlier of the Cross-Over Date or the fifth anniversary of the Cut-off Date,
the Fraud Loss Coverage Amount shall be zero.
Upon the initial issuance of the certificates, the Special Hazard Loss
Coverage Amount will equal approximately $[ ] (approximately 1.1% of the
aggregate Stated Principal Balances of the mortgage loans as of the Cut-off
Date). As of any distribution date, the Special Hazard Loss Coverage Amount will
equal the greater of
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. 1% (or if greater than 1%, the hig hest percentage of mortgage loans by
principal balance secured by mortgaged properties in any single
California zip code) of the outstanding principal balance of all the
mortgage loans as of the related Determination Date, and
. twice the outstanding principal balance of the mortgage loan which has
the largest outstanding principal balance as of the related
Determination Date,
less, in each case, the aggregate amount of Special Hazard Losses that would
have been previously allocated to the subordinated certificates in the absence
of the Loss Allocation Limitation.
As of any distribution date on or after the Cross-Over Date, the Special
Hazard Loss Coverage Amount will be zero.
On each distribution date, the Bankruptcy Loss Coverage Amount will equal
approximately $[ ], subject to reduction as described in the Agreement, minus
the aggregate amount of previous Deficient Valuations and Debt Service
Reductions. As of any distribution date on or after the Cross-Over Date, the
Bankruptcy Loss Coverage Amount will be zero. The Bankruptcy Loss Coverage
Amount and the manner of reduction thereof described in the Agreement may be
reduced or modified upon written confirmation from each of the Rating Agencies
that such reduction or modification will not adversely affect the then current
ratings of the senior certificates. Such reduction may adversely affect the
coverage provided by subordination with respect to Bankruptcy Losses.
Method of Allocating Realized Losses
All allocations of Realized Losses to a class of certificates will be
accomplished on a distribution date by reducing the class certificate balance
thereof by the appropriate share of any such losses occurring during the month
preceding the month of such distribution date and, accordingly, will be taken
into account in determining the distributions of principal and interest on such
certificates commencing on the following distribution date. The aggregate amount
of the principal portion of any Non-Excess Losses to be allocated to the Class
PO Certificates on any distribution date through the Cross-Over Date will also
be taken into account in determining distributions in respect of the Class PO
Deferred Amount for such distribution date.
The interest portion of all Realized Losses will be allocated among the
outstanding classes of certificates entitled to distributions of interest to the
extent described under "-- Distributions on the Certificates -- Interest" above.
No reduction of the class certificate balance of any class will be made on
any distribution date on account of any Realized Loss to the extent that such
reduction would have the effect of reducing the aggregate class certificate
balances of all classes of the certificates as of such distribution date to an
amount less than the Pool Principal Balance as of the first day of the month of
such distribution date, less any Deficient Valuations occurring before the
Bankruptcy Loss Coverage Amount has been reduced to zero (such limitation being
the "Loss Allocation Limitation").
Debt Service Reductions are not treated as Realized Losses, and the
principal portion thereof will not be allocated in reduction of the class
certificate balance of any class of certificates. However, after the Bankruptcy
Loss Coverage Amount has been reduced to zero, the amounts distributable under
clause (1) of the definitions of Senior Optimal Principal Amount, Class PO
Principal Distribution Amount and Subordinated Optimal Principal Amount will be
reduced by the amount of the principal portion of any Debt Service Reductions.
Regardless of when they occur, Debt Service Reductions may reduce the amount of
Available Funds otherwise available for distribution on a distribution date. As
a result of the subordination of the subordinated certificates in right of
distribution, the reduction in Available Funds resulting from
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<PAGE>
any Debt Service Reductions before the Bankruptcy Loss Coverage Amount has been
reduced to zero will be borne by the subordinated certificates (to the extent
then outstanding) in inverse order of priority.
Notwithstanding the foregoing, with respect to the Class A-5 Certificates,
the policy will cover the interest and principal portions of all Realized Losses
allocated thereto. See "The Policy" in this prospectus supplement. If payments
are not made as required under the policy, Realized Losses allocated to the
Class A-5 Certificates will be borne by the holders of such certificates.
Voting Rights
There are actions specified in the prospectus that may be taken by holders
of certificates evidencing a specified percentage of all undivided interests in
the trust and may be taken by holders of certificates entitled in the aggregate
to that percentage of the voting rights. 98% of all voting rights will be
allocated among all holders of the certificates, other than the Class A-7, Class
A-RU and Class A-RL Certificates, in proportion to their then outstanding class
certificate balances. In addition, 1% of all voting rights will be allocated
among the holders of the Class A-7 Certificates in proportion to their then
outstanding Notional Principal Amounts, and 0.50% of all voting rights will be
allocated among the holders of each of the Class A-RU and Class A-RL
Certificates, in each case in proportion to the percentage interests evidenced
by their respective certificates. The pooling and servicing agreement may be
amended without the consent of the certificateholders in specified
circumstances.
Notwithstanding the foregoing, so long as there does not exist a failure by
the insurer to make a required payment under the policy, the insurer shall have
the right to exercise all rights of the holders of the Class A-5 Certificates
under the pooling and servicing agreement without any consent of such holders,
and such holders may exercise such rights only with the prior written consent of
the insurer except as provided in the pooling and servicing agreement.
Additional Rights of the Residual Certificateholders
In addition to distributions of principal and interest the holders of the
Residual Certificates will be entitled to receive:
(a) the amount, if any, of Available Funds remaining in the related
REMIC on any distribution date after distributions of interest and
principal and in respect of the Class PO Deferred Amount are made on the
certificates on such date; and
(b) as to the Class A-RL Certificates only, the amount of any
Unanticipated Recoveries received by the Master Servicer in the calendar
month preceding the month of a distribution date and not otherwise
allocated to other classes of certificates as described in "Servicing of
the Mortgage Loans -- Unanticipated Recoveries of Losses on the Mortgage
Loans"; and
(c) the proceeds, if any, of the assets of the trust remaining in the
related REMIC after the class certificate balances of all classes of the
certificates have each been reduced to zero.
It is not anticipated that any material assets will be remaining for such
distributions on the Residual Certificates at any such time. See "Federal Income
Tax Consequences -- Residual Certificates" herein.
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<PAGE>
Subordination
Priority of Senior Certificates
As of the date of the initial issuance of the certificates, the aggregate
class certificate balance of the classes of subordinated certificates will equal
approximately 4.25% of the aggregate class principal balance of all the classes
of certificates. The rights of the holders of the subordinated certificates to
receive distributions with respect to the mortgage loans will be subordinate to
such rights of the holders of the senior certificates, to the extent described
above. The subordination of the subordinated certificates is intended:
(a) to enhance the likelihood of timely receipt by the holders of the
senior certificates (to the extent of the subordination of the subordinated
certificates) of the full amount of the scheduled monthly distributions of
principal and interest allocable to the senior certificates; and
(b) to afford the holders of the senior certificates (to the extent of the
subordination of the subordinated certificates) protection against Realized
Losses, to the extent described above.
If Realized Losses exceed the credit support provided to the senior
certificates through subordination, or if Excess Losses occur, all or a portion
of such losses will be borne by the senior certificates.
The protection afforded to the holders of senior certificates by means of
the subordination feature will be accomplished by:
(1) the preferential right of such holders to receive, prior to any
distribution being made on a distribution date in respect of the
subordinated certificates, in accordance with the paydown rules specified
above under "-- Distributions on the Certificates -- Allocation of
Available Funds," the amounts due to the senior certificateholders on each
distribution date out of the Available Funds with respect to such date and,
if necessary, by the right of such holders to receive future distributions
on the mortgage loans that would otherwise have been payable to the holders
of the subordinated certificates;
(2) the allocation to the subordinated certificates of the applicable
Non-PO Percentage of the principal portion of any Non-Excess Loss to the
extent set forth herein; and
(3) the allocation to the subordinated certificates of the applicable
PO Percentage of the principal portion of any Non-Excess Loss to the extent
set forth herein through the operation of the Class PO Deferred Payment
Writedown Amount.
The allocation of the principal portion of Realized Losses (as set forth
herein) to the subordinated certificates on any distribution date will decrease
the protection provided to the senior certificates then outstanding on future
distribution dates by reducing the aggregate class certificate balance of the
classes of subordinated certificates then outstanding.
In addition, in order to extend the period during which the subordinated
certificates remain available as credit enhancement for the senior certificates,
the entire amount of the applicable Non-PO Percentage of any prepayment or other
unscheduled recovery of principal with respect to a mortgage loan will be
allocated to the senior certificates as a whole entitled to principal
distributions (other than the Class PO Certificates) during at least the first
five years after the date of initial issuance of the certificates, with such
allocation being subject to reduction thereafter as described herein. This
allocation has the effect of accelerating the amortization of such senior
certificates as a group while, in the absence of losses in respect of the
mortgage loans, increasing the percentage interest in the principal balance of
the mortgage loans evidenced by the subordinated certificates. Among such senior
certificates, such amounts will be allocated to the outstanding Group I Senior
Certificates during the first five years after the date of initial
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<PAGE>
issuance of the certificates (except as otherwise described herein on or
following the Group I Final Distribution Date) with such allocation being
subject to reduction thereafter as described herein, except that such amounts
will be allocated pro rata among all of the outstanding senior certificates
entitled to principal distributions (other than the Class PO Certificates) on
each distribution date after the Cross-Over Date. In addition, the Class A-6
Certificates are not entitled to receive scheduled principal payments or
prepayments during the first five years after the closing date (except as
otherwise described herein on or after the Group I Final Distribution Date).
After the payment of amounts distributable in respect of the senior
certificates on each distribution date, the subordinated certificates will be
entitled on such date to the remaining portion, if any, of the Available Funds
in an aggregate amount equal to the Accrued Certificate Interest on the
subordinated certificates for such date, any remaining undistributed Accrued
Certificate Interest thereon from previous distribution dates and the sum of the
Allocable Shares of the classes of subordinated certificates. Amounts so
distributed to subordinated certificateholders will not be available to cover
any delinquencies or any Realized Losses in respect of subsequent distribution
dates.
Priority Among Subordinated Certificates
As of the date of the initial issuance of the certificates, the aggregate
class certificate balance of the Class B-4, Class B-5 and Class B-6
Certificates, all of which are subordinate in right of distribution to the
subordinated certificates offered hereby, will equal approximately 1.00% of the
initial aggregate class certificate balance of all of the classes of
certificates and approximately 23.53% of the initial aggregate class certificate
balance of all of the classes of subordinated certificates. On each distribution
date, the holders of any particular class of subordinated certificates, other
than the Class B-6 Certificates, will have a preferential right to receive the
amounts due them on such distribution date out of Available Funds, prior to any
distribution being made on such date on each class of certificates ranking
subordinated to such class. In addition, except as described herein, the
applicable Non-PO Percentage of the principal portion of any Non-Excess Loss
with respect to a mortgage loan and any Class PO Deferred Payment Writedown
Amount will be allocated, to the extent set forth herein, in reduction of the
class certificate balances of the subordinated certificates in inverse order of
priority of such certificates. The effect of the allocation of such Realized
Losses and of the Class PO Deferred Payment Writedown Amount to a class of
subordinated certificates will be to reduce future distributions allocable to
such class and increase the relative portion of distributions allocable to more
senior classes of certificates.
In order to maintain the relative levels of subordination among the
subordinated certificates, the applicable Non-PO Percentage of prepayments and
certain other unscheduled recoveries of principal in respect of the mortgage
loans (which will not be distributable to such certificates for at least the
first five years after the date of initial issuance of the certificates, except
as otherwise described herein on or following the Senior Final Distribution
Date) will not be distributable to the holders of the Class B-2, Class B-3,
Class B-4 or Class B-5 Certificates on any distribution date for which the
related Class Prepayment Distribution Trigger is not satisfied, except as
described above. See "-- Distributions on the Certificates -- Principal." If the
Class Prepayment Distribution Trigger is not satisfied with respect to any such
class of Class B Certificates, the amortization of more senior ranking classes
of subordinated certificates may occur more rapidly than would otherwise have
been the case and, in the absence of losses in respect of the mortgage loans,
the percentage interest in the principal balance of the mortgage loans evidenced
by such Class B Certificates may increase.
As a result of the subordination of any class of certificates, such class
of certificates will be more sensitive than more senior ranking classes of
certificates to the rate of delinquencies and defaults on the mortgage loans,
and under certain circumstances investors in such certificates may not recover
their initial investment.
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Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following
Structuring Assumptions:
. the mortgage pool consists of two mortgage loans with the following
characteristics:
<TABLE>
<CAPTION>
Original Term Remaining
Principal Net to Maturity to Maturity
Balance Mortgage Rate Mortgage Rate (in Months) (in Months)
------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
$ % %
$ % %
</TABLE>
. the mortgage loans prepay at the specified constant percentages of
PSA,
. no defaults in the payment by mortgagors of principal of and interest
on the mortgage loans are experienced,
. scheduled payments on the mortgage loans are received on the first
day of each month commencing in the calendar month following the
closing date and are computed before giving effect to prepayments
received on the last day of the prior month,
. prepayments are allocated without giving effect to loss and
delinquency tests,
. there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual mortgage loans and are received on
the last day of each month, commencing in the calendar month of the
closing date,
. the scheduled monthly payment for each mortgage loan has been
calculated so that each mortgage loan will amortize in amounts
sufficient to repay the current balance of the mortgage loan by its
respective remaining term to maturity,
. the initial class certificate balance of each class of certificates
is as set forth on page S-5,
. the approximate initial class certificate balances of the Class B-4,
Class B-5 and Class B-6 Certificates are $[ ], $[ ] and $[ ],
respectively,
. interest accrues on each interest bearing class of certificates
during each interest accrual period at the applicable pass-through
rate set forth on page S-5,
. distributions in respect of the certificates are received in cash on
the 25th day of each month commencing in the calendar month following
the closing date,
. the closing date of the sale of the certificates is [ ],
. the seller is not required to repurchase or substitute for any
mortgage loan, and
. the master servicer does not exercise the option to repurchase the
mortgage loans described under "-- Optional Purchase of Defaulted
Loans" and "-- Optional Termination."
While it is assumed that each of the mortgage loans prepays at the
specified constant percentages of PSA, this is not likely to be the case.
Moreover, discrepancies may exist between
S-47
<PAGE>
the characteristics of the actual mortgage loans which will be delivered to the
trustee and characteristics of the mortgage loans used in preparing the tables
in this prospectus supplement.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
PSA, which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. PSA does not
purport to be either a historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the mortgage loans. 100% PSA assumes
prepayment rates of 0.2% per annum of the then unpaid principal balance of the
pool of mortgage loans in the first month of the life of the mortgage loans and
an additional 0.2% per annum in each month thereafter (e.g., 0.4% per annum in
the second month) until the 30th month. Beginning in the 30th month and in each
month thereafter during the life of the mortgage loans, 100% PSA assumes a
constant prepayment rate of 6% per annum. Multiples may be calculated from this
prepayment rate sequence. For example, 150% PSA assumes prepayment rates will be
0.3% per annum in month one, 0.6% per annum in month two, and increasing by 0.3%
in each succeeding month until reaching a rate of 9.0% per annum in month 30 and
remaining constant at 9.0% per annum thereafter. 0% PSA assumes no prepayments.
There is no assurance that prepayments will occur at any PSA rate or at any
other constant rate.
Optional Purchase of Defaulted Loans
The master servicer may, at its option, purchase from the trust fund any
mortgage loan which is delinquent in payment by 91 days or more. Any purchase
shall be at a price equal to 100% of the Stated Principal Balance of the
mortgage loan plus accrued interest at the applicable mortgage rate from the
date through which interest was last paid by the related mortgagor or advanced,
and not reimbursed, to the first day of the month in which the amount is to be
distributed.
Optional Termination
The master servicer will have the right to repurchase all remaining
mortgage loans and foreclosed or otherwise repossessed properties in the
mortgage pool and thereby effect early retirement of the certificates, subject
to the Pool Principal Balance of the mortgage loans and foreclosed or otherwise
repossessed properties at the time of repurchase being less than 10% of the cut-
off date pool principal balance. In the event the master servicer exercises its
repurchase option, the purchase price distributed with respect to each class of
certificates will be 100% of its then outstanding class certificate balance plus
any Class PO Deferred Amounts in the case of the Class PO Certificates and, in
the case of an interest bearing certificate, any unpaid accrued interest at the
applicable pass-through rate, in each case subject to reduction as provided in
the pooling and servicing agreement if the purchase price is based in part on
the appraised value of any foreclosed or otherwise repossessed properties and
the appraised value is less than the Stated Principal Balance of the related
mortgage loans. Distributions on the certificates in respect of any optional
termination will first be paid to the senior certificates and then to the
subordinated certificates. The proceeds from any distribution may not be
sufficient to distribute the full amount to which each class of certificates is
entitled if the purchase price is based in part on the appraised value of any
foreclosed or otherwise repossessed property and the appraised value is less
than the Stated Principal Balance of the related mortgage loan.
No holder of any certificates will be entitled to any Unanticipated
Recoveries received with respect to any mortgage loan after the termination of
the trust. See "Servicing of the Mortgage Loans -- Unanticipated Recoveries of
Losses on the Mortgage Loans."
The Trustee
[The Bank of New York] will be the trustee under the pooling and servicing
agreement. The depositor and the master servicer may maintain other banking
relationships in the ordinary course of business with [The Bank of New York].
Offered certificates may be surrendered at the
S-48
<PAGE>
Corporate Trust Office of the trustee located at [ ], Attention: or at any
[ ] or at any other address the trustee designates.
Restrictions on Transfer of the Residual Certificates
The Residual Certificates will be subject to the restrictions on transfer
described in the prospectus under "Material Federal Income Tax Consequences --
Taxation of Holders of Residual Interest Securities -- Restrictions on Ownership
and Transfer of Residual Interest Securities." The pooling and servicing
agreement provides that the Residual Certificates, in addition to certain other
ERISA restricted classes of certificates, may not be acquired by an ERISA Plan.
See "ERISA Considerations". Each Residual Certificate will contain a legend
describing these restrictions.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of each interest bearing class of
certificates will be lower than the yield otherwise produced by the applicable
pass-through rate and the purchase price of the certificates because monthly
distributions will not be payable to the holders until the 25th day (or, if that
day is not a business day, the following business day) of the month after the
applicable interest accrual period without any additional distribution of
interest or earnings to compensate for the delay.
Delinquencies on the mortgage loans which are not advanced by or on behalf
of the master servicer because such amounts, if advanced, would not be
recoverable, will adversely affect the yield on the certificates. Because of
the priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the subordinated certificates, in the reverse
order of their numerical class designations, and then by the senior
certificates. If, as a result of shortfalls, the aggregate of the class
certificate balances of all classes of the certificates exceeds the Pool
Principal Balance, the class certificate balance of the class of subordinated
certificates then outstanding with the highest numerical class designation will
be reduced by the amount of the excess.
Net Interest Shortfalls will adversely affect the yields on the classes of
offered certificates, other than the Class A-5 Certificates. Any Net Interest
Shortfalls in respect of the Class A-5 Certificates will be covered by the
Reserve Fund (to the extent of amounts on deposit in the Reserve Fund) or the
policy (if there are no amounts remaining on deposit in the Reserve Fund),
provided that the policy will not cover interest shortfalls resulting from
Relief Act Reductions. See "The Policy" in this prospectus supplement.
In addition, although all losses initially will be borne by the
subordinated certificates, in the reverse order of their numerical class
designations, either directly or through distributions of Class PO Deferred
Amounts on the Class PO Certificates, Excess Losses will be borne by all classes
of certificates on a pro rata basis. Moreover, since the amounts available for
distribution to the subordinated certificates for each distribution date will be
reduced by the amount of any distributions on the distribution date in respect
of Class PO Deferred Amounts, the amount distributable as principal on each
distribution date to each class of subordinated certificates then entitled to a
distribution of principal will be less than it otherwise would be in the absence
of the Class PO Deferred Amounts. As a result, the yields on the offered
certificates will depend on the rate and timing of Realized Losses, including
Excess Losses. Excess Losses could occur at a time when one or more classes of
subordinated certificates are still outstanding and otherwise available to
absorb other types of Realized Losses. With respect to the Class A-5
Certificates only, Realized Losses allocated thereto will be covered by the
policy to the extent set forth in the policy. See "The Policy" in this
prospectus supplement.
S-49
<PAGE>
General Prepayment Considerations and Risks
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related to the rate and timing of payments of
principal on the mortgage loans. The rate of principal payments on the mortgage
loans will in turn be affected by the amortization schedules of the mortgage
loans and by the rate of principal prepayments, including for this purpose,
prepayments resulting from refinancing, liquidations of the mortgage loans due
to defaults, casualties, condemnations and repurchases by the seller or master
servicer. The mortgage loans may be prepaid by the mortgagors at any time
without a prepayment penalty. The mortgage loans may also be subject to "due-on-
sale" provisions. See "The Mortgage Pool".
Prepayments, liquidations and purchases of the mortgage loans will result
in distributions on the offered certificates of principal amounts which would
otherwise be distributed over the remaining terms of the mortgage loans. Since
the rate of payment of principal of the mortgage loans will depend on future
events and a variety of factors, no assurance can be given as to the rate of
payment of principal on the mortgage loans or the rate of principal prepayments.
The extent to which the yield to maturity of a class of offered certificates may
vary from the anticipated yield will depend upon the degree to which the class
of offered certificates is purchased at a discount or premium, and the degree to
which the timing of payments on the offered certificates is sensitive to
prepayments, liquidations and purchases of the mortgage loans.
You should consider the risk that,
. if you purchase principal only certificates or any other offered
certificate at a discount, a slower than anticipated rate of principal
payments (including prepayments) on the mortgage loans could result in
an actual yield on your certificates that is lower than the
anticipated yield;
. if you purchase interest only certificates (e.g., the Class A-7
Certificates) or any other offered certificate purchased at a premium,
a faster than anticipated rate of principal payments (including
prepayments) on the mortgage loans could result in an actual yield on
your certificates that is lower than the anticipated yield and, in the
case of the Class A-7 Certificates, you could lose your entire
investment.
The rate of principal payments, including prepayments, on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties, servicing decisions, as well as the characteristics of the
mortgage loans included in the mortgage pool as described under "The Mortgage
Pool -- General". In addition, refinancing programs, including First Horizon's
Streamlined Documentation Program, may affect the rate of prepayments on the
mortgage loans. In general, if prevailing interest rates were to fall
significantly below the mortgage rates on the mortgage loans, the mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
were to remain at or above the mortgage rates on the mortgage loans. Conversely,
if prevailing interest rates were to rise significantly, the rate of prepayments
on the mortgage loans would generally be expected to decrease. No assurances can
be given as to the rate of prepayments on the mortgage loans in stable or
changing interest rate environments. Furthermore, with respect to up to 25% of
the mortgage loans, the depositor may deliver all or a portion of each related
mortgage file to the trustee not later than thirty days after the closing date,
a delayed delivery. If the seller fails to deliver all or a portion of any
mortgage file to the depositor or other designee of the depositor or, at the
depositor's direction, to the trustee within the 30-day period, the seller will
be required to use its best efforts to deliver a substitute mortgage loan for
the related delayed delivery mortgage loan or repurchase the related delayed
delivery mortgage loan. Any repurchases pursuant to this provision would also
have the effect of accelerating the rate of prepayments on the mortgage loans.
Voluntary prepayments in full of principal on the mortgage loans received
by the master servicer from the first day through the fifteenth day of each
month (other than the month of the cut-off date) are passed through to the
certificateholders in the month of receipt or payment.
S-50
<PAGE>
Voluntary prepayments of principal in full received from the sixteenth day (or,
in the case of the month of the Cut-off Date, from the Cut-off Date) through the
last day of each month, and all voluntary partial prepayments of principal on
the mortgage loans are passed through to the certificateholders in the month
following the month of receipt or payment. Any prepayment of a mortgage loan or
liquidation of a mortgage loan (by foreclosure proceedings or by virtue of the
purchase of a mortgage loan in advance of its stated maturity as required or
permitted by the Agreement) will generally have the effect of passing through to
the certificateholders principal amounts which would otherwise be passed through
(or reduced) in amortized increments over the remaining term of such mortgage
loan.
The timing of changes in the rate of prepayments on the mortgage loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the mortgage loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher or
lower than the rate anticipated by the investor during the period immediately
following the issuance of the offered certificates may not be offset by a
subsequent like decrease or increase in the rate of principal payments.
Prepayment Considerations and Risks for the Class A-6 Certificates
As described under "Description of the Certificates -- Distributions on the
Certificates -- Principal," the entire amount of the applicable Non-PO
Percentage of any prepayments and other unscheduled recoveries of principal with
respect to a mortgage loan will be allocated solely to the outstanding senior
certificates entitled to principal distributions (other than the Class PO
Certificates) during at least the first five years after the closing date, with
such allocation being subject to reduction thereafter as described herein. The
portion of such amounts otherwise allocable to the Class A-6 Certificates will
be allocated solely to the outstanding Group I Senior Certificates during the
first five years after the closing date (except as otherwise described herein on
or following the Group I Final Distribution Date), with such allocation being
subject to reduction thereafter as described herein, provided that such amounts
will be allocated pro rata among all the outstanding senior certificates
entitled to principal distributions (other than the Class PO Certificates) on
each distribution date after the Cross-Over Date. The resulting allocation
between the Group I Senior Certificates and the Class A-6 Certificates is
designed to accelerate the allocation of principal prepayments and certain other
unscheduled recoveries of principal on the mortgage loans to holders of the
Group I Senior Certificates relative to the Class A-6 Certificates through the
earlier of the Group I Final Distribution Date and the Cross-Over Date.
Notwithstanding the foregoing, all distributions of principal on the outstanding
senior certificates entitled to principal distributions (other than the Class PO
Certificates) will be made pro rata among such certificates on each distribution
date after the Cross-over Date. In addition, the Class A-6 Certificates are not
entitled to receive scheduled principal payments or prepayments during the first
five years after the closing date (except as otherwise described herein on or
following the Group I Final Distribution Date).
Prepayment Considerations and Risks for the Class B Certificates
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class B Certificates will be affected by the rate
of prepayments on the mortgage loans, as well as the rate of mortgagor defaults
resulting in Realized Losses, by the severity of those losses and by the timing
thereof. See "Description of the Certificates -- Allocation of Realized Losses
on the Certificates" herein for a description of the manner in which such losses
are borne by the holders of the certificates. If the purchaser of a Class B
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of Realized Losses that is lower than the default rate and the amount
of losses actually incurred, its actual yield to maturity may be lower than that
so calculated and could be negative. The timing of defaults and losses will also
affect an investor's actual yield to maturity, even if the average rate of
defaults and severity of losses are consistent with an investor's expectations.
In general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity.
S-51
<PAGE>
The yields to maturity on the classes of Class B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted mortgage loans than will the yields on such classes with lower
numerical designations, and the yields to maturity on all of the Class B
Certificates will be more sensitive to such losses than will the yields on the
other classes of certificates. The Class B Certificates will be more sensitive
to losses due to liquidations of defaulted mortgage loans because the entire
amount of such losses will be allocable to such certificates in inverse order of
priority, either directly or through the allocation of the Class PO Deferred
Payment Writedown Amount, except as provided herein. To the extent not covered
by the master servicer's advances of delinquent monthly payments of principal
and interest, delinquencies on the mortgage loans may also have a relatively
greater effect:
(1) on the yields to investors in the Class B Certificates with higher
numerical designations than on the yields to investors in those Class B
Certificates with lower numerical designations; and
(2) on the yields to investors in the Class B Certificates than on the
yields to investors in the senior certificates.
As described above under "Description of the Certificates -- Distributions
on the Certificates -- Interest" and "-- Principal," "-- Allocation of Realized
Losses on the Certificates" and "-- Subordination," amounts otherwise
distributable to holders of any class of Class B Certificates will be made
available to protect the holders of the more senior ranking classes of the
certificates against interruptions in distributions due to certain mortgagor
delinquencies. Such delinquencies, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of the Class B
Certificates.
To the extent that the Class B Certificates are being purchased at
discounts from their initial class certificate balances, if the purchaser of
such a certificate calculates its yield to maturity based on an assumed rate of
payment of principal faster than that actually received on such certificate, its
actual yield to maturity may be lower than that so calculated.
Yield Sensitivity of Class A-7 Certificates
As indicated in the following table, the yield to investors in the Class A-
7 Certificates will be sensitive to the rate of principal payments (including
prepayments) of the mortgage loans. The mortgage loans generally can be prepaid
at any time. On the basis of the assumptions described under this heading, the
yield to maturity on the Class A-7 Certificates would be approximately 0% if
prepayments were to occur at a constant rate of approximately 929% of PSA. If
the actual prepayment rate of the mortgage loans were to exceed the foregoing
level for as little as one month while equaling the level for the remaining
months, the investors in the Class A-7 Certificates would not fully recoup their
initial investments.
Because the Notional Principal Amount of the Class A-7 Certificates will be
determined by reference to the class certificate balances of the Class A-3,
Class A-4 and Class A-5 Certificates, investors should be aware that reductions
in the aggregate Notional Principal Amount of the Class A-7 Certificates will
occur concurrently with certain reductions in the class certificate principal
balance of the Class A-5 Certificates as described herein.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Class A-7 Certificates, expressed as a percentage of its
initial Notional Principal Amount, is as follows:
CLASS PRICE
----------------- -----
Class A-7........ %
S-52
<PAGE>
SENSITIVITY OF THE CLASS A-7 CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
PERCENTAGE OF PSA
-------------------------------
CLASS 0% 250% 600% 800% 1000%
------------------------ -- ---- ---- ---- -----
Class A-7...................
It is highly unlikely that all of the mortgage loans will have the precise
characteristics described in this prospectus supplement or that the mortgage
loans will prepay at the same rate until maturity or that all of the mortgage
loans will prepay at the same rate or time. As a result of these factors, the
pre-tax yield on the Class A-7 Certificates is likely to differ from those shown
in the table above, even if all of the mortgage loans prepay at the indicated
percentages of PSA. No representation is made as to the actual rate of principal
payments on the mortgage loans for any period or over the lives of the Class A-7
Certificates or as to the yields on the Class A-7 Certificates. Investors must
make their own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase the Class A-7 Certificates.
Yield Sensitivity of Class PO Certificates
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the Class PO Certificates to various constant
percentages of PSA. The yields set forth in the tables were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class PO Certificates, would cause the
discounted present value of the assumed streams of cash flows to equal the
assumed aggregate purchase price of the Class PO Certificates and converting the
monthly rates to corporate bond equivalent rates. These calculations do not take
into account variations that may occur in the interest rates at which investors
may be able to reinvest funds received by them as distributions on the Class PO
Certificates and consequently do not purport to reflect the return on any
investment in the Class PO Certificates when the reinvestment rates are
considered.
The Class PO Certificates will be principal only certificates and will not
bear interest. As indicated in the table below, a lower than anticipated rate of
principal payments, including prepayments, on the Discount mortgage loans will
have an adverse effect on the yield to investors in the Class PO Certificates.
As described under "Description of the Certificates -- Principal," the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments, including prepayments, on the Discount mortgage loans. The
Discount mortgage loans will have lower Net Mortgage Rates, and lower mortgage
rates, than the other mortgage loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount mortgage loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Class PO Certificates, expressed as a percentage of its
initial class certificate balance, is as follows:
CLASS PRICE
-------------------- -----
Class PO............ %
S-53
<PAGE>
SENSITIVITY OF THE CLASS PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
PERCENTAGE OF PSA
---------------------------------
CLASS 0% 125% 250% 400% 600%
----------------------- -- ---- ---- ---- ----
Class PO...............
It is unlikely that the Discount mortgage loans will have the precise
characteristics described in this prospectus supplement or that the Discount
mortgage loans will all prepay at the same rate until maturity or that all of
the Discount mortgage loans will prepay at the same rate or time. As a result of
these factors, the pre-tax yield on the Class PO Certificates is likely to
differ from those shown in the table above, even if all of the Discount mortgage
loans prepay at the indicated percentages of PSA. No representation is made as
to the actual rate of principal payments on the Discount mortgage loans for any
period or over the life of the Class PO Certificates or as to the yield on the
Class PO Certificates. Investors must make their own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
the Class PO Certificates.
Additional Information
The depositor intends to file certain additional yield tables and other
computational materials with respect to one or more classes of offered
certificates with the SEC in a report on Form 8-K. The tables and materials
were prepared by [Underwriter] at the request of one or more prospective
investors, based on assumptions provided by, and satisfying the special
requirements of, the prospective investors. The tables and assumptions may be
based on assumptions that differ from the Structuring Assumptions. Accordingly,
the tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an offered certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the class certificate
balance of the certificate on each distribution date by the number of years from
the date of issuance to the distribution date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the net reductions in class
certificate balance of the certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments,
including prepayments, of the mortgage loans, see "--Prepayment Considerations
and Risks" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.
In general, the weighted average lives of the offered certificates will be
shortened if the level of prepayments of principal of the mortgage loans
increases. However, the weighted average lives of the offered certificates will
depend upon a variety of other factors, including the timing of changes in the
rate of principal payments, the priority sequence of distributions of principal
of the classes of certificates. See "Description of the Certificates --
Principal".
The interaction of the foregoing factors may have different effects on
various classes of offered certificates and the effects on any class may vary at
different times during the life of the class. Accordingly, no assurance can be
given as to the weighted average life of any class of offered certificates.
Further, to the extent the prices of the offered certificates represent
discounts or premiums to their respective original class certificate balances,
variability in the weighted average lives of the classes of offered certificates
will result in variability in the related yields to maturity. For an example of
how the weighted average lives of the classes of offered certificates may be
affected at various constant percentages of PSA, see the Decrement Tables below.
S-54
<PAGE>
Decrement Tables
The following tables indicate the percentages of the initial class
certificate balances of the classes of offered certificates that would be
outstanding after each of the dates shown at various constant percentages of PSA
and the corresponding weighted average lives of the classes. The tables have
been prepared on the basis of the Structuring Assumptions. It is not likely
that the mortgage loans will have the precise characteristics described in the
Structuring Assumptions or that all of the mortgage loans will prepay at the
constant percentages of PSA specified in the tables below or at any other
constant rate. Moreover, the diverse remaining terms to maturity of the mortgage
loans could produce slower or faster principal distributions than indicated in
the tables, which have been prepared using the specified constant percentages of
PSA, even if the remaining term to maturity of the mortgage loans is consistent
with the remaining terms to maturity of the mortgage loans specified in the
Structuring Assumptions.
[remainder of page intentionally left blank]
S-55
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-1 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class A-1 Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- --- ---- ---- ---- ----
Initial...............................
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Weighted Average Life (in years)*.....
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under
"--Weighted Average Lives of the Offered Certificates".
S-56
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-2 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class A-2 Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
Initial...............................
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Weighted Average Life (in years)*.....
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
S-57
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-3 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class A-3 Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
Initial.................................
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Weighted Average Life (in years)*.......
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
S-58
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-4 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class A-4 Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
Initial..............................
.....................................
Weighted Average Life (in years)*....
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
S-59
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-5 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class A-5 Certificates**
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
Initial.................................
........................................
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........................................
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........................................
........................................
Weighted Average Life (in years)*.......
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
**The weighed average life shown in the table for this class of
certificates represents the weighted average life of these certificates taken as
a whole and is not likely to reflect the experience of any particular investor.
Because holders of these certificates will receive distributions in reduction of
the class certificate balance of these certificates on the basis of requested
distributions or by random lot, the weighted average life of any such
certificates owned by an individual investor may vary significantly from the
weighted average life of this class of certificates taken as a whole.
S-60
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-6 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class A-6 Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial...............................
......................................
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Weighted Average Life (in years)*.....
</TABLE>
*For purposes of the above tables, the percent of initial class
certificate balance outstanding has been rounded to the nearest whole percentage
and the weighted average life (in years) has been determined as specified under
"-- Weighted Average Lives of the Offered Certificates".
S-61
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-RU AND CLASS RL CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class A-RU and Class A-RL Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial............................... 100 100 100 100 100
......................................
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Weighted Average Life (in years)*.....
</TABLE>
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
S-62
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS PO CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF PSA
Class PO Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial............................ 100 100 100 100 100
...................................
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Weighted Average Life (in years)*..
</TABLE>
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
S-63
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES
AT THE FOLLOWING CONSTANT PERCENTAGES OF PSA
<TABLE>
<CAPTION>
Class B-1, Class B-2 and Class B-3 Certificates
Distribution Date 0% 125% 250% 400% 600%
----------------- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial............................
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Weighted Average Life (in years)*..
</TABLE>
*For purposes of the above tables, the percent of initial class certificate
balance outstanding has been rounded to the nearest whole percentage and the
weighted average life (in years) has been determined as specified under "--
Weighted Average Lives of the Offered Certificates".
S-64
<PAGE>
Last Scheduled Distribution Date
The last scheduled distribution date for each class of offered certificates
is the distribution date in August 2030, which is the distribution date in the
month following the month of the latest scheduled maturity date for any of the
mortgage loans. Since the rate of distributions in reduction of the class
certificate balance of each class of offered certificates will depend on the
rate of payment, including prepayments, of the mortgage loans, the class
certificate balance of any class could be reduced to zero significantly earlier
or later than the last scheduled distribution date. The rate of payments on the
mortgage loans will depend on their particular characteristics, as well as on
prevailing interest rates from time to time and other economic factors, and no
assurance can be given as to the actual payment experience of the mortgage
loans. See "-- Prepayment Considerations and Risks" and "-- Weighted Average
Lives of the Offered Certificates" in this prospectus supplement and "Yield and
Prepayment Considerations" in the prospectus.
THE POLICY
The following summary of terms of the policy to be issued by the insurer
does not purport to be complete and is qualified in its entirety by reference to
the policy included as an exhibit to the pooling and servicing agreement.
Simultaneously with the issuance of the certificates, the insurer will
deliver the policy to the trustee for the benefit of each holder of Class A-5
Certificates. Under the policy, the insurer unconditionally and irrevocably
guarantees to the trustee for the benefit of each holder of Class A-5
Certificates the full and complete payment on each distribution date of
Guaranteed Distributions.
If, by the close of business on the business day next succeeding the
related determination date, the master servicer informs the trustee that funds
to be deposited in the Certificate Account will be insufficient to make the
Guaranteed Distributions on the Class A-5 Certificates for such distribution
date, the trustee is required to make a claim under the policy in the amount of
such deficiency. Payment of claims under the policy will be made by the insurer
following receipt by the insurer of the appropriate notice for payment on the
later to occur of (a) 12:00 noon, New York City time, on the third business day
following receipt of such notice for payment, and (b) 12:00 noon, New York City
time, on the date on which such Guaranteed Distribution is due.
Receipt or received as those terms relate to the policy shall mean actual
delivery to the insurer and to its fiscal agent, if any, at or prior to 12:00
noon, New York City time, on a business day. Delivery either on a day that is
not a business day or after 12:00 noon, New York City time, shall be deemed to
be in receipt on the next succeeding business day. If any notice or certificate
given under the policy by the trustee is not in proper form or is not properly
completed, executed or delivered, it shall be deemed not to have been received,
and the insurer or its fiscal agent shall promptly so advise the trustee and the
trustee may submit an amended notice.
Under the policy, "business day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York or in the city in which the corporate office of the trustee is located are
authorized or obligated by law or executive order to be closed.
The insurer's obligations under the policy in respect of Guaranteed
Distributions shall be discharged to the extent funds are transferred to the
trustee as provided in the policy whether or not such funds are properly applied
by the trustee.
The insurer shall be subrogated to the rights of each holder of a Class A-5
Certificate to receive payments of principal and interest, as applicable, with
respect to distributions on the Class A-5 Certificates to the extent of any
payment with respect thereto by the insurer under the policy in accordance with
the express provisions of the policy.
S-65
<PAGE>
To the fullest extent permitted by applicable law, the insurer agrees under
the policy not to assert, and waives, for the benefit of each holder of a Class
A-5 Certificate, all its rights, whether by counterclaim, setoff or otherwise,
and defenses, including, without limitation, the defense of fraud, whether
acquired by subrogation, assignment or otherwise, to the extent that such rights
and defenses may be available to the insurer to avoid payment of its obligations
under the policy.
Claims under the policy constitute direct, unsecured and unsubordinated
obligations of the insurer, and will rank equally with any other unsecured and
unsubordinated indebtedness of the insurer for borrowed money. Claims against
the insurer under the policy and claims against the insurer under each other
financial guarantee insurance policy issued by the insurer constitute equal
claims against the general assets of the insurer. The terms of the policy cannot
be modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Depositor. The policy may not be canceled
or revoked prior to distribution in full of all Guaranteed Distributions. The
policy is governed by the laws of the State of New York.
The policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
[THE INSURER
The information provided below about the insurer and its parent company,
including the information incorporated by reference in this prospectus
supplement, has been provided by the insurer, and none of the depositor, the
master servicer or any underwriter make any representations or warranties as to
the accuracy or completeness of such information.
General
The insurer is a monoline insurance company incorporated in 1984 under the
laws of the State of New York. The insurer is licensed to engage in financial
guaranty insurance business in all 50 states, the District of Columbia, Puerto
Rico and the U.S. Virgin Islands.
The insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. Financial guaranty insurance provides for a
guaranty of scheduled payments on an issuer's securities, thereby enhancing the
credit rating of those securities, in consideration for the payment of a premium
to the insurer. The insurer and its subsidiaries principally insure asset-
backed, collateralized and municipal securities. Asset-backed securities are
typically supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities include general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The insurer insures both newly issued securities sold in
the primary market and outstanding securities sold in the secondary market that
satisfy the insurer's underwriting criteria.
The insurer is a wholly owned subsidiary of Financial Security Assurance
Holdings Ltd., which is referred to in this prospectus supplement as Holdings.
Holdings is an indirect subsidiary of Dexia S.A., a publicly held Belgian
corporation. Dexia S.A., through its bank subsidiaries, is primarily engaged in
the business of public finance in France, Belgium and other European countries.
No shareholder of Holdings or the insurer is obligated to pay any debt of the
insurer or any claim under any insurance policy issued by the insurer or to make
any additional contribution to the capital of the insurer.
The principal executive offices of the insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
S-66
<PAGE>
Reinsurance
Under an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the insurer or its domestic
or Bermuda operating insurance company subsidiaries are generally reinsured
among such companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, the insurer reinsures a portion of its
liabilities under some of its financial guaranty insurance policies with other
reinsurers under various treaties and on a transaction-by-transaction basis.
This reinsurance is used by the insurer as a risk management device and to
comply with statutory and rating agency requirements; it does not alter or limit
the insurer's obligations under any financial guaranty insurance policy.
Ratings
The insurer's insurance financial strength is rated "Aaa" by Moody's
Investors Service, Inc. The insurer's insurer financial strength is rated "AAA"
by Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd. The insurer's
claims-paying ability is rated "AAA" by Fitch, Inc. and Japan Rating and
Investment Information, Inc. These ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by those rating
agencies. See "Ratings" in this prospectus supplement.
Capitalization
The following table sets forth the capitalization of the insurer and its
subsidiaries as of March 31, 2000 on the basis of accounting principles
generally accepted in the United States:
<TABLE>
<CAPTION>
March 31, 2000
---------------
(in Thousands)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums).......... $ 547,872
----------
Surplus Notes........................................................... 120,000
----------
Minority Interest....................................................... 33,914
----------
Shareholder's Equity:
Common Stock.......................................................... 15,000
Additional Paid-In Capital............................................ 841,036
Accumulated Other Comprehensive Loss (net of deferred income taxes)... (3,409)
Accumulated Earnings.................................................. 508,095
----------
Total Shareholder's Equity.............................................. 1,360,722
----------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest and
Shareholder's Equity.................................................. $2,062,508
==========
</TABLE>
For further information concerning the insurer, see the Consolidated
Financial Statements of Financial Security Assurance Inc. and Subsidiaries, and
the notes thereto, incorporated by reference in this prospectus supplement. The
insurer's financial statements are included as exhibits to the Annual Reports on
Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and
Exchange Commission by Holdings and may be reviewed at the EDGAR web site
maintained by the Securities and Exchange Commission and at Holdings' website,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by the insurer are
available upon request to the State of New York Insurance Department.
S-67
<PAGE>
Incorporation of Certain Documents by Reference
In addition to the documents described in the prospectus under
"Incorporation of Certain Documents by Reference," the financial statements of
the insurer included in, or as exhibits to, the following documents filed by
Holdings with the Securities and Exchange Commission, are hereby incorporated by
reference in this prospectus supplement:
. Annual Report on Form 10-K for the period ended December 31, 1999 and,
. Quarterly Report on Form 10-Q for the period ended March 31, 2000.
All financial statements of the insurer included in, or as an exhibit to,
documents filed by Holdings pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, after the date of this
prospectus supplement and before the termination of the offering of the
certificates shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part of this prospectus supplement from the
respective dates of filing such documents.
You may request a free copy of any of the filings incorporated by reference
in this prospectus supplement by writing or by calling First Horizon Home Loan
Corporation, 4000 Horizon Way, Irving, Texas 75063, telephone number (214) 441-
4000.
The depositor, on behalf of the trust hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, as amended, each
filing of the trust's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934, as amended, to the extent required, and
each filing of the financial statements of the insurer included in or as an
exhibit to the annual report of Holdings filed pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934, as amended, that is
incorporated by reference in the Registration Statement (as defined in the
prospectus) shall be deemed to be a new registration statement relating to the
certificates offered hereby, and the offering of such certificates at that time
shall be deemed to be the initial bona fide offering thereof.
Insurance Regulation
The insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the insurer and its insurance subsidiaries are subject
to regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of a financial guaranty insurer to writing financial guaranty insurance
and related business lines, requires each financial guaranty insurer to maintain
a minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each financial guaranty insurer, and limits the
size of individual transactions and the volume of transactions that may be
underwritten by each financial guaranty insurer. Other provisions of the New
York Insurance Law, applicable to non-life insurance companies such as the
insurer, regulate, among other things, permitted investments, payment of
dividends, transactions with affiliates, mergers, consolidations, acquisitions
or sales of assets and incurrence of liability for borrowings.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholders's equity, and cash
flows for each of the three years in the period ended December 31, 1999,
incorporated by reference in this prospectus supplement have been incorporated
in this prospectus supplement in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.]
S-68
<PAGE>
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the certificates
against the purchase price of the mortgage loans.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
trust fund (exclusive of the Reserve Fund) and the Rounding Account as two
separate REMICs. The Class A-RU Certificates will represent the sole class of
residual interests in the upper REMIC and the Class A-RL Certificates will
represent the sole class of residual interests in the lower REMIC.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting. Under the
accrual method of accounting, interest income may be required to be included in
a holder's gross income in advance of the holder's actual receipt of that
interest income.
The Class A-7 Certificates will be treated for federal income tax purposes
as having been issued with an amount of OID equal to the excess of the sum of
all distributions of interest expected to be received on them over their issue
price (including all accrued interest). The principal only certificates will be
treated for federal income tax purposes as having been issued with an amount of
OID equal to the difference between their principal balance and their issue
price. The remaining classes of Regular Certificates, depending on their
respective issue prices (as described in the prospectus under "Material Federal
Income Tax Consequences"), may be treated as having been issued with OID in an
amount equal to the excess of their initial respective class certificate balance
(plus accrued interest from the last day preceding the issue date corresponding
to a distribution date through the issue date), over their issue prices
(including all accrued interest). The prepayment assumption that is to be used
in determining the rate of accrual of original issue discount and whether the
original issue discount is considered de minimis, and that may be used by a
holder of a Regular Certificate to amortize premium, will be 250% of the PSA.
No representation is made as to whether the mortgage loans will prepay at the
foregoing rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement and "Material Federal Income Tax
Consequences" in the prospectus. Computing accruals of OID in the manner
described in the prospectus and this prospectus supplement may, depending on the
actual rate of prepayments during the accrual period, result in the accrual of
negative amounts of OID on the certificates issued with OID in an accrual
period. Holders will be entitled to offset negative accruals of OID only against
future OID accrual on their certificates.
If the holders of any Regular Certificates are treated as holding their
certificates at a premium, they are encouraged to consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
See "Material Federal Income Tax Consequences -- Taxation of Debt Securities --
Premium" in the prospectus.
As is described more fully under "Material Federal Income Tax Consequences"
in the prospectus, the offered certificates will represent qualifying assets
under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Code, and net interest
income attributable to the offered certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the trust fund are assets
described in those sections.
The Regular Certificates will represent qualifying assets under Section
860G(a)(3) if acquired by a REMIC within the prescribed time periods of the
Code.
The holders of the Residual Certificates must include the taxable income of
the related REMIC in their federal taxable income. The resulting tax liability
of the holders may exceed cash distributions to them during certain periods. All
or a portion of the taxable income from a
S-69
<PAGE>
Residual Certificate recognized by a holder may be treated as "excess inclusion"
income, which with limited exceptions, is subject to U.S. federal income tax.
In computing alternative minimum taxable income, the special rule providing
that taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year does not apply. However, a taxpayer's alternative
minimum taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year. In addition, the amount of any alternative minimum tax
net operating loss is determined without regard to any excess inclusions.
Purchasers of a Residual Certificate are encouraged to consider carefully
the tax consequences of an investment in residual certificates discussed in the
prospectus and consult their own tax advisors with respect to those
consequences. Specifically, prospective holders of a Residual Certificates
should consult their tax advisors regarding whether, at the time of acquisition,
a Residual Certificate will be treated as a "noneconomic" residual interest, a
"non-significant value" residual interest and a "tax avoidance potential"
residual interest. See "Material Federal Income Tax Consequences -- Taxation
of the REMIC," "-- Taxation of Holders of Residual Interest Securities" and "--
Tax Treatment of Foreign Investors" in the prospectus. Additionally, for
information regarding prohibited transactions, see "Material Federal Income Tax
Consequences -- Taxation of the REMIC -- Prohibited Transactions and
Contributions Tax" in the prospectus.
The Internal Revenue Service has issued proposed Treasury regulations that
would add to the conditions necessary to ensure that a transfer of a noneconomic
residual interest would be respected for federal income tax purposes. The
proposed additional condition provides that a transfer of a noneconomic residual
interest will not qualify under this safe harbor unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of (i) any consideration given to the
transferee to acquire the interest (the inducement payment), (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value is calculated using a discount rate equal to the
lesser of the applicable federal rate and the transferee's cost of borrowing.
The proposed effective date for the changes is February 4, 2000.
ERISA CONSIDERATIONS
Any fiduciary of a Plan that proposes to cause the Plan to acquire any of
the offered certificates is encouraged to consult with its counsel with respect
to the potential consequences of the Plan's acquisition and ownership of the
certificates under ERISA and Section 4975 of the Code. See "ERISA
Considerations" in the prospectus. Section 406 of ERISA prohibits "parties in
interest" with respect to an employee benefit plan subject to ERISA from
engaging in various different types of transactions involving the plan and its
assets unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes on prohibited
transactions involving "disqualified persons" and Plans described under that
Section. ERISA authorizes the imposition of civil penalties for prohibited
transactions involving Plans not subject to the requirements of Section 4975 of
the Code.
Some employee benefit plans, including governmental plans and some church
plans, are not subject to ERISA's requirements. Accordingly, assets of those
plans may be invested in the offered certificates without regard to the ERISA
considerations described in this prospectus supplement and in the prospectus,
subject to the provisions of other applicable federal and state law. Any of
those plans that are qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code may nonetheless be subject to the prohibited transaction
rules set forth in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the offered certificates should
S-70
<PAGE>
consider, among other factors, the extreme sensitivity of the investment to the
rate of principal payments, including prepayments, on the mortgage loans.
The U.S. Department of Labor has granted to [Underwriter] an individual
administrative exemption, PTE 89-88 (54 Fed. Reg. 42,581, October 17, 1989) from
some of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of specified receivables, loans and other obligations that
meet the conditions and requirements of the exemption. PTE 89-88 applies to
mortgage loans such as the mortgage loans in the trust fund.
For a general description of PTE 89-88 and the conditions that must be
satisfied for it to apply, see "ERISA Considerations" in the prospectus.
It is expected that PTE 89-88 will apply to the acquisition and holding by
Plans of the Class A Certificates, excluding the Residual Certificates, and that
all conditions of PTE 89-88 other than those within the control of the investors
will be met. In addition, as of the date hereof, no single mortgagor is the
obligor on five percent (5%) of the mortgage loans included in the trust fund by
aggregate unamortized principal balance of the assets of the trust fund.
Because the Class PO Certificates are not being purchased by any
underwriter to whom an exemption similar to PTE 89-88 has been granted, those
classes of certificates do not currently meet the requirements of the exemption
or any comparable individual administrative exemption granted to any
underwriter. Consequently, the Class PO Certificates may be transferred only if
the conditions in the first or third bullet point in the next paragraph are met.
Because the characteristics of the Class B-1, Class B-2, Class B-3 and
Residual Certificates may not meet the requirements of PTE 89-88 or any other
issued exemption under ERISA, a Plan or an individual retirement account or
other plan subject to Section 4975 of the Code may engage in a prohibited
transaction or incur excise taxes or civil penalties if it purchases and holds
the Class B-1, Class B-2, Class B-3 and Residual Certificates. Consequently,
transfers of the Class B-1, Class B-2, Class B-3 and Residual Certificates will
not be registered by the trustee unless the trustee receives:
. a representation from the transferee of the certificate, acceptable
to and in form and substance satisfactory to the trustee, that the
transferee is not an employee benefit plan subject to Section 406 of
ERISA or a plan or arrangement subject to Section 4975 of the Code,
nor a person acting on behalf of any plan or arrangement or using the
assets of any plan or arrangement to effect the transfer,
. if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing the certificates
with funds contained in an "insurance company general account" (as
defined in Section V(e) of PTE 95-60) and that the purchase and
holding of the certificates are covered under Sections I and III of
PTE 95-60, or
. an opinion of counsel satisfactory to the trustee that the purchase
or holding of the certificate by a plan, or any person acting on
behalf of a plan or using the plan's assets, will not result in the
assets of the trust fund being considered to be "plan assets" and
subject to the prohibited transaction requirements of ERISA and the
Code and will not subject the trustee to any obligation in addition to
those undertaken in the agreement.
The representations described in the first and second bullet points above
shall be considered to have been made to the trustee by the transferee's
acceptance of a Class B-1, Class B-2 or Class B-3 Certificate. In the event
that a representation is violated, or any attempt to transfer a Class B-1, Class
B-2 or Class B-3 Certificate to a plan or person acting on behalf of a
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plan or using the plan's assets is initiated without the required opinion of
counsel, the attempted transfer or acquisition shall be void.
Prospective Plan investors are encouraged to consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of the
exemption and PTE 83-1 described in the prospectus, and the potential
consequences in their specific circumstances, before making an investment in any
of the offered certificates. Moreover, each Plan fiduciary is encouraged to
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in any of the offered certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the depositor has agreed to sell the Underwritten Certificates to
[Underwriter] Distribution of the Underwritten Certificates will be made by
[Underwriter], [ ] and [ ] (solely with respect to the Class
A-5 Certificates) from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the
sale of the Underwritten Certificates, [Underwriter] may be deemed to have
received compensation from the depositor in the form of underwriting discounts.
Each of [Underwriter] and [ ] intends to make a secondary market in the
Underwritten Certificates, other than the Class A-5 Certificates, but neither
has any obligation to do so. [ ] intends to make a secondary market in the
Class A-5 Certificates, but has no obligation to do so. There can be no
assurance that a secondary market for the Underwritten Certificates will develop
or, if it does develop, that it will continue or that it will provide
certificateholders with a sufficient level of liquidity of investment.
The depositor and the master servicer have agreed to indemnify
[Underwriter] and [ ] against, or make contributions to [Underwriter] and
[ ] with respect to, liabilities customarily indemnified against, including
liabilities under the Securities Act of 1933, as amended.
The Class PO Certificates will initially be retained by the seller and may
be offered by the seller in the future.
After the initial distribution of the certificates offered hereby, this
prospectus and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets, Inc.], an affiliate of the
depositor, the seller and the master servicer, in connection with market making
transactions in such certificates. [First Tennessee Securities
Corporation][First Tennessee Capital Markets, Inc.] may act as principal or
agent in these transactions. These transactions will be at market prices at the
time of sale and not at the prices of the initial offering.
LEGAL MATTERS
The validity of the certificates, including their material federal income
tax consequences, will be passed upon for the depositor by Andrews & Kurth
L.L.P., Dallas, Texas. [ ], will pass upon certain legal matters on behalf
of the underwriter.
RATINGS
It is a condition to the issuance of the senior certificates that they be
rated "AAA" by each of Fitch and S&P. It is a condition to the issuance of the
Class B-1, Class B-2 and Class B-3 Certificates that they be rated at least
"AA," "A" and "BBB" by Fitch, respectively.
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The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which certificateholders are entitled. Fitch's ratings address the structural
and legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. Fitch's ratings on mortgage pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that
certificateholders might suffer a lower than anticipated yield.
S&P's ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of payments required under the operative
agreements. S&P's ratings take into consideration the credit quality of the
mortgage pool including any credit support providers, structural and legal
aspects associated with the certificates, and the extent to which the payment
stream of the mortgage pool is adequate to make payment required under the
certificates. S&P's ratings on the certificates do not, however, constitute a
statement regarding the frequency of prepayments on the mortgage loans. S&P's
rating does not address the possibility that investors may suffer a lower than
anticipated yield.
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the rating agencies.
The depositor has not requested a rating of the offered certificates by any
rating agency other than Fitch and S&P; there can be no assurance, however, as
to whether any other rating agency will rate the offered certificates or, if it
does, what rating would be assigned by the other rating agency. The rating
assigned by the other rating agency to the offered certificates could be lower
than the respective ratings assigned by either, or both, of Fitch and S&P.
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GLOSSARY OF TERMS
Accrued Certificate Interest -- For any class of certificates entitled to
distributions of interest for any distribution date will equal the interest
accrued during the related interest accrual period at the applicable pass-
through rate on the class certificate balance (or Notional Principal Amount, in
the case of the Class A-7 Certificates) of such class of certificates
immediately prior to such distribution date, less such class' share of any Net
Interest Shortfall, the interest portion of any Excess Losses through the Cross-
Over Date and, after the Cross-Over Date, the interest portion of Realized
Losses, including Excess Losses.
Allocable Share -- With respect to any class of subordinated certificates
on any distribution date, such class's pro rata share (based on the class
certificate balance of each class entitled thereto) of each of the components of
the Subordinated Optimal Principal Amount described herein; provided, that,
except as provided in the pooling and servicing agreement, no Class B
Certificates (other than the Class B-1 Certificates) shall be entitled on any
distribution date to receive distributions pursuant to clauses (2), (3) and (5)
of the definition of Subordinated Optimal Principal Amount unless the Class
Prepayment Distribution Trigger for the related class is satisfied for such
distribution date.
Available Funds -- With respect to any distribution date, an amount equal
to the sum of:
. all scheduled installments of interest, net of the master servicing
fee, the trustee fee and any amounts due to First Horizon in respect
of excess spread as described in the second paragraph under the
heading "Servicing of the Mortgage Loans -- Servicing Compensation and
Payment of Expenses," and all scheduled installments of principal due
on the due date in the month in which the distribution date occurs and
received before the related determination date, together with any
advances in respect thereof;
. all Insurance Proceeds and all Liquidation Proceeds during the
calendar month before the distribution date, which in each case is the
net of unreimbursed expenses incurred in connection with a liquidation
or foreclosure and unreimbursed advances, if any;
. all partial or full prepayments received during the related
Prepayment Period, net of any Prepayment Interest Excess;
. any Compensating Interest in respect of full prepayments received
during the period from the sixteenth day of the month prior to the
month of such distribution date through the last day of such month;
and
. any Substitution Adjustment Amount or the purchase price for any
deleted mortgage loan or a mortgage loan repurchased by the seller or
the master servicer as of such distribution date, reduced by amounts
in reimbursement for advances previously made and other amounts that
the master servicer is entitled to be reimbursed for out of the
Certificate Account pursuant to the pooling and servicing agreement.
Available Funds Allocation -- The allocation of Available Funds as
described under "Distributions on the Certificates -- Allocation of Available
Funds" in the prospectus supplement.
Bankruptcy Loss Coverage Amount -- The aggregate amount of Realized Losses
which may be allocated in connection with Deficient Valuations.
Bankruptcy Losses -- Deficient Valuations or Debt Service Reductions.
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Certificate Account -- An account established and maintained by the master
servicer, in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.
Class A-6 Percentage -- For any distribution date, the percentage (carried
to six places rounded up) obtained by dividing (1) the aggregate class
certificate balance of the Class A-6 Certificates immediately preceding such
distribution date by (2) the aggregate class certificate balance of the Group 1
Senior Certificates and the Class A-6 Certificates immediately preceding such
distribution date.
Class A-6 Prepayment Distribution Percentage -- 0% through the
distribution date in [ ] 200[ ]; 30% thereafter through the distribution date
in [ ]; 40% thereafter through the distribution date in [ ];
60% thereafter through the distribution date in [ ]; 80% thereafter
through the distribution date in [ ]; and 100% thereafter.
Class A-6 Principal Distribution Amount -- For any distribution date, the
sum of:
(a) the total of the amounts described in clauses (1) and (4) of the
definition of Senior Optimal Principal Amount for such date multiplied by
the Class A-6 Scheduled Distribution Percentage for such date; and
(b) the total of the amounts described in clauses (2), (3) and (5) of
the definition of Senior Optimal Principal Amount for such date multiplied
by the product of (x) the Class A-6 Prepayment Distribution Percentage for
such date and (y) the Class A-6 Percentage for such date.
Notwithstanding the foregoing, (1) on the Group I Final Distribution Date,
the Class A-6 Principal Distribution Amount will be increased by any Senior
Optimal Principal Amount remaining after distributions of principal have been
made on the Group I Senior Certificates, and (2) following the Group I Final
Distribution Date, the Class A-6 Principal Distribution Amount will equal the
Senior Optimal Principal Amount.
Class A-6 Scheduled Distribution Percentage -- As to any distribution date,
0% through the distribution date in [ ] 200[ ] and thereafter, the Class A-6
Percentage for such date.
Class B Certificates -- The Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates, collectively.
Class PO Deferred Amount -- With respect to any distribution date through
the Cross-Over Date, the sum of (1) the applicable PO Percentage of the
principal portion of Non-Excess Losses on a Discount mortgage loan allocated to
the Class PO Certificates on such date, and (2) all amounts previously allocated
to the Class PO Certificates in respect of such losses and not distributed to
the Class PO Certificates on prior distribution dates.
Class PO Deferred Payment Writedown Amount -- For any distribution date,
the amount, if any, distributed on such date in respect of the Class PO Deferred
Amount pursuant to priority fourth of the second paragraph under "Distributions
on the Certificates -- Allocation of Available Funds" in the prospectus
supplement. The Subordinated Certificate Writedown Amount and the Class PO
Deferred Payment Writedown Amount will be allocated to the classes of
subordinated certificates in inverse order of priority, until the class
certificate balance of each such class has been reduced to zero.
Class PO Principal Distribution Amount -- With respect to each
distribution date, an amount equal to the sum of:
(1) the applicable PO Percentage of all scheduled payments of
principal due on each mortgage loan on the first day of the month in which
the distribution date occurs, as specified in the amortization schedule at
the time applicable thereto, after adjustment for previous principal
prepayments and the principal portion of Debt Service Reductions after the
Bankruptcy Loss Coverage Amount has been reduced to zero, but before any
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adjustment to such amortization schedule by reason of any other bankruptcy
or similar proceeding or any moratorium or similar waiver or grace period;
(2) the applicable PO Percentage of the Stated Principal Balance of
each mortgage loan which was the subject of a prepayment in full received
by the master servicer during the related Prepayment Period;
(3) the applicable PO Percentage of all partial prepayments of
principal received by the master servicer during the related Prepayment
Period;
(4) the applicable PO Percentage of the sum of (a) the net liquidation
proceeds allocable to principal on each mortgage loan which became a
Liquidated Mortgage Loan during the related Prepayment Period, other than
mortgage loans described in clause (b), and (b) the principal balance of
each mortgage loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim under the
related insurance policy; and
(5) the applicable PO Percentage of the sum of (a) the Stated
Principal Balance of each mortgage loan which was repurchased by the seller
in connection with such distribution date and (b) the difference, if any,
between the Stated Principal Balance of a mortgage loan that has been
replaced by the seller with a substitute mortgage loan pursuant to the
Agreement in connection with such distribution date and the Stated
Principal Balance of such substitute mortgage loan.
For purposes of clauses (2) and (5) above, the Stated Principal Balance of
a mortgage loan will be reduced by the amount of any Deficient Valuation that
occurred prior to the reduction of the Bankruptcy Loss Coverage Amount to zero.
Class Prepayment Distribution Trigger -- For a class of Class B
Certificates (other than the Class B-1 Certificates), any distribution date on
which a fraction (expressed as a percentage), the numerator of which is the
aggregate class certificate balance of such class and each class subordinate
thereto, if any, and the denominator of which is the Pool Principal Balance with
respect to such distribution date, equals or exceeds such percentage calculated
as of the closing date.
Code -- The Internal Revenue Code of 1986, as amended.
Compensating Interest -- As to any distribution date and any mortgage loan
that prepaid in full during the period from the sixteenth day of the month prior
to the month of such distribution date through the last day of such month, an
additional payment made by the master servicer, to the extent funds are
available from the master servicing fee, equal to the amount of interest at the
Net Mortgage Rate, for that mortgage loan from the date of the prepayment to the
related due date; provided that such payment shall not exceed 0.0083% of the
Pool Principal Balance as of the related determination date.
Cross-over Date -- The distribution date on which the respective class
certificate balances of the subordinated certificates have been reduced to zero.
Debt Service Reduction -- With respect to any mortgage loan, a reduction by
a court of competent jurisdiction in a proceeding under the Bankruptcy Code in
the scheduled payment for such mortgage loan which became final and non-
appealable, except such a reduction resulting from a Deficient Valuation or any
reduction that results in a permanent forgiveness of principal.
Deceased Holder -- A beneficial owner of a Class A-5 Certificate who was a
natural person living at the time that holder's interest was acquired and whose
executor or other authorized representative causes to be furnished to the DTC
participant, evidence of death satisfactory to the DTC participant and any tax
waivers requested by the DTC participant.
Deficient Valuation -- With respect to any mortgage loan, a valuation by a
court of competent jurisdiction of the related mortgaged property in an amount
less than the then-
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outstanding indebtedness under the mortgage loan, or any reduction in the amount
of principal to be paid in connection with any scheduled payment that results in
a permanent forgiveness of principal, which valuation or reduction results from
an order of such court which is final and non-appealable in a proceeding under
the Bankruptcy Code.
Determination Date -- As to any distribution date, the earlier of (i) the
third business day after the 15th day of each month, and (ii) the second
business day prior to the related distribution date.
Discount mortgage loan -- Any mortgage loan with a Net Mortgage Rate that
is less than 7.75% per annum.
Distribution Account -- An account established and maintained with the
trustee on behalf of the certificateholders, into which the master servicer will
deposit the Available Funds withdrawn from the Certificate Account.
DTC -- The Depository Trust Company.
Excess Losses -- Any Deficient Valuation, Fraud Loss or Special Hazard
Losses (each a type of Realized Loss), or any part thereof, occurring after the
Bankruptcy Loss Coverage Amount, Fraud Loss Coverage Amount or Special Hazard
Loss Coverage Amount, respectively, has been reduced to zero.
Fraud Loss Coverage Amount -- The aggregate amount of Realized Losses which
may be allocated in connection with Fraud Losses.
Fraud Losses -- Realized Losses incurred on defaulted mortgage loans as to
which there was fraud, dishonesty or misrepresentation in the origination of the
mortgage loans.
First Horizon-- First Horizon Home Loan Corporation, a Kansas corporation
and an indirect wholly owned subsidiary of First Tennessee National Corporation,
a Tennessee corporation.
Fitch -- Fitch, Inc. and its successors and/or assigns.
Group I Final Distribution Date -- The distribution date on which the class
certificate balance of each of the Group I Senior Certificates has been reduced
to zero.
Group I Senior Certificates -- The Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5 and Residual Certificates, collectively.
Guaranteed Distributions -- With respect to the Class A-5 Certificates, the
sum of (i) one full month's interest on the class certificate balance of the
Class A-5 Certificates at the respective pass-through rate indicated in the
table on page S-5 in this prospectus supplement, reduced by (a) any Net
Prepayment Interest Shortfalls allocated to the Class A-5 Certificates that were
covered by the Reserve Fund, and (b) any interest shortfalls relating to Relief
Act Reductions, (ii) the principal portion of any Realized Loss allocated to the
Class A-5 Certificates and (iii) the class certificate balance of the Class A-5
Certificates to the extent unpaid on the final distribution date or earlier
termination of the trust pursuant to the terms of the pooling and servicing
agreement.
Insurance Proceeds -- All proceeds of any primary mortgage guaranty
insurance policies and any other insurance policies with respect to the mortgage
loans, to the extent the proceeds are not applied to the restoration of the
related mortgaged property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures.
Liquidated mortgage loan -- A defaulted mortgage loan as to which the
master servicer has determined that all recoverable liquidation and insurance
proceeds have been received.
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Liquidation Proceeds -- All cash amounts, other than Insurance Proceeds,
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise during the calendar month before the
distribution date.
Living Holder -- A beneficial owner of a Class A-5 Certificate, other than
a Deceased Holder.
Net Interest Shortfall -- For any distribution date, the sum of:
. the amount of interest which would otherwise have been received for
any mortgage loan that was the subject of (x) a Relief Act Reduction
or (y) a Special Hazard Loss, Fraud Loss, or Bankruptcy Loss, after
the exhaustion of the respective amounts of coverage provided by the
Subordinate Certificates for those types of losses; and
. any Net Prepayment Interest Shortfalls.
Net Interest Shortfalls on any distribution date will be allocated pro rata
among all classes of certificates entitled to receive distributions of interest
on that distribution date, based on the amount of interest each of those classes
of certificates would otherwise be entitled to receive on that distribution date
before taking into account any reduction in that amounts resulting from that Net
Interest Shortfalls.
Net Mortgage Rate or "NMR" -- With respect to a mortgage loan, the mortgage
rate thereof, less the master servicing fee rate and the trustee fee rate with
respect to the mortgage loan, expressed as a per annum percentage of its Stated
Principal Balance.
Net Prepayment Interest Shortfall -- For any distribution date, the amount
by which the aggregate of Prepayment Interest Shortfalls during the applicable
prepayment period applicable to that distribution date exceeds the available
Compensating Interest, if any, for that period.
Non-Discount mortgage loan -- Any mortgage loan with a Net Mortgage Rate
that is equal to or greater than 7.75%.
Non-Excess Loss -- Any Realized Loss other than an Excess Loss.
Non PO Percentage -- (a) With respect to a Discount mortgage loan, the
fraction, expressed as a percentage, equal to the NMR divided by 7.75%, and (b)
with respect to any Non-Discount mortgage loan, 100%.
Notional Principal Amount -- With respect to the Class A-7 Certificates and
any distribution date, an amount equal to the class certificate balance of the
Class A-5 Certificates immediately prior to such distribution date, less an
amount equal to the product of (a) 1.31578947368 and (b) the sum of the class
certificate balances of the Class A-3 and Class A-4 Certificates immediately
prior to such distribution date. The initial Notional Principal Amount is
$4,050,000.
OID -- Original issue discount.
Original Subordinated Principal Balance -- The aggregate class certificate
balance of the subordinated certificates as of the date of issuance of the
certificates.
Plan -- An employee benefit plan or arrangement (such as an individual
retirement plan or Keogh plan) that is subject to ERISA or Section 4975 of the
Code.
Pool Principal Balance -- With respect to any distribution date, the
aggregate of the Stated Principal Balances of the mortgage loans outstanding on
the due date in the month before the distribution date.
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PO Percentage -- (a) With respect to any Discount mortgage loan, the
fraction, expressed as a percentage, equal to (7.75% - NMR) divided by 7.75%,
and (b) with respect to any Non-Discount mortgage loan, 0%.
Prepayment Interest Excess -- As to any principal prepayment in full
received by the master servicer from the first day through the fifteenth day of
any calendar month (other than the calendar month in which the cut-off date
occurs), all amounts paid by the related mortgagor in respect of interest on
such principal prepayment. All Prepayment Interest Excess shall be paid to the
Master Servicer as additional master servicing compensation.
Prepayment Interest Shortfall -- As to any distribution date, mortgage loan
and principal prepayment received (a) during the period from the sixteenth day
of the month preceding the month of such distribution date through the last day
of such month, in the case of a principal prepayment in full, or (b) during the
month preceding the month of such distribution date, in the case of a partial
principal prepayment, the amount, if any, by which one month's interest at the
related Net Mortgage Rate (exclusive of the trustee fee) on such principal
prepayment exceeds the amount of interest actually paid by the borrower in
connection with such principal prepayment.
Prepayment Period -- (a) With respect to any mortgage loan that was the
subject of a voluntary prepayment in full and any distribution date, the period
from the sixteenth day of the month preceding the month of such distribution
date (or, in the case of the first distribution date, from the Cut-off Date)
through the fifteenth day of the month of such distribution date, and (b) with
respect to any other unscheduled prepayment of principal of any mortgage loan
and any distribution date, the calendar month preceding the month of such
distribution date.
PSA -- The prepayment standard assumption, a prepayment standard or model
which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans.
PTE -- A prohibited transaction exemption issued by the U.S. Department of
Labor.
Realized Loss -- (a) for a Liquidated mortgage loan, the unpaid principal
balance thereof plus accrued and unpaid interest thereon at the Net Mortgage
Rate through the last day of the month of liquidation, less the net proceeds
from the liquidation of, and any insurance proceeds from, such mortgage loan and
the related mortgaged property; and (b) for any mortgage loan, a Deficient
Valuation.
Regular Certificates -- All classes of certificates, other than the
Residual Certificates.
Residual Certificates -- The Class A-RU and Class A-RL Certificates.
Relief Act Reduction -- A reduction in the amount of monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940.
Reserve Fund -- A fund established at the time of the issuance of the
certificates solely for the benefit of the Class A-5 Certificates by an initial
deposit into the Reserve Fund of approximately $10,000 by [Underwriter]
Rounding Account -- A non-interest bearing account to be established on the
closing date for the Class A-5 Certificates.
S&P -- Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and its successors and/or assigns.
Senior Final Distribution Date -- For any class of senior certificates, the
distribution date on which the class certificate balance of such class of senior
certificates (other than the Class PO Certificates) has been reduced to zero.
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Senior Optimal Principal Amount -- With respect to each distribution date,
an amount equal to the sum of:
(1) the Senior Percentage of the applicable Non-PO Percentage of all
scheduled payments of principal due on each mortgage loan on the first day
of the month in which the distribution date occurs, as specified in the
amortization schedule at the time applicable thereto after adjustment for
previous principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Loss Coverage Amount has been reduced to
zero, but before any adjustment to such amortization schedule by reason of
any other bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period;
(2) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the Stated Principal Balance of each mortgage loan which was
the subject of a prepayment in full received by the master servicer during
the applicable Prepayment Period;
(3) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received during the
applicable Prepayment Period;
(4) the lesser of:
(a) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (x) the net liquidation proceeds allocable to
principal on each mortgage loan which became a Liquidated Mortgage
Loan during the related Prepayment Period, other than mortgage loans
described in clause (y), and (y) the principal balance of each
mortgage loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim
under the related insurance policy; and
(b) (i) the Senior Percentage of the applicable Non-PO Percentage
of the sum of (x) the Stated Principal Balance of each mortgage loan
which became a Liquidated Mortgage Loan during the related Prepayment
Period, other than mortgage loans described in clause (y), and (y) the
Stated Principal Balance of each mortgage loan that was purchased by a
private mortgage insurer during the related Prepayment Period as an
alternative to paying a claim under the related insurance policy minus
(ii) the Senior Percentage of the applicable Non-PO Percentage of the
principal portion of Excess Losses (other than Debt Service
Reductions) during the related Prepayment Period; and
(5) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Stated Principal Balance of each mortgage
loan which was repurchased by the seller in connection with such
distribution date and (b) the difference, if any, between the Stated
Principal Balance of a mortgage loan that has been replaced by the seller
with a substitute mortgage loan pursuant to the Agreement in connection
with such distribution date and the Stated Principal Balance of such
substitute mortgage loan.
Senior Percentage -- On any distribution date, the lesser of 100% and the
percentage (carried to six places rounded up) obtained by dividing the aggregate
class certificate balances of all classes of senior certificates (other than the
Class PO Certificates) immediately preceding such distribution date by the
aggregate class certificate balances of all classes of the certificates (other
than the Class PO Certificates) immediately preceding such distribution date.
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Senior Prepayment Percentage -- On any distribution date occurring during
the periods set forth below, the Senior Prepayment Percentages described below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Period (Dates Inclusive) Senior Prepayment Percentage
-----------------------------------------------------------------------------------------
<S> <C>
[ ] - [ ] 100%
-----------------------------------------------------------------------------------------
[ ] - [ ] Senior Percentage plus 70% of the Subordinated Percentage
-----------------------------------------------------------------------------------------
[ ] - [ ] Senior Percentage plus 60% of the Subordinated Percentage
-----------------------------------------------------------------------------------------
[ ] - [ ] Senior Percentage plus 40% of the Subordinated Percentage
-----------------------------------------------------------------------------------------
[ ] - [ ] Senior Percentage plus 20% of the Subordinated Percentage
-----------------------------------------------------------------------------------------
[ ] and thereafter Senior Percentage
-----------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, if the Senior Percentage on any distribution
date exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such distribution date will equal 100%.
In addition, no reduction of the Senior Prepayment Percentage below the
level in effect for the most recent prior period specified in the table above
shall be effective on any distribution date unless, as of the last day of the
month preceding such distribution date, either:
(A)(1) the aggregate Stated Principal Balance of mortgage loans
delinquent 60 days or more (including for this purpose any mortgage loans
in foreclosure and mortgage loans with respect to which the related
mortgaged property has been acquired by the trust) does not exceed 50% of
the aggregate class certificate balance of the subordinated certificates as
of such date; and
(2) cumulative Realized Losses do not exceed:
(a) 30% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ];
(b) 35% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ];
(c) 40% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ];
(d) 45% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ]; and
(e) 50% of the Original Subordinated Principal Balance if such
distribution date occurs during or after [ ]; or
(B)(1) the aggregate Stated Principal Balance of mortgage loans
delinquent 60 days or more (including for this purpose any mortgage
loans in foreclosure and mortgage loans with respect to which the
related mortgaged property has been acquired by the trust), averaged
over the last three months, as a percentage of the aggregate Stated
Principal Balance of all mortgage loans averaged over the last three
months, does not exceed 4%; and
(2) cumulative Realized Losses do not exceed:
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(a) 10% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ];
(b) 15% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ];
(c) 20% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ];
(d) 25% of the Original Subordinated Principal Balance if such
distribution date occurs between and including [ ] and [ ]; and
(e) 30% of the Original Subordinated Principal Balance if such
distribution date occurs during or after [ ].
Special Hazard Loss Coverage Amount -- The aggregate amount of Realized
Losses which may be allocated in connection with Special Hazard Losses.
Special Hazard Losses -- A Realized Loss incurred, to the extent that the
loss was attributable to direct physical damage to a mortgaged property other
than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable; and any shortfall in insurance proceeds for
partial damage due to the application of the co-insurance clauses contained in
hazard insurance policies. The amount of the Special Hazard Loss is limited to
the lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. Special Hazard Losses do not include losses occasioned by war,
civil insurrection, various governmental actions, errors in design, faulty
workmanship or materials, except under some circumstances, nuclear reaction,
chemical contamination or waste by the mortgagor.
Stated Principal Balance -- For any mortgage loan and due date, the unpaid
principal balance of the mortgage loan as of the due date, as specified in its
amortization schedule at the time, before any adjustment to the amortization
schedule for any moratorium or similar waiver or grace period, after giving
effect to any previous partial prepayments and liquidation proceeds received and
to the payment of principal due on the due date and irrespective of any
delinquency in payment by the related mortgagor.
Structuring Assumptions -- The assumed characteristics of the mortgage
loans used for purposes of estimating the weighted average lives of the
certificates, as listed on page S-47.
Subordinated Certificate Writedown Amount -- As of any distribution date,
the amount by which (a) the sum of the class certificate balances of all of the
certificates, after giving effect to the distribution of principal and the
allocation of Realized Losses in reduction of the class certificate balances of
all of the certificates on such distribution date, exceeds (b) the Pool
Principal Balance on the first day of the month of such distribution date less
any Deficient Valuations occurring before the Bankruptcy Loss Coverage Amount
has been reduced to zero.
Subordinated Optimal Principal Amount -- With respect to each distribution
date, an amount equal to the sum of the following (but in no event greater than
the aggregate class certificate balances of the subordinated certificates
immediately prior to such distribution date):
(1) the Subordinated Percentage of the applicable Non-PO Percentage of
all scheduled payments of principal due on each outstanding mortgage loan
on the first day of the month in which the distribution date occurs, as
specified in the amortization schedule at the time applicable thereto,
after adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Loss Coverage
Amount has been reduced to zero, but before any adjustment to such
amortization schedule by reason of any other bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period;
S-82
<PAGE>
(2) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of the Stated Principal Balance of each mortgage loan which was
the subject of a prepayment in full received by the master servicer during
the related Prepayment Period;
(3) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received during the
related Prepayment Period, plus, on the Senior Final Distribution Date,
100% of any Senior Optimal Principal Amount remaining undistributed on such
date;
(4) the amount, if any, by which the sum of (a) the applicable Non-PO
Percentage of the net liquidation proceeds allocable to principal received
during the related Prepayment Period in respect of each Liquidated Mortgage
Loan, other than mortgage loans described in clause (b) and (b) the
applicable Non-PO Percentage of the principal balance of each mortgage loan
that was purchased by a private mortgage insurer during the related
Prepayment Period as an alternative to paying a claim under the related
insurance policy exceeds (c) the sum of the amounts distributable to the
senior certificateholders (other than the holders of the Class PO
Certificates) under clause (4) of the definition of Senior Optimal
Principal Amount on such distribution date; and
(5) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Stated Principal Balance of each mortgage
loan which was repurchased by the seller in connection with such
distribution date and (b) the difference, if any, between the Stated
Principal Balance of a mortgage loan that has been replaced by the seller
with a substitute mortgage loan pursuant to the Agreement in connection
with such distribution date and the Stated Principal Balance of such
substitute mortgage loan.
Subordinated Percentage -- For any distribution date, 100% minus the Senior
Percentage.
Subordinated Prepayment Percentage -- For any distribution date, 100% minus
the Senior Prepayment Percentage.
Substitution Adjustment Amount -- The amount by which the principal balance
of a substituted mortgage loan exceeds the principal balance of a replacement
mortgage loan.
Unanticipated Recovery -- Any amount recovered by the Master Servicer in
respect of principal of a mortgage loan which had previously been allocated as a
Realized Loss to one or more classes of certificates.
Underwriting Agreement -- The underwriting agreement by and among First
Horizon Asset Securities Inc., First Horizon Home Loan Corporation and
[Underwriter], as representative of the several underwriters.
Underwritten Certificates -- The senior certificates, other than the Class
PO Certificates, and the Class B-1, Class B-2 and Class B-3 Certificates.
S-83
<PAGE>
[LOGO] FIRST
HORIZON(TM)
Home Loan Corporation
(Seller and Master Servicer)
First Horizon Mortgage Pass-through Trust 200[ ]-[ ]
(Issuer)
$[ ]
(Approximate)
Mortgage Pass-through Certificates, Series 200[ ]-[ ]
______________________________
PROSPECTUS SUPPLEMENT
_____________________________
[UNDERWRITERS]
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus until [ ].
[ ], 200[ ]
<PAGE>
SUBJECT TO COMPLETION; DATED JANUARY 5, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus dated [________], 200[_])
$[__________]
(Approximate)
[LOGO OF FIRST HORIZON HOME LOAN CORPORATION]
Seller and Master Servicer
First Horizon Home Loan Trust 200[_]-[_]
Issuer
Asset-Backed Certificates, Series 200[_]-[_]
Distributions payable monthly commencing in [ ]________
--------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page S-[ ] of this
prospectus supplement and on page [__] of the accompanying prospectus.
--------------------------------------------------------------------------------
The trust will issue:
. [ ] classes of fixed rate certificates; and
. [ ] classes of variable rate certificates.
The Trust Fund
The trust fund consists primarily of a pool of fixed and adjustable rate,
conventional mortgage loans that are secured by first and second liens on one-
to-four family residential properties and certain other property and assets
described in this prospectus supplement. The mortgage loans in the trust fund
will consist of [two] separate loan groups based on whether the interest rate on
the related mortgage loans is fixed or adjustable. The fixed rate loan group
will consist solely of fixed rate mortgage loans that are secured by first and
second liens on mortgaged properties. The adjustable rate loan group will
consist solely of adjustable rate mortgage loans that are secured by first and
second liens on mortgaged properties.
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus supplement or the prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
[Underwriter] will offer the certificates subject to prior sale and subject
to its right to reject orders in whole or in part. The certificates will be
issued in book-entry form on or about [ ], 200[ ] and will be offered
in the United States and Europe.
[UNDERWRITER]
[Date]
<PAGE>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
After the initial distribution of the certificates offered hereby, this
prospectus and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets], an affiliate of the depositor,
the seller and the master servicer, in connection with market making
transactions in those certificates. [First Tennessee Securities
Corporation][First Tennessee Capital Markets] may act as principal or agent in
these transactions. These transactions will be at market prices at the time of
sale and not at the prices of the initial offering. Certain information in this
prospectus supplement will be updated from time to time.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus ............................ S-2
SUMMARY ................................................................................... S-6
Description of the Certificates ........................................................... S-10
RISK FACTORS .............................................................................. S-18
The subordinated certificates have a greater risk of loss than senior certificates
and subordination may not be sufficient to protect senior certificates
from losses ............................................................. S-18
Excess interest from the mortgage loans may not provide adequate
credit enhancement ...................................................... S-19
[Risk regarding mortgage rates ................................................... S-21
Defaults on second lien [fixed] [adjustable] rate mortgage loans could result
in payment delay or loss on the offered [fixed] [adjustable] rate
certificates ............................................................ S-22
[Balloon loans may have high rates of default .................................... S-22
Cash flow considerations and risks could cause payment delays and losses ......... S-23
Yield and reinvestment could be adversely affected by unpredictability of
prepayments ............................................................. S-24
[Possible prepayment due to inability to acquire related subsequent mortgage
loans .................................................................. S-25
Reduction in or withdrawal of certificate ratings will affect the value of the
certificates ............................................................ S-26
Distribution to and rights of investors could be adversely affected by the
bankruptcy or insolvency of certain parties ............................. S-0
Geographic concentration of mortgaged properties in [California] increases the
risk that certificate yields could be impaired ......................... S-27
You may have difficulty reselling certificates ................................... S-28
FORWARD LOOKING STATEMENTS ................................................................ S-29
THE MORTGAGE POOL ......................................................................... S-29
General .......................................................................... S-29
The [Statistical Calculation] [Mortgage] Pool .................................... S-37
Assignment of the Mortgage Loans ................................................. S-55
[Pre-Funding ..................................................................... S-59
SERVICING OF THE MORTGAGE LOANS ........................................................... S-60
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
General .......................................................................... S-60
The Master Servicer .............................................................. S-61
Loan Servicing ................................................................... S-61
Foreclosure and Delinquency Experience ........................................... S-62
Servicing Compensation and Payment of Expenses ................................... S-64
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans .... S-64
Advances ......................................................................... S-65
DESCRIPTION OF THE CERTIFICATES ........................................................... S-65
General .......................................................................... S-65
Book-Entry Certificates .......................................................... S-67
Deposits to the Certificate Account .............................................. S-68
Withdrawals from the Certificate Account ......................................... S-69
Deposits to the Distribution Account ............................................. S-71
Withdrawals from the Distribution Account ........................................ S-71
Distributions .................................................................... S-72
Overcollateralization and Cross-Collateralization Provisions ..................... S-83
Calculation of One-Month LIBOR ................................................... S-86
Fixed Rate Carryover Reserve Fund ................................................ S-87
Adjustable Rate Carryover Reserve Fund ........................................... S-87
Reports to Certificateholders .................................................... S-88
Amendment ........................................................................ S-90
Optional Termination ............................................................. S-90
Optional Purchase of Defaulted Loans ............................................. S-91
Events of Default ................................................................ S-91
Rights Upon Event of Default ..................................................... S-92
The Trustee ...................................................................... S-92
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS ............................................. S-93
General .......................................................................... S-93
Prepayments and Yields for Offered Certificates .................................. S-94
Additional Information ........................................................... S-109
USE OF PROCEEDS ........................................................................... S-110
MATERIAL FEDERAL INCOME TAX CONSEQUENCES .................................................. S-110
Taxation of Regular Interests .................................................... S-111
Status of the Offered Certificates ............................................... S-112
The Fixed Rate Carryover Reserve Fund and Adjustable Rate Carryover
Reserve Fund ............................................................ S-112
Prohibited Transactions Tax and Other Taxes ...................................... S-113
STATE TAXES ............................................................................... S-113
ERISA CONSIDERATIONS ...................................................................... S-114
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
METHOD OF DISTRIBUTION .................................................................... S-116
LEGAL MATTERS ............................................................................. S-117
RATINGS ................................................................................... S-118
INDEX OF DEFINED TERMS .................................................................... S-119
</TABLE>
S-5
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider when making your
investment decision. To understand all of the terms of an offering of the
certificates, read this entire document and the accompanying prospectus
carefully.
The Certificates
Asset-Backed Certificates, Series 200[_]-[_], represent an undivided
beneficial ownership interest in a trust fund. The trust fund consists primarily
of a pool of fixed and adjustable rate, conventional mortgage loans that are
secured by first and second liens on one-to four-family residential properties
and certain other property and assets described in this prospectus supplement.
See "Description of the Certificates -- General" in this prospectus
supplement.
Depositor
First Horizon Asset Securities Inc.
See "The Depositor" in the prospectus.
Seller and Master Servicer
First Horizon Home Loan Corporation
See "Servicing of the Mortgage Loans" in this prospectus supplement.
Trustee
[Name of the Trustee]
See "Description of the Certificates -- The Trustee" in this prospectus
supplement.
Pooling and Servicing Agreement
The pooling and servicing agreement among the seller and master servicer,
the depositor and the trustee, under which the trust fund will be formed.
Cut-off Date
[____________], 200[_]
S-6
<PAGE>
Closing Date
On or about [___________], 200[_].
[Funding Period
On the closing date, an amount equal to not more than approximately
$[__________] will be deposited in a pre-funding account. During the funding
period, which commences on the closing date and ends on [__________], 200[_]:
. approximately [____]% of the aggregate amount deposited in the pre-
funding account on the closing date is expected to be used to purchase
subsequent fixed rate mortgage loans; and
. approximately [____]% of the aggregate amount deposited in the pre-
funding account on the closing date is expected to be used to purchase
subsequent adjustable rate mortgage loans.
Neither the seller nor the depositor will exercise any discretion in the
selection of subsequent mortgage loans to be sold to the trust fund. The
selection will be made by a mechanical procedure on a first-in first-out basis.
Any amounts in the pre-funding account not used during the funding period
to purchase subsequent mortgage loans for the related loan group or subgroup, as
applicable, will be paid to the related certificateholders as a prepayment of
principal on the [___________], 200[_] Distribution Date.
See "The Mortgage Pool -- Pre-Funding" in this prospectus supplement.]
The Mortgage Loans
The mortgage loans will be divided into two separate groups based on
whether the interest rate on the related mortgage loans is fixed or adjustable.
Each of these groups of mortgage loans is referred to as a "loan group."
The fixed rate loan group will consist solely of fixed rate mortgage loans
that are secured by [first and second] liens on mortgaged properties. The
adjustable rate loan group will consist solely of adjustable rate mortgage loans
that are secured by [first and second] liens on mortgaged properties. [The
[fixed] [adjustable] rate loan group will be further divided into [___] separate
subgroups based on the criteria described below. Each subgroup is referred to in
this prospectus supplement as a "loan subgroup."] Loan subgroup [__] will
consist of [fixed] [adjustable] rate mortgage loans with principal balances at
origination that may or may not conform to the criteria specified below for the
principal balances at origination of the mortgage loans included in loan
subgroup [__]. Loan subgroup [ ] will consist of [fixed] [adjustable] rate
mortgage loans that had a principal balance at origination of no more than
$[_______] if a single-family property (or
S-7
<PAGE>
$[_______] if the property is located in [______] or [_____]) or $[_________] if
a two- to four-family property (or $[__________] if the property is located in
[_____] or [______]).
[Statistical Calculation Information
The statistical information presented in this prospectus supplement
concerning the pool of mortgage loans (or either loan group or subgroup) does
not reflect all of the mortgage loans that will be included in the mortgage pool
(and either loan group or subgroup) on the closing date nor does it take into
account any subsequent mortgage loans that may be added to the mortgage pool
(and either loan group or subgroup) during the funding period. Instead, the
statistical information relates to a statistical calculation pool (and
statistical calculation loan groups and subgroups) which includes the number and
principal balances of only mortgage loans originated by the seller through
[_________], 200[_]. The information presented in this prospectus supplement
with respect to the statistical calculation pool (and the statistical
calculation loan groups and subgroups) is, unless otherwise specified, based on
the scheduled principal balances of those mortgage loans in the mortgage pool as
of [________], 200[_], which is the statistical calculation date. The aggregate
scheduled principal balance of the statistical calculation pool as of the
statistical calculation date is referred to as the statistical calculation pool
principal balance. The aggregate scheduled principal balance of a statistical
calculation loan group as of the statistical calculation date is referred to as
the statistical calculation date group principal balance for that loan group.
[The aggregate scheduled principal balance of a statistical calculation loan
subgroup as of the statistical calculation date is referred to as the
statistical calculation date subgroup principal balance for that loan subgroup.]
The aggregate scheduled principal balance of the mortgage loans in the
statistical calculation pool as of the statistical calculation date is
$[________].
Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by the statistical calculation date group or subgroup
(as applicable) scheduled principal balance of the related statistical
calculation loan group or subgroup, as applicable, as of the statistical
calculation date.
Fixed Rate Statistical Calculation Loan Group
The following table summarizes the characteristics of the mortgage loans in
the fixed rate statistical calculation loan group as of the statistical
calculation date (based on scheduled principal balances).
[Statistical Calculation Loan Subgroup [__]].
Number of Mortgage Loans .............................. [ ]
Aggregate Principal Balance ........................... $[ ]
Average Principal Balance ............................. $[ ]
Range of Principal Balances .................. $[ ] to $[ ]
Range of Mortgage Rates .............................. % to %
Weighted Average Mortgage Rate ............................ %
Weighted Average Combined Loan-to-Value Ratio ............. %
S-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Weighted Average Remaining Amortization Term to Maturity..... [ ] months
Range of Scheduled Amortization Term to Maturity............. [ ] months to [ ] months
Type of Mortgaged Premises
Single-family detached dwellings............................................. %
2-4 family dwellings......................................................... %
Low-rise Condominiums........................................................ %
Planned unit developments.................................................... %
Manufactured housing (treated as real property).............................. %
High-rise Condominiums....................................................... %
First liens........................................................................... %
Second liens.......................................................................... %
</TABLE>
Adjustable Rate Statistical Calculation Loan Group
The following tables summarize the characteristics of the mortgage
loans in the adjustable rate statistical calculation loan group by respective
loan subgroup as of the statistical calculation date (based on scheduled
principal balances):
<TABLE>
<CAPTION>
<S> <C>
[Statistical Calculation Loan Subgroup [__]].
Number of Mortgage Loans.......................................................... [. ]
Aggregate Principal Balance....................................................... $[. ]
Average Principal Balance......................................................... $[. ]
Range of Principal Balances.............................................. $[ ] to $[. ]
Mortgage Interest Rates
Current Weighted Average Mortgage Rate....................................... %
Range of Current Mortgage Rates......................................... % to %
Weighted Average Maximum Mortgage Rate....................................... %
Range of Maximum Mortgage Rates......................................... % to %
Weighted Average Minimum Mortgage Rate....................................... %
Range of Minimum Mortgage Rates......................................... % to %
Weighted Average Loan-to-Value Ratio.................................................. %
Weighted Average Scheduled Remaining Term to Maturity........................ [ ]months
Range of Scheduled Remaining Term to Maturity................. [ ]months to [ ]months
Type of Mortgaged Premises
Single-family detached dwellings............................................. %
Planned unit developments.................................................... %
Low-rise Condominiums........................................................ %
2-4 family dwellings......................................................... %
Manufactured housing (treated as real property).............................. %
High-rise Condominiums....................................................... %
First liens........................................................................... %
Second liens.......................................................................... %
</TABLE>
S-9
<PAGE>
As described in this prospectus supplement under "The Mortgage Pool," the
interest rates for the adjustable rate mortgage loans will generally adjust
semi-annually, subject to certain caps and floors, as described in this
prospectus supplement.
Approximately [____]% and [____]% of the mortgage loans in [statistical
calculation] loan subgroup [ ] and [statistical calculation] loan subgroup [
], respectively, are mortgage loans that initially have a [fixed] rate of
interest for [one, two or three] years following their origination, and
thereafter have an [adjustable] rate of interest for the remaining life of the
loan, as described under "The Mortgage Pool -- Additional Information Regarding
the Adjustable Rate Mortgage Loans" in this prospectus supplement.
See "The Mortgage Pool" in this prospectus supplement.]
Description of the Certificates
The certificates are being issued in two certificate groups. The
certificates listed below under the column entitled "offered fixed rate
certificates" will represent interests in the fixed rate loan group as described
in this prospectus supplement. The certificates listed below under the column
entitled "offered adjustable rate certificates" will represent interests in the
adjustable rate loan group as described in this prospectus supplement. [Further
the Class AV-[1] Certificates will represent interests in loan subgroup [__] and
the Class AV-[2] Certificates will represent interests in loan subgroup [__] as
described in this prospectus supplement.]
The trust will also issue the Class BF-IO Certificates, Class BV-IO
Certificates and a class of residual certificates designated as the Class R
Certificates, none of which are offered by this prospectus supplement.
The original certificate principal balances, pass-through rates and last
scheduled distribution dates for the offered certificates are as follows:
<TABLE>
<CAPTION>
Original Certificate Pass-Through Last Scheduled
Class Principal Balance (1) Rate Distribution Date (2)
----- --------------------- ---- ---------------------
Offered Fixed Rate Certificates
<S> <C> <C>
Class AF-1 [(3)]
Class AF- [(4)]
Class AF- [(4)(5)
]
Class MF-1 [(4)]
Class MF-2 [(4)]
Class BF [(4)]
Offered Adjustable Rate Certificates
Class AV-1 [(6)]
Class AV-2 [(6)]
Class MV-1 [(6)]
Class MV-2 [(6)]
Class BV [(6)]
</TABLE>
S-10
<PAGE>
(1) The original certificate principal balance of the offered certificates will
be subject to a permitted variance in the aggregate of plus or minus 10%,
depending on the amount of mortgage loans actually delivered on the closing
date.
(2) Each date was determined as described under "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement.
(3) The pass-through rate on the Class AF-[1] Certificates will adjust
[monthly] and will be subject to an interest rate cap as described in this
prospectus supplement under "Description of the Certificates --
Distributions -- Distributions of Interest."
(4) The pass-through rates for these classes of offered fixed rate certificates
will be subject to an interest rate cap as described in this prospectus
supplement under "Description of the Certificates -- Distributions --
Distributions of Interest."
(5) The pass-through rates for the Class AF-[ ] Certificates will increase to
[___]% per annum, after the related optional termination date, subject in
each case to the interest rate cap described in this prospectus supplement
under "Description of the Certificates -- Distributions -- Distributions of
Interest."
(6) The pass-through rates for the offered adjustable rate certificates will
adjust [monthly], will be subject to increase after the related optional
termination date and will be subject to an interest rate cap, in each case
as described in this prospectus supplement under "Description of the
Certificates -- Distributions -- Distributions of Interest."
Record Date
The [last] business day of the month preceding the month of a distribution
date.
Denominations
$[25,000] and multiples of $[1,000] in excess of $[25,000].
Registration of Certificates
The certificates will initially be issued in book-entry form. Persons
acquiring beneficial ownership interests in the certificates may elect to hold
their beneficial interests through The Depository Trust Company, in the United
States, or Clearstream, Luxembourg or the Euroclear System, in Europe.
See "Description of Certificates -- Book-Entry Certificates" in this
prospectus supplement.
S-11
<PAGE>
Pass-through Rates
The pass-through rates for the offered fixed rate certificates (other than
the Class AF-[1] Certificates) are the respective per annum fixed rates set
forth on page S-10 of this prospectus supplement. The pass-through rate for the
Class AF-[1] Certificates is a variable rate that on any distribution date will
be equal to One-Month LIBOR plus the pass-through margin for that class. On any
distribution date, the pass-through rates per annum for all classes of offered
fixed rate certificates will be subject to an interest rate cap equal to the
weighted average of the net mortgage rates on the fixed rate mortgage loans
(which interest rate cap is called the "fixed net rate cap").
The pass-through rates for the offered adjustable rate certificates are
variable rates that may change from distribution date to distribution date. On
any distribution date, the pass-through rate per annum for each class of offered
adjustable rate certificates will be equal to the least of:
. One-Month LIBOR plus the pass-through margin for that class, [the
weighted average of the maximum net interest rates on the adjustable
rate mortgage loans,] and
. a maximum per annum rate referred to as the "adjustable rate available
funds cap," calculated as described under "Description of the
Certificates -- Distributions -- Distributions of Interest" in this
prospectus supplement.
See "Description of the Certificates -- Distributions -- Distributions of
Interest" and "-- Calculation of One-Month LIBOR" in this prospectus supplement.
If on any distribution date, the pass-through rate for a class of offered
fixed rate certificates is based on the fixed net rate cap, or the pass-through
rate for a class of offered adjustable rate certificates is based on the
adjustable rate available funds cap, the holders of those certificates will
receive a smaller amount of interest than those holders would have received on
that distribution date had the pass-through rate for that class not been
calculated based on the fixed net rate cap or the adjustable rate available
funds cap, as applicable. The amount by which a certificateholder's interest
payment has been reduced by operation of the fixed net rate cap or the
adjustable rate available funds cap will be paid to that certificateholder on
future distribution dates to the extent that money is available to make those
payments.
See "Description of the Certificates -- Distributions" in this prospectus
supplement.
Distribution Dates
The trustee will make distributions on the [ ]th day of each calendar
month. If the [ ]th day of a month is not a business day, then the trustee will
make distributions on the next business day. The first distribution date is
scheduled for [ ].
S-12
<PAGE>
Interest Payments
On each distribution date holders of the offered certificates will be
entitled to receive:
. the interest that has accrued on the certificates at the related pass-
through rate during the related accrual period, and
. any interest due on a prior distribution date that was not paid.
The "accrual period":
. for the offered fixed rate certificates (other than the Class AF-[1]
Certificates) will be the calendar month immediately preceding the
calendar month in which a distribution date occurs, and
. for the offered adjustable rate certificates and the Class AF-[1]
Certificates will be the period from and including the preceding
distribution date (or from the closing date, in the case of the first
distribution date) to and including the day before the current
distribution date.
The trustee will calculate interest:
. on the offered fixed rate certificates (other than the Class AF-[1]
Certificates), based on a 360-day year that consists of twelve 30-day
months, and
. on the offered adjustable rate certificates and the Class AF-[1]
Certificates, based on a 360-day year and the actual number of days
elapsed during the related accrual period.
There are certain circumstances that could reduce the amount of interest
paid to you.
See "Description of the Certificates -- Distributions -- Distributions of
Interest" in this prospectus supplement.
Principal Payments
On each distribution date, certificateholders will receive a distribution
of principal on their certificates if there is cash available on that date for
the payment of principal. Monthly principal distributions:
. will generally include principal payments on the mortgage loans in the
related loan group [or subgroup, as applicable],
. until overcollateralization levels have been reached, will include
excess interest payments on the mortgage loans in the related loan
group, and
S-13
<PAGE>
. [on the distribution date following the end of the funding period,
will include any money remaining in the pre-funding account that was
allocated to the related loan group or subgroup, as applicable.]
Certificateholders should review the priority of payments described under
"Description of the Certificates -- Distributions" in this prospectus
supplement.
See "Description of the Certificates -- Distributions" and "--
Overcollateralization and Cross-Collateralization Provisions" in this prospectus
supplement.
Credit Enhancement
Credit enhancements provide limited protection to certain holders of
certificates against shortfalls in payments received on the mortgage loans. This
transaction employs the following forms of credit enhancement.
Subordination
The issuance of senior certificates and subordinated certificates by the
trust is designed to increase the likelihood that senior certificateholders will
receive regular payments of interest and principal. Among the fixed rate
certificates, the Class AF-[ ] Certificates constitute the "senior
certificates," and the Class MF-[1], Class MF-[2], Class BF and Class BF-IO
Certificates constitute the "subordinated certificates." Among the adjustable
rate certificates, the Class AV-[1] and Class AV-[2] Certificates constitute the
"senior certificates," and the Class MV-[1], Class MV-[2], Class BV and Class
BV-IO Certificates constitute the "subordinated certificates."
The certificates that have been designated as senior certificates will have
a payment priority over the certificates that are designated as subordinated
certificates. Within the classes of subordinated certificates of a certificate
group:
. certificates that have a class M-[1] designation will have payment
priority over certificates of the same certificate group that have a
class M-[2] designation and any class B designation;
. certificates that have a class M-[2] designation will have payment
priority over certificates of the same certificate group that have any
class B designation; and
. the Class BF and Class BV Certificates will have payment priority over
the Class BF-IO and Class BV-IO Certificates, respectively.
Subordination is designed to provide the holders of certificates having a
higher payment priority with protection against most losses realized when the
remaining unpaid principal balance on a mortgage loan exceeds the amount of
proceeds recovered upon the liquidation of that mortgage loan. In general, this
loss protection is accomplished by allocating realized losses among the
subordinated certificates, beginning with the subordinated certificates with the
lowest payment priority, before realized losses are allocated to the senior
certificates.
S-14
<PAGE>
See "Description of the Certificates -- Distributions" in this prospectus
supplement.
Overcollateralization and Cross-Collateralization
When excess interest payments received in respect of the mortgage loans of
a loan group are used to reduce principal owed on the related certificate group,
the sum of the aggregate principal balance of the mortgage loans in that loan
group [plus the amount, if any, on deposit in the pre-funding account allocated
to purchase subsequent mortgage loans to be included in that loan group] may
become greater than the principal balance of the related certificate group. If
this occurs, the certificate group will be "overcollateralized," and on any
distribution date, the amount of that overcollateralization will be available to
absorb the related certificates' share of losses from liquidated mortgage loans,
if those losses are not otherwise covered. The required level of
overcollateralization will vary by certificate group and may change over time.
Each group of mortgage loans is expected to generate more interest than is
needed to pay interest on the related classes of certificates because the
weighted average interest rate of the mortgage loans in each loan group is
expected to be higher than the weighted average pass-through rate on the related
certificates. Any interest payments received in respect of the mortgage loans of
a loan group in excess of the amount that is needed to pay interest on the
certificates of the related certificate group will be used to reduce the total
principal balance of those certificates until a required level of
overcollateralization has been achieved.
In addition, the principal payment rules require that, under certain
circumstances, excess interest generated by one loan group be used with respect
to the other loan group; this is called "cross-collateralization."
See "Description of the Certificates -- Overcollateralization and Cross-
Collateralization Provisions" in this prospectus supplement.
Advances
The master servicer will make cash advances with respect to delinquent
payments of principal and interest on the mortgage loans to the extent that the
master servicer reasonably believes that those cash advances can be repaid from
future payments on the related mortgage loans. These cash advances are only
intended to maintain a regular flow of scheduled interest and principal payments
on the certificates and are not intended to guarantee or insure against losses.
See "Servicing of the Mortgage Loans" in this prospectus supplement.
Optional Termination
The master servicer may purchase all of the remaining assets [in a loan
group] after the principal balance of the [related] mortgage loans and any
[related] foreclosed real estate owned by the trust fund declines to or below
[10]% of the sum of the principal balance of the mortgage loans [in that loan
group] as of the initial cut-off date [plus the amount deposited in the pre-
funding account on the closing date that is allocated to purchase subsequent
mortgage loans to be
S-15
<PAGE>
included in that loan group]. Such a purchase by the master servicer will result
in the early retirement of all certificates [in the related certificate group].
See "Description of the Certificates -- Optional Termination" in this
prospectus supplement.
Material Federal Income Tax Consequences
For federal income tax purposes, the trust will comprise multiple real
estate mortgage investment conduits, organized in a tiered REMIC structure. The
certificates offered by this prospectus supplement and the Class BF-IO and Class
BV-IO Certificates will represent beneficial ownership of REMIC "regular
interests" in the upper tier REMIC identified in the pooling and servicing
agreement.
The residual certificates will represent the beneficial ownership of the
sole class of "residual interest" in each REMIC. Some classes of offered
certificates may be issued with original issue discount for federal income tax
purposes.
The adjustable rate certificates will also represent the beneficial
interest in the right to receive payments from the adjustable rate carryover
reserve fund in accordance with an interest rate cap agreement contained in the
pooling and servicing agreement.
The treatment of the rights of the offered fixed rate certificates to any
interest in excess of the weighted average net mortgage rate of the fixed rate
mortgage loans is unclear for federal income tax purposes. The rights of these
certificates to interest carryforward amounts may be treated as representing
beneficial interests in the right to receive payments from a separate reserve
fund in accordance with an interest rate cap agreement treated as a notional
principal contract. Alternatively, the rights of these certificates to interest
carryforward amounts may be treated as representing beneficial interests in an
entity taxable as a partnership for federal income tax purposes with the Class
BF-IO Certificates in respect of the Class BF-IO Certificates' entitlement to
interest.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus.
Legal Investment Considerations
None of the classes of offered certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
See "Legal Investment" in the prospectus.
S-16
<PAGE>
ERISA Considerations
The Class AF-[__] [and AV-[__]] certificates may be purchased by a pension
or other employee benefit plan subject to the Employee Retirement Income
Security Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, or by
an entity investing the assets of an employee benefit plan so long as certain
conditions are met. A fiduciary of an employee benefit plan must determine that
the purchase of a certificate is consistent with its fiduciary duties under
applicable law and does not result in a nonexempt prohibited transaction under
applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Certificate Ratings
The classes of certificates listed below will not be offered unless they
receive the respective ratings set forth below from [Rating Agency] and [Rating
Agency]
------------------------------------------------
Class [Rating Agency] [Rating Agency]
----- --------------- ---------------
------------------------------------------------
Class AF-[1]
------------------------------------------------
Class AF-[ ]
------------------------------------------------
Class AF-[ ]
------------------------------------------------
Class AV-[1]
------------------------------------------------
Class AV-[2]
------------------------------------------------
Class MF-[1]
------------------------------------------------
Class MV-[1]
------------------------------------------------
Class MF-[2]
------------------------------------------------
Class MV-[2]
------------------------------------------------
Class BF
------------------------------------------------
Class BV
------------------------------------------------
A rating is not a recommendation to buy, sell or hold securities.
These ratings may be lowered or withdrawn at any time by either of the rating
agencies.
See "Ratings" in this prospectus supplement and "Risk Factors --
Rating of the Securities" and "Rating" in the prospectus.
S-17
<PAGE>
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth under
"Risk Factors" in the prospectus.
The subordinated certificates have a
greater risk of loss than senior
certificates and subordination may
not be sufficient to protect senior
certificates from losses.......... When certain classes of certificates
provide credit enhancement for other
classes of certificates this is
sometimes referred to as
"subordination." The subordination
feature is intended to enhance the
likelihood that senior
certificateholders will receive
regular payments of interest and
principal. For purposes of this
prospectus supplement, "related
subordinated classes" means:
. with respect to the senior
certificates of a certificate group,
the certificates of the same
certificate group that have a Class M
or Class B designation;
. with respect to the certificates that
have a Class M-[1] designation, the
certificates of the same certificate
group that have a Class M-[2]
designation or any Class B
designation;
. with respect to the certificates that
have a Class M-[2] designation, the
certificates of the same certificate
group that have any Class B
designation; and
. with respect to the Class BF and
Class BV Certificates, the Class
BF-IO and Class BV-IO Certificates,
respectively.
Credit enhancement will be provided
for the certificates, first, by the
right of the holders of the
certificates to receive certain
payments of principal before the
related subordinated classes and,
second, by the allocation of realized
losses to the related subordinated
classes. This form of credit
enhancement is provided by using
collections on the mortgage loans
S-18
<PAGE>
otherwise payable to the holders of the
related subordinated classes to pay
amounts due on the more senior classes.
Collections otherwise payable to
subordinated classes comprise the sole
source of funds from which this credit
enhancement is provided. Realized losses
are allocated to the subordinated
certificates, beginning with the
subordinated certificates with the
lowest payment priority, until the
principal amount of that subordinated
class has been reduced to zero. This
means that with respect to the
certificates offered by this prospectus
supplement, realized losses on the
mortgage loans of a particular loan
group will first be allocated to the
Class BF or Class BV Certificates, as
applicable, until the principal balance
of the Class BF or Class BV Certificates
has been reduced to zero. Subsequent
realized losses will be allocated to the
next most junior class of subordinated
certificates of the related certificate
group, until the principal balance of
that class of subordinated certificates
has been reduced to zero. Accordingly,
if the aggregate principal balance of
the related subordinated classes were to
be reduced to zero, delinquencies and
defaults on the mortgage loans would
reduce the amount of funds available for
monthly distributions to holders of the
remaining certificates.
You should fully consider the risks of
investing in a subordinated certificate,
including the risk that you may not
fully recover your initial investment as
a result of realized losses. In
addition, investors in senior
certificates should consider the risk
that the subordination of the related
subordinated classes may not be
sufficient to protect the senior
certificates from losses.
See "Description of the Certificates" in
this prospectus supplement .
Excess interest from the mortgage
loans may not provide adequate credit
enhancement...................... Each group of mortgage loans is expected
to generate more interest than is needed
to pay interest on the related classes
of certificates because the weighted
average interest rate on the related
mortgage loans is expected to be higher
than the weighted average pass-through
S-19
<PAGE>
rate on the related classes of
certificates. If the amount of interest
generated by the related mortgageloans
is more than the amount than is needed
to pay interest on the related
certificates, that "excess interest"
will be used to make additional
principal payments on the related
certificates. The use of excess interest
to make additional principal payments on
related certificates will reduce the
total principal balance of those
certificates below the aggregate
principal balance of the related
mortgage loans, thereby creating
additional "overcollateralization."
Overcollateralization is intended to
provide limited protection to
certificateholders by absorbing the
related certificates' share of losses
from liquidated mortgage loans.
However, we cannot assure you that
enough excess interest will be generated
on the mortgage loans of either loan
group to establish or maintain the
required levels of overcollateralization
for the related certificate group.
The excess interest available on any
distribution date will be affected by
the actual amount of interest received,
collected or recovered in respect of the
related mortgage loans during the
preceding month. That amount will be
influenced by changes in the pass-
through rates on the offered adjustable
rate certificates and the Class AF-[1]
Certificates, and changes to the
weighted average of the mortgage rates
resulting from prepayments and
liquidations of the related mortgage
loans, and in the case of the offered
adjustable rate certificates,
adjustments of the mortgage rates on
adjustable rate mortgage loans. Because
the mortgage rates on the fixed rate
mortgage loans are fixed, [except for
some mortgage rates that may decline
based on payment history,] while the
pass-through rate on the Class AF-[1]
Certificates is variable and because the
index used to determine the mortgage
rates on the adjustable rate mortgage
loans is different from the index used
to determine the pass-through rates on
the offered adjustable rate
certificates, it is possible that the
pass-through rates on these certificates
may be higher than the interest rates on
the related mortgage loans. In that
event, it may be necessary to apply all
or a portion of the available excess
interest to make
S-20
<PAGE>
required payments of interest on the
related classes of certificates. As a
result, excess interest may be
unavailable for any other purpose.
If the protection afforded by
overcollateralization and cross-
collateralization is insufficient, then
the holders of the certificates could
experience a loss on their investment.
[Risk regarding mortgage rates The pass-through rate on each class
of adjustable rate certificates
adjusts monthly and is generally
based on one-month LIBOR. The
mortgage rates on the adjustable rate
mortgage loans generally adjust
semi-annually based on six-month
LIBOR [(although with respect to
approximately [___]% and [___]% of
the mortgage loans in statistical
calculation loan subgroup [___] and
statistical calculation loan subgroup
[__], respectively, the related
interest rates are initially fixed
for one, two or three years before
they begin to adjust semi-annually).]
Because six-month LIBOR may respond
to different economic and market
factors than one-month LIBOR, there
is not necessarily a correlation in
movement between those indices. For
example, it is possible that the
interest rates on some of the
adjustable rate mortgage loans may
decline while the pass-through rates
on the related certificates are
stable or rising. In addition,
although it is possible that both the
mortgage rates and certificate
pass-through rates may decline or
increase during the same period,
because of the difference between
interest rate adjustment periods and
pass-through rate adjustment periods,
mortgage rates may decline or
increase more slowly than the related
certificate pass-through rates.
This absence of a correlation between
movement in the mortgage rates and
the certificate pass-through rates
may reduce the interest payable on
the adjustable rate certificates
because of the imposition of a
pass-through rate cap called the
"adjustable rate available funds
cap." Although it is intended that
the amount by which a
certificateholder's interest payment
has been reduced by operation of the
adjustable rate available funds cap
will be paid to that
certificateholder on future
distribution dates, we cannot assure
you that excess funds will be
available to make any of those
payments.
S-21
<PAGE>
In addition, the pass-through rate on
the Class AF-[1] Certificates adjusts
monthly and is based on one-month
LIBOR while the mortgage rates on the
fixed rate mortgage loans are fixed
[, except for some mortgage rates that
may decline based on payment history].
The absence of the correlation between
the variable pass-through rate on the
Class AF-[1] Certificates and the fixed
mortgage rates for the fixed rate loan
group may reduce the interest payable on
the Class AF-[1] Certificates because of
the imposition of a pass-through rate
cap called "fixed net rate cap."
Although it is intended that the amount
by which a certificateholder's interest
payment has been reduced by operation of
the fixed net rate cap will be paid to
that certificateholder on future
distribution dates, we cannot assure you
that excess funds will be available to
make any of those payments.]
Defaults on second lien [fixed]
[adjustable] rate mortgage loans
could result in payment delay or loss
on the offered [fixed] [adjustable]
rate certificates.................... Approximately [___]% of the mortgage
loans in the [fixed] [adjustable] rate
[statistical calculation] loan group
will be secured by second mortgages on
residential properties. In the case of
liquidations, [fixed] [adjustable] rate
mortgage loans secured by second
mortgages are entitled to proceeds that
remain from the sale of the related
mortgaged property after any related
first lien mortgage loan and prior
statutory liens have been repaid in full
and any related foreclosure costs have
been paid. If those proceeds are
insufficient to satisfy the mortgage
loans secured by second mortgages and
prior liens and costs in the aggregate,
the trust fund and, accordingly, holders
of the offered [fixed] [adjustable] rate
certificates will bear:
. the risk of delay in distributions
while any deficiency judgment
against the borrower is sought, and
. the risk of loss if the deficiency
judgment cannot be obtained or is
not realized upon.
S-22
<PAGE>
See "Certain Legal Aspects of the
Loans" in the prospectus.
[Balloon loans may have high
rates of default...................... With respect to approximately [___]% of
the mortgage loans in the [fixed]
[adjustable] rate [statistical
calculation] loan group, borrowers make
monthlypayments of principal that are
less than sufficient to amortize those
mortgage loans by their maturity. These
loans are commonly called "balloon
loans." As a result of these lower
monthly payments, a borrower generally
will be required to pay a large
remaining principal balance upon the
maturity of a balloon loan. The ability
of a borrower to make that payment may
depend on its ability to obtain
refinancing of the balance due on the
mortgage loan. In addition, an increase
in prevailing market interest rates over
the loan rate on the mortgage loan at
origination may reduce the borrower's
ability to obtain refinancing and to pay
the principal balance of the mortgage
loan at its maturity.]
Cash flow considerations and risks
could cause payment delays and
losses............................ There could be substantial delays in
the liquidation of defaulted mortgage
loans and corresponding delays in
your receiving your portion of the
proceeds of a liquidation. These
delays could continue for several
years. Furthermore, an action to
obtain a deficiency judgment is
regulated by statutes and rules, and
the amount of a deficiency judgment
may be limited by law. In the event
of a default by a borrower, these
restrictions may impede the ability
of the master servicer to foreclose
on or to sell the mortgaged property
or to obtain a deficiency judgment.
In addition, liquidation expenses
(such as legal and appraisal fees,
real estate taxes and maintenance and
preservation expenses) will reduce
the amount of security for the
mortgage loans and, in turn, reduce
the proceeds payable to
certificateholders. If:
. the mortgaged properties fail to
provide adequate security for the
related mortgage loans, and
S-23
<PAGE>
. the protection provided by the
subordination of certain classes and
the availability of
overcollateralization are
insufficient to cover any shortfall,
you could lose all or a portion of
the money you paid for the
certificates.
Yield and reinvestment could be
adversely affected by
unpredictability of
prepayments ..................... No one can accurately predict the
level of prepayments that the trust
fund will experience. The trust
fund's prepayment experience may be
affected by many factors, including:
. general economic conditions,
. the level of prevailing interest
rates,
. the availability of alternative
financing, and
. homeowner mobility.
In addition, [substantially all of]
the mortgage loans contain
due-on-sale provisions, and the
master servicer intends to enforce
those provisions unless doing so is
not permitted by applicable law or
the master servicer, in a manner
consistent with reasonable commercial
practice, permits the purchaser of
the mortgaged property in question to
assume the related mortgage loan.
See "The Mortgage Pool" and "Yield,
Prepayment and Maturity
Considerations" in this prospectus
supplement and "Certain Legal Aspects
of the Loans -- Due-on-Sale Clauses"
in the prospectus for a description
of certain provisions of the mortgage
loans that may affect the prepayment
experience on the mortgage loans.
[In addition, the weighted average
life of the certificates will be
affected by any prepayment resulting
from the distribution of amounts (if
any) on deposit in the pre-funding
account after the end of the
S-24
<PAGE>
funding period that are allocated to the
related loan group or subgroup, as
applicable.]
The weighted average life of the
certificates will be sensitive to the
rate and timing of principal payments
(including prepayments) on the
mortgage loans, which may fluctuate
significantly from time to time. You
should note that:
. generally, if you purchase your
certificates at a discount and
principal is repaid on the related
mortgage loans slower than you
anticipate, then your yield may be
lower than you anticipate;
. generally, if you purchase your
certificates at a premium and
principal is repaid on the related
mortgage loans faster than you
anticipate, then your yield may be
lower than you anticipate;
. if you purchase an adjustable rate
certificate, your yield will also be
sensitive to:
- the level of one-month LIBOR;
- the timing of adjustment of the
pass-through rate on your certificate
as it relates to the timing of
adjustment of the interest rates on
the adjustable rate mortgage loans;
- the level of the mortgage index;
and
- other limitations on the pass-
through rate of that certificate, as
described further in this prospectus
supplement; and
. if you purchase a Class AF-[1]
Certificate, your yield will also be
sensitive to:
- the level of one-month LIBOR, and
- the adjustment of the pass-through
rate on your certificates as it
relates to the interest rates on the
fixed rate mortgage loans, you bear
the reinvestment risks resulting from
a faster or slower rate of principal
payments than you expected.
S-25
<PAGE>
See "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement.
[Possible prepayment due to
inability to acquire related
subsequent mortgage loans.......... The ability of the trust fund to acquire
subsequent mortgage loans for inclusion
in the related loan group or subgroup
(as applicable) depends on the ability
of the seller to originate and acquire
mortgage loans during the funding period
that meet the eligibility criteria for
subsequent mortgage loans as described
in this prospectus supplement. The
ability of the seller to originate and
acquire these loans will be affected by
a number of factors including prevailing
interest rates, employment levels, the
rate of inflation and economic
conditions generally.
If the full amounts on deposit in the
pre-funding account allocated to
purchase subsequent mortgage loans for a
loan group or subgroup (as applicable)
cannot be used by the end of the funding
period for that purpose, that amount
remaining on deposit in the pre-funding
account will be distributed to the
related certificateholders as a
prepayment of principal on the
[_______], 200[__] distribution date. In
particular, investors in the Class AV-
[2] Certificates should note that a
substantial portion of the pre-funded
amount (approximately [___]%) has been
allocated to purchase subsequent
mortgage loans to be included in loan
group [__]. No assurance can be given as
to the magnitude of any amount on
deposit in the pre-funding account at
the end of the funding period with
respect to any loan group or subgroup.]
Reduction in or withdrawal of
certificate ratings will affect the
value of the certificates............. The ratings of the certificates will
depend primarily on an assessment by the
rating agencies of the mortgage loans
underlying the certificates, the amount
of overcollateralization and the
subordination afforded by certain
classes of certificates. The rating by
each of the rating agencies of the
certificates is not a recommendation to
purchase, hold or sell the certificates
because that rating does not address the
market price of the certificates or
suitability for a particular investor.
S-26
<PAGE>
The rating agencies may suspend, reduce
or withdraw the ratings on the
certificates at anytime. Any reduction
in, or suspension or withdrawal of, the
ratings assigned to the certificates
would probably reduce the market value
of the certificates and may affect your
ability to sell them.
Distribution to and rights of
investors could be adversely
affected by the bankruptcy or
insolvency of certain parties ........ First Horizon will treat its transfer
of the mortgage loans to the
depositor as a sale of the mortgage
loans. However, if First Horizon
becomes bankrupt, the trustee in
bankruptcy of First Horizon may argue
that the mortgage loans were not sold
but were only pledged to secure a
loan to First Horizon. If that
argument is made, you could
experience delays or reduction in
payments on the certificates. If
that argument is successful, the
bankruptcy trustee could elect to
sell the mortgage loans and pay down
the certificates early. Thus, you
could lose the right to future
payments of interest, and might
suffer reinvestment loss in a lower
interest rate environment.
In addition, if the master servicer
becomes bankrupt, a bankruptcy
trustee or receiver may have the
power to prevent the trustee from
appointing a successor master
servicer. Any related delays in
servicing could result in increased
delinquencies or losses on the
mortgage loans.
Geographic concentration of
mortgaged properties in
[California] increases the risk
that certificate yields could be
impaired............................. Approximately [___]% of the mortgage
loans in the fixed rate [statistical
calculation] loan group and
approximately [___]% of the mortgage
loans in the adjustable rate
[statistical calculation] loan group
[(and [___]% and [___]% of the
mortgage loans in statistical
calculation loan subgroup [__] and
statistical calculation loan subgroup
[__], respectively)] as of the
[statistical calculation] [cut-off]
date are secured by mortgaged
properties that are located in the
State of [California]. Property in
[California] may be more susceptible
than homes located in other parts of
the
S-27
<PAGE>
country to some types of uninsurable
hazards, such as earthquakes, floods,
mudslides and other natural disasters.
In addition:
. economic conditions in [California]
(which may or may not affect real
property values) may affect the
ability of borrowers to repay their
loans on time;
. declines in the [California]
residential real estate market may
reduce the values of properties
located in [California], which would
result in an increase in the loan-to-
value ratios; and
. any increase in the market value of
properties located in [California]
would reduce the loan-to-value ratios
and could, therefore, make
alternative sources of financing
available to the borrowers at lower
interest rates, which could result in
an increased rate of prepayment of
the mortgage loans.
You may have difficulty reselling
certificates ......................... The underwriters intend to make a
secondary market in the classes of
certificates purchased by them, but no
underwriter has any obligation to do so.
We cannot assure you that a secondary
market will develop or, if it develops,
that it will continue. Consequently, you
may not be able to sell your
certificates readily or at prices that
will enable you to realize your desired
yield. The market values of the
certificates are likely to fluctuate.
Fluctuations may be significant and
could result in significant losses to
you.
The secondary markets for asset backed
securities have experienced periods of
illiquidity and can be expected to do so
in the future. Illiquidity can have a
severely adverse effect on the prices of
certificates that are especially
sensitive to prepayment, credit or
interest rate risk, or that have been
structured to meet the investment
requirements of limited categories of
investors.
S-28
<PAGE>
FORWARD LOOKING STATEMENTS
Some statements contained in or incorporated by reference in this
prospectus supplement and the accompanying prospectus consist of forward-looking
statements relating to future economic performance or projection and other
financial items. These statements can be identified by the use of forward-
looking words such as "may," "will," "should," "expects," "believes,"
"anticipates," "estimates," or other comparable words. Forward-looking
statements are subject to a variety of risks and uncertainties that could cause
actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences and various other matters, many of which are beyond our control.
Because we cannot predict the future, what actually happens may be very
different from what we predict in our forward-looking statements.
THE MORTGAGE POOL
General
The following discussion applies to the origination, sales and servicing
practices of First Horizon in effect at the time of the origination of the
Mortgage Loans.
Set forth below is certain [statistical] information based on scheduled
principal balances as of [_________], 200[__] which is the ["Statistical
Calculation Date"] concerning (1) the pool of mortgage loans, [and] (2) each
group of mortgage loans comprising that pool [and (3) each subgroup of mortgage
loans comprising the [fixed] [adjustable] rate group of mortgage loans], in each
case with respect to mortgage loans originated by the Seller (as defined in this
prospectus supplement) through [__________], 200[__] [(such pool, the
"Statistical Calculation Pool," each such group, a "Statistical Calculation Loan
Group", and each such subgroup, a "Statistical Calculation Loan Subgroup")]. A
detailed description of the pool of conventional mortgage loans (the "[Initial]
Mortgage Loans") to be actually included in the Trust Fund at the Closing Date
(such pool, the "[Initial] Mortgage Pool") will be available to purchasers of
the Offered Certificates at or before, and will be filed on Form 8-K with the
Securities and Exchange Commission after delivery of the Offered Certificates.
The Detailed Description will specify the aggregate of the Stated Principal
Balances of the [Initial] Mortgage Loans included in the [Initial] Mortgage Pool
[as of the later of (x) [_________], 200[__] and (y) the date of origination of
each of those Initial Mortgage Loans (the "Initial Cut-off Date," and such
aggregate of those Stated Principal Balances, the "Initial Cut-off Date Pool
Principal Balance")] and will also include, among other things, the following
information regarding those [Initial] Mortgage Loans:
. the Mortgage Rates borne by the [Initial] Mortgage Loans as of the
[Initial Cut-off Date],
. the lien priorities of the [Initial] Mortgage Loans,
S-29
<PAGE>
. the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as
applicable, of the [Initial] Mortgage Loans,
. the remaining months to stated maturity of the [Initial] Mortgage
Loans as of the [Initial Cut-off Date],
. the type of properties securing the [Initial] Mortgage Loans,
. the geographical distribution of those [Initial] Mortgage Loans by
state,
. the occupancy types of the [Initial] Mortgage Loans, and
. the loan purposes of the [Initial] Mortgage Loans.
The "[Statistical Calculation] [Cut-off] Date Pool Principal Balance" is
$[___________], which is equal to the aggregate Stated Principal Balance of the
Mortgage Loans as of the [Statistical Calculation] [Cut-off] Date. The
[Statistical Calculation] [Cut-off] Date Group Principal Balance for the
[Statistical Calculation] Loan Group comprised of Fixed Rate Mortgage Loans (the
"Fixed Rate [Statistical Calculation] Loan Group") is $[__________], which is
equal to the aggregate Stated Principal Balance of the Fixed Rate Mortgage Loans
as of the [Statistical Calculation] [Cut-off] Date. The [Statistical
Calculation] [Cut-off] Date Group Principal Balance for the [Statistical
Calculation] Loan Group comprised of Adjustable Rate Mortgage Loans (the
"Adjustable Rate [Statistical Calculation] [Cut-off] Loan Group") is $[______],
which is equal to the aggregate Stated Principal Balance of the Adjustable Rate
Mortgage Loans as of the [Statistical Calculation] [Cut-off] Date. [The
"[Statistical Calculation] [Cut-off] Date Subgroup Principal Balance" for the
[Statistical Calculation] Loan Subgroup identified below as "[Statistical
Calculation] Loan Subgroup [__]" is $[_______] which is equal to the aggregate
Stated Principal Balances of the [Fixed] [Adjustable] Rate Mortgage Loans in
[Statistical Calculation] Loan Subgroup [__].
[The Statistical Calculation Pool will consist of [___] Mortgage Loans, of
which approximately [___]% are included in the Fixed Rate Statistical
Calculation Loan Group and approximately [___]% are included in the Adjustable
Rate Statistical Calculation Loan Group (based on the scheduled principal
balances as of the Statistical Calculation Date).] First Horizon Asset
Securities Inc. (the "Depositor") believes that the information set forth in
this prospectus supplement with respect to the [Statistical Calculation]
[Mortgage] Pool, each [Statistical Calculation] Loan Group [and each Statistical
Calculation Loan Subgroup] as presently constituted is representative of the
characteristics of the Mortgage Pool, each Loan Group [and each Loan Subgroup],
respectively, as will be constituted at the Closing Date, although some
characteristics of the Mortgage Loans in the Mortgage Pool, each Loan Group [and
each Loan Subgroup] may vary. See "-- Difference between Statistical
Calculation Pool and the Actual Mortgage Pool" below. Unless otherwise
indicated, information presented below expressed as a percentage (other than
rates of interest) are approximate percentages based on either the [Statistical
Calculation] [Cut-off] Date Group Principal Balance of the related [Statistical
Calculation] Loan Group [or the Statistical Calculation Date Subgroup Principal
Balance of the related Statistical Loan Subgroup, as applicable].
S-30
<PAGE>
All of the Mortgage Loans to be included in the Trust Fund will be
evidenced by promissory notes (the "Mortgage Notes"). The Mortgage Notes are
secured by first and second lien deeds of trust, security deeds or mortgages on
one- to four-family residential properties (the "Mortgaged Properties") which
are located in 49 states and the District of Columbia. Each Mortgage Loan in the
Trust will be assigned to one of two mortgage loan groups (the "Fixed Rate Loan
Group" and "Adjustable Rate Loan Group," and each a "Loan Group"), comprised of
Mortgage Loans that bear interest at fixed rates[, except for some mortgage
rates that may decline based on payment history], in the case of the Fixed Rate
Loan Group such Mortgage Loans, (the "Fixed Rate Mortgage Loans"), and
adjustable rates, in the case of the Adjustable Rate Loan Group such Mortgage
Loans, (the "Adjustable Rate Mortgage Loans"). [The [Fixed] [Adjustable] Rate
Loan Group will be comprised of [ ] subgroups of Mortgage Loans (each a "Loan
Subgroup"). ["Loan Subgroup [__]" will consist of [Fixed] [Adjustable] Rate
Mortgage Loans with principal balances at origination that may or may not
conform to the criteria specified below for principal balances at origination of
the Mortgage Loans included in Loan Subgroup [__]. "Loan Subgroup [__]" will
consist of [Fixed] [Adjustable] Rate Mortgage Loans that had a principal balance
at origination of no more than $[_________] (or $[_______] if the property is
located in [___________] or [__________]), if a single-family property, or
$[________] (or $[________] if the property is located in [__________] or
[________]), if a two- to four-family property.]
[Substantially] all of the Mortgage Loans to be included in the Trust Fund
will provide for the amortization of the amount financed over a series of
monthly payments and will provide for payments due as of the first day of each
month. [The Mortgage Loans to be included in the Trust Fund will have been
originated or purchased by First Horizon and will have been originated
substantially in accordance with First Horizon's underwriting criteria described
in the prospectus under "Loan Programs -- Underwriting Standards." ]
Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
("Scheduled Payments") either earlier or later than the scheduled due dates of
those Mortgage Loans will not affect the amortization schedule or the relative
application of those payments to principal and interest. All of the Mortgage
Notes will provide for a fifteen (15) day grace period for monthly payments. Any
Mortgage Loan may be prepaid in full or in part at any time; however,
approximately [___]% of the Mortgage Loans in the Fixed Rate [Statistical
Calculation] Loan Group and [___]% of the Mortgage Loans in the Adjustable Rate
[Statistical Calculation] Loan Group (approximately [___]% of the Mortgage Loans
in [Statistical Calculation] Loan Subgroup [__] and approximately [___]% of the
Mortgage Loans in [Statistical Calculation] Loan Subgroup [__]) provide for the
payment by the borrower of a prepayment charge on full prepayments typically
made within five years from the date of execution of the related Mortgage Note.
In general, the related Mortgage Note will provide that a prepayment charge will
apply if, during the first five years from the date of origination of that
Mortgage Loan, the borrower prepays that Mortgage Loan in full. The amount of
the prepayment charge will generally be equal to six months' advance interest
calculated on the basis of the rate in effect at the time of that prepayment on
the amount prepaid in excess of 20% of the original balance of that Mortgage
Loan.
S-31
<PAGE>
Fixed Rate [Statistical Calculation] Loan Group
For the Fixed Rate Mortgage Loans in the Fixed Rate [Statistical
Calculation] Loan Group:
. The aggregate of the Stated Principal Balances was $[_______]. The
average Stated Principal Balance was $[_______], the minimum Stated
Principal Balance was $[_______], and the maximum Stated Principal
Balance was $[_______].
. The minimum Mortgage Rate and the maximum Mortgage Rate were
approximately [___]% and [___]% per annum, respectively, and the
weighted average Mortgage Rate was approximately [___]% per annum.
. The remaining amortization term to maturity ranged from approximately
[___] months to [___] months and the weighted average remaining
amortization term to maturity was approximately [___] months.
. Approximately [___]% of the Mortgage Loans were secured by Mortgaged
Properties which are single-family detached residences and
approximately [___]% were owner-occupied.
. Approximately [___]%, [___]%, [___]%, [___]% and [___]% of the
Mortgage Loans are secured by Mortgaged Properties located in [___],
[___], [___], [___] and [___], respectively.
. Approximately [___]% of the Mortgage Loans were underwritten in
accordance with First Horizon's [Stated Income] Program.
. Approximately [___]% of the Mortgage Loans constitute Balloon Loans.
. Approximately [___]% of the Mortgage Loans were 30 to 59 days
delinquent. As of the [Statistical Calculation] [Cut-off] Date, no
Mortgage Loan was 60 or more days delinquent.
. Approximately [___]% of the Mortgage Loans are secured by first liens
on the related Mortgaged Properties, and approximately [___]% of the
Mortgage Loans are secured by second liens on the related Mortgaged
Properties.
Adjustable Rate [Statistical Calculation] Loan Group
For the Adjustable Rate Mortgage Loans in the Adjustable Rate [Statistical
Calculation] Loan Group:
. The aggregate of the Stated Principal Balances was $[_______]. The
average Stated Principal Balance was $[_________], the minimum Stated
Principal
S-32
<PAGE>
Balance was $[________], and the maximum Stated Principal Balance was
$[_______].
. The minimum current Mortgage Rate and the maximum current Mortgage
Rate were approximately [___]% and [___]% per annum, respectively, and
the weighted average Mortgage Rate was approximately [___]% per annum.
. The remaining term to scheduled maturity ranged from approximately
[___] to [___] months and the weighted average remaining term to
scheduled maturity was approximately [___] months.
. Approximately [___]% of the Mortgage Loans were secured by Mortgaged
Properties which are single-family detached residences and
approximately [ ] % were owner-occupied.
. Approximately [___]%, [___]%, [___]%, [___]% and [___]% of the
Mortgage Loans are secured by Mortgaged Properties located in [___],
[___], [___], [___] and [___], respectively.
. Approximately [___]% of the Mortgage Loans were underwritten in
accordance with First Horizon's [Stated Income] Program.
. None of the Mortgage Loans constitute Balloon Loans.
. Approximately [___]% of the Mortgage Loans were 30 to 59 days
delinquent. No Mortgage Loan was 60 or more days delinquent.
. All of the Mortgage Loans are secured by first liens on the related
Mortgaged Properties.
[Statistical Calculation] Loan Subgroup [__]
For the [Fixed] [Adjustable] Rate Mortgage Loans in [Statistical
Calculation] Loan Group [__]:
. The aggregate of the Stated Principal Balances was $[________]. The
average Stated Principal Balance was $[_______], the minimum Stated
Principal Balance was $[_______], and the maximum Stated Principal
Balance was $[_______].
. The minimum current Mortgage Rate and the maximum current Mortgage
Rate were approximately [___]% and [___]% per annum, respectively, and
the weighted average Mortgage Rate was approximately [___]% per annum.
. The remaining term to scheduled maturity ranged from approximately
[___] to [___] months and the weighted average remaining term to
scheduled maturity was approximately [___] months.
S-33
<PAGE>
. Approximately [___]% of the Mortgage Loans were secured by Mortgaged
Properties which are single-family detached residences and
approximately [___]% were owner-occupied.
. Approximately [___]%, [___]%, [___]%, [___]% and [___]% of the
Mortgage Loans are secured by Mortgaged Properties located in [___],
[___], [___], [___] and [___], respectively.
. Approximately [___]% of the Mortgage Loans were underwritten in
accordance with First Horizon's Stated Income Program.
. None of the Mortgage Loans constitute Balloon Loans.
. Approximately [___]% of the Mortgage Loans were 30 to 59 days
delinquent. No Mortgage Loan was 60 or more days delinquent.
Additional Information Regarding the Adjustable Rate Mortgage Loans
Each of the Adjustable Rate Mortgage Loans will have a Mortgage Rate which
is subject to semi-annual adjustment on the first day of the months specified in
the related Mortgage Note (each of these dates, an "Adjustment Date") to equal
the sum, rounded to the nearest [___]%, of:
. the average of the London interbank offered rates for [six-month] U.S.
dollar deposits in the London market, as set forth in The Wall Street
Journal, or, if that rate ceases to be published in The Wall Street
Journal or becomes unavailable for any reason, then based upon a new
index selected by the Trustee, as holder of the related Mortgage Note,
based on comparable information, in each case as most recently
announced as of a date [45] days before that Adjustment Date (the
"Mortgage Index"); and
. a fixed percentage amount specified in the related Mortgage Note (the
"Gross Margin");
provided, however, that the Mortgage Rate for substantially all of the
Adjustable Rate Mortgage Loans will not increase or decrease by more than [___]%
on any Adjustment Date (the "Periodic Rate Cap"), with the exception of the
initial Adjustment Date for some of the [1/29], [2/28] and [3/27] Mortgage Loans
(each defined below), which are subject to a different initial Periodic Rate
Cap, which is set forth in the Mortgage Note. Substantially all of the Mortgage
Loans in the Adjustable Rate Statistical Calculation Loan Group were originated
with Mortgage Rates less than the sum of the then applicable Mortgage Index and
the related Gross Margin. Approximately [___]% of the Mortgage Loans in the
Adjustable Rate [Statistical Calculation] Loan Group [(and
S-34
<PAGE>
[___]% in Statistical Calculation Loan Subgroup [___] and [___]% in Statistical
Calculation Loan Subgroup [___]) have fixed Mortgage Rates for approximately
[12] months after origination of those Mortgage Loans (the "[1/29] Mortgage
Loans"), approximately [___]% of the Mortgage Loans in the Adjustable Rate
[Statistical Calculation] Loan Group [(and [___]% in Statistical Calculation
Loan Subgroup [___] and [___]% in Statistical Calculation Loan Subgroup [___])]
have fixed Mortgage Rates for approximately [24] months after origination of
those Mortgage Loans (the "[2/28] Mortgage Loans"), and approximately [___]% of
the Mortgage Loans in the Adjustable Rate [Statistical Calculation] Loan Group
[(and [___]% in Statistical Calculation Loan Subgroup [__] and [___]% in
Statistical Calculation Loan Subgroup [__])] have fixed Mortgage Rates for
approximately [36] months after origination of those Mortgage Loans (the "[3/27]
Mortgage Loans"), in each case before becoming subject to the semi-annual
adjustment described in the preceding sentences. Approximately [___]% of the
Mortgage Loans in the Adjustable Rate [Statistical Calculation] Loan Group [(and
[___]% in Statistical Calculation Loan Subgroup [__] and [___]% in Statistical
Calculation Loan Subgroup [__])] will provide that over the life of each
Mortgage Loan in that Adjustable Rate [Statistical Calculation] Loan Group [or
Statistical Calculation Loan Subgroup] the Mortgage Rate will in no event be
more than the initial Mortgage Rate plus [___]% (the "Maximum Mortgage Rate").
Effective with the first payment due on an Adjustable Rate Mortgage Loan after
each related Adjustment Date, the monthly payment will be adjusted to an amount
which will fully amortize the outstanding principal balance of the Mortgage Loan
over its remaining term.
[Difference between Statistical Calculation Pool and the Initial Mortgage Pool
The statistical information presented in this prospectus supplement is
based on the Statistical Calculation Pool. The Statistical Calculation Pool
reflects Mortgage Loans originated by the Seller through [________], 200[_]. The
statistical information presented in this prospectus supplement is based on the
number and the Stated Principal Balances of those Mortgage Loans as of the
Statistical Calculation Date. The Depositor expects the aggregate Stated
Principal Balances of the [Initial] Mortgage Loans to be included in the
[Initial] Mortgage Pool as of the [Initial] Cut-off Date will be approximately
$[______]. The Mortgage Loans to be included in the [Initial] Mortgage Pool will
represent Mortgage Loans in the Statistical Calculation Pool plus additional
Mortgage Loans sold by the Seller to the Depositor, and by the Depositor to the
Trust Fund, on the Closing Date. However, with respect to the Mortgage Loans in
the Statistical Calculation Pool, as to which statistical information is
presented in this prospectus supplement, certain amortization will occur before
the transfer of those Mortgage Loans to the Trust Fund. Moreover, some Mortgage
Loans in the Statistical Calculation Pool may prepay in full or may be
determined not to meet the eligibility requirements for the final Mortgage Pool
and as a result may not be included in the final Mortgage Pool. As a result of
the foregoing, the statistical distribution of characteristics for the [Initial]
Mortgage Pool will vary from the statistical distribution of such
characteristics of the Statistical Calculation Pool as presented in this
prospectus supplement, although that variance will not be material.]
Loan-to-Value Ratio and Combined Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan is equal to:
. the principal balance of that Mortgage Loan at the date of
origination, divided by
. the Collateral Value of the related Mortgaged Property.
S-35
<PAGE>
The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio, expressed as a percentage, of:
. the sum of:
. the original principal balance of the Mortgage Loan, and
. the outstanding principal balance at the date of origination of
the Mortgage Loan of any senior mortgage loan(s) or, in the case
of any open-ended senior mortgage loan, the maximum available
line of credit with respect to that mortgage loan, regardless of
any lesser amount actually outstanding at the date of origination
of the Mortgage Loan, to
. the Collateral Value of the related Mortgaged Property.
The "Collateral Value" of a Mortgaged Property is the lesser of:
. the appraised value based on an appraisal made for First Horizon by an
independent fee appraiser at the time of the origination of the
related Mortgage Loan, and
. the sales price of that Mortgaged Property at that time of
origination.
With respect to a Mortgage Loan the proceeds of which were used to
refinance an existing mortgage loan, the Collateral Value is the appraised value
of the Mortgaged Property based upon the appraisal obtained at the time of
refinancing.
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels as of the dates of origination of the
related Mortgage Loans. The weighted average Combined Loan-to-Value Ratio in the
Fixed Rate [Statistical Calculation] Loan Group was approximately [___]%, the
weighted average Combined Loan-to-Value Ratio for the Mortgage Loans in the
Adjustable Rate [Statistical Calculation] Loan Group was approximately [___]%
[and the weighted average Combined Loan-to-Value Ratio for the Mortgage Loans in
[Statistical Calculation] Loan Subgroup [__] and [Statistical Calculation] Loan
Subgroup [__] were approximately [___]% and [___]%, respectively.]
Stated Principal Balance
"Stated Principal Balance" means, for any Mortgage Loan and (1) the related
[Initial] Cut-off Date [or Subsequent Cut-off Date (as defined below), as
applicable (the "Cut-off Date")], [or the Statistical Calculation Date (as the
context requires),] the unpaid principal balance of the Mortgage Loan as of that
date, as specified in its amortization schedule at the time (before any
adjustment to the amortization schedule for any moratorium or similar waiver or
grace period), after giving effect to any partial prepayments and Liquidation
Proceeds received before that date and to the payment of principal due on that
date and irrespective of any delinquency in payment
S-36
<PAGE>
by the related mortgagor or (2) any Distribution Date, the Stated Principal
Balance of the Mortgage Loan as of its Cut-off Date, minus the sum of (i) the
principal portion of scheduled payments due with respect to the Mortgage Loan on
or before the end of the most recent Due Period that were received by the Master
Servicer on or before the most recent Determination Date or were advanced by the
Master Servicer on or before the most recent Master Servicer Advance Date, (ii)
principal prepayments with respect to the Mortgage Loan received on or before
the end of the most recent Prepayment Period and (iii) Liquidation Proceeds
received by the Master Servicer before the end of the most recent Due Period to
the extent applied as recoveries of principal with respect to the Mortgage Loan.
When used with respect to the Mortgage Pool, a Loan Group [or Loan Subgroup] as
a whole, Stated Principal Balance means the aggregate Stated Principal Balances
of all Mortgage Loans in that Mortgage Pool, Loan Group [or Loan Subgroup],
respectively.
The [Statistical Calculation] [Mortgage] Pool
The following information sets forth in tabular format certain information,
as of the [Statistical Calculation] [Cut-off] Date, about Mortgage Loans
included in the [Statistical Calculation] [Mortgage] Pool. Other than with
respect to rates of interest, percentages are approximate and are stated by the
related [Statistical Calculation] [Cut-off] Date Group Principal Balance [or
related [Statistical Calculation] [Cut-off] Date Subgroup Principal Balance, as
applicable]. The sum of the columns below may not equal the total indicated due
to rounding.
S-37
<PAGE>
FIXED RATE [STATISTICAL CALCULATION] LOAN GROUP
[[STATISTICAL CALCULATION] LOAN SUBGROUP [ ]]
MORTGAGE RATES FOR THE
MORTGAGE LOANS IN THE FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Number of Balance
Mortgage Rates (%) Mortgage Loans Outstanding
------------------ -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
Mortgage Rate of the Mortgage Loans in the Fixed Rate [Statistical
Calculation] Loan [Group] [Subgroup [ ]] was approximately [ ]% per
annum.
S-38
<PAGE>
[COMBINED] LOAN-TO-VALUE RATIOS FOR THE
MORTGAGE LOANS IN THE FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of [Combined] Number of Balance
Loan-to-Value Ratios (%) Mortgage Loans Outstanding
------------------------ -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
[Combined] Loan-to-Value Ratio of the Mortgage Loans in the Fixed Rate
[Statistical Calculation] Loan [Group] [Subgroup [ ]] was approximately [
]%.
S-39
<PAGE>
MORTGAGE LOAN PRINCIPAL BALANCE FOR THE
MORTGAGE LOANS IN THE FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Mortgage Loan Number of Balance
Principal Balances ($) Mortgage Loans Outstanding
---------------------- -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the average principal
balance of the Mortgage Loans in the Fixed Rate [Statistical Calculation]
Loan [Group] [Subgroup [ ]] was $[ ].
S-40
<PAGE>
STATE DISTRIBUTIONS OF MORTGAGED PROPERTIES
FOR THE MORTGAGE LOANS IN THE FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Aggregate
Number of Principal Balance
State Mortgage Loans Outstanding
----- -------------- -----------
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
TOTALS:..........
S-41
<PAGE>
TYPE OF MORTGAGED PROPERTIES FOR THE
MORTGAGE LOANS IN THE FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
Number of Aggregate
Mortgage Principal Balance
Property Type Loans Outstanding
------------- ----- -----------
2-4 Family Dwellings ..............
High-Rise Condominiums ............
Low-Rise Condominiums .............
Manufactured Housing
(treated as real property) ......
Planned Unit Developments .........
Single-Family Detached Dwellings ..
TOTALS: ......................
OCCUPANCY TYPES FOR THE MORTGAGE LOANS IN
THE FIXED RATE [STATISTICAL CALCULATION]
LOAN [GROUP] [SUBGROUP [ ]] (1)
---------------------------------
Number of Aggregate
Mortgage Principal Balance
Occupancy Type Loans Outstanding
-------------- ----- -----------
Second Home ...........
Investment Property ...
Primary Residence .....
TOTALS: ..........
(1) Based upon representations of the related mortgagors at the time of
origination.
S-42
<PAGE>
REMAINING MONTHS TO STATED MATURITY FOR THE
MORTGAGE LOANS IN THE FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]] (1)
-----------------------------------------------------------
Number of Aggregate
Mortgage Principal Balance
Remaining Term (Months) Loans Outstanding
----------------------- ----- -----------
- ...................
- ...................
- ...................
TOTALS: ...........
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
remaining amortization terms to maturity for the Mortgage Loans in the
Fixed Rate [Statistical Calculation] Loan [Group] [Subgroup [ ]] was
approximately [ ] months.
LOAN PURPOSE FOR THE
MORTGAGE LOANS IN FIXED RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Number of Aggregate
Mortgage Principal Balance
Loan Purpose Loans Outstanding
------------ ----- -----------
Refinance-Cash Out .......
Purchase .................
Refinance-Rate/Term ......
TOTALS:
S-43
<PAGE>
ADJUSTABLE RATE [STATISTICAL CALCULATION] LOAN GROUP
[[STATISTICAL CALCULATION] LOAN SUBGROUP [ ]]
MORTGAGE RATES FOR THE MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Number of Balance
Mortgage Rates (%) Mortgage Loans Outstanding
------------------ -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
Mortgage Rate of the Mortgage Loans in [Statistical Calculation] Loan
[Group] [Subgroup [ ]] was approximately [ ]% per annum.
S-44
<PAGE>
GROSS MARGINS FOR MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Number of Balance
Gross Margins (%) Mortgage Loans Outstanding
----------------- -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
Gross Margin of the Mortgage Loans in [Statistical Calculation] Loan
[Group] [Subgroup [ ]] was approximately [ ]%.
S-45
<PAGE>
MAXIMUM RATES FOR THE MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Number of Balance
Maximum Rates (%) Mortgage Loans Outstanding
----------------- -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
Maximum Rate of the Mortgage Loans in [Statistical Calculation] Loan
[Group] [Subgroup [ ]] was approximately [ ]% per annum.
S-46
<PAGE>
MORTGAGE LOAN PRINCIPAL BALANCES
FOR THE MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Mortgage Loan Number of Balance
Principal Balances ($) Mortgage Loans Outstanding
---------------------- -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the average principal
balance of the Mortgage Loans in [Statistical Calculation] Loan [Group]
[Subgroup [ ]] was $[ ].
S-47
<PAGE>
MINIMUM MORTGAGE RATES FOR MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of Minimum Number of Balance
Interest Rates (%) Mortgage Loans Outstanding
------------------ -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
Minimum Mortgage Rate of the Mortgage Loans in [Statistical Calculation]
Loan [Group] [Subgroup [ ]] was approximately [ ]% per annum.
S-48
<PAGE>
[COMBINED] LOAN-TO-VALUE RATIO FOR MORTGAGE
LOANS IN THE ADJUSTABLE RATE
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP] (1)
-----------------------------------------------------
Aggregate
Principal
Range of [Combined] Number of Balance
Loan-to-Value Ratios (%) Mortgage Loans Outstanding
------------------------ -------------- -----------
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
% - % ..............
TOTAL: ......
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
Loan-to-Value Ratio of the Mortgage Loans in [Statistical Calculation]
Loan [Group] [Subgroup [ ]] was approximately [ ]%.
S-49
<PAGE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES
FOR THE MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Aggregate
Number of Principal Balance
State Mortgage Loans Outstanding
----- -------------- -----------
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
TOTALS:..........
S-50
<PAGE>
INITIAL FIXED RATE PERIOD
FOR THE MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Aggregate
Initial Fixed Rate Number of Principal Balance
Period (Months) Mortgage Loans Outstanding
--------------- -------------- -----------
6 ..............
12 ..............
24 ..............
36 ..............
TOTALS: ......
S-51
<PAGE>
NEXT ADJUSTMENT DATE FOR
THE [2/28] AND [3/27] MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Aggregate
Number of Principal Balance
Next Adjustment Date Mortgage Loans Outstanding
-------------------- -------------- -----------
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
TOTALS:..........
NEXT ADJUSTMENT DATE FOR
THE NON- [2/28] AND [3/27] MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Aggregate
Number of Principal Balance
Next Adjustment Date Mortgage Loans Outstanding
-------------------- -------------- -----------
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
TOTALS:..........
S-52
<PAGE>
TYPE OF MORTGAGED PROPERTIES FOR THE
MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
Number of Aggregate
Mortgage Principal Balance
Property Type Loans Outstanding
------------- ----- -----------
2-4 Family Dwellings ............
Low-Rise Condominiums ............
Manufactured Housing
(treated as real property) .....
Planned Unit Developments ........
Single-Family Detached Dwellings..
TOTALS: .....................
OCCUPANCY TYPES FOR THE MORTGAGE LOANS IN
THE [STATISTICAL CALCULATION]
LOAN [GROUP] [SUBGROUP [ ]] (1)
---------------------------------
Number of Aggregate
Mortgage Principal Balance
Occupancy Type Loans Outstanding
-------------- ----- -----------
Investment Property ..............
Primary Residence ................
TOTALS: .....................
(1) Based upon representation of the related mortgagors at the time of
origination.
S-53
<PAGE>
REMAINING MONTHS TO STATED MATURITY FOR THE
MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]] (1)
-----------------------------------------------------------
Number of Aggregate
Mortgage Principal Balance
Remaining Term (Months) Loans Outstanding
----------------------- ----- -----------
- ..................
- ..................
- ..................
TOTALS: ..........
(1) As of the [Statistical Calculation] [Cut-off] Date, the weighted average
remaining months to scheduled maturity for the Mortgage Loans in
[Statistical Calculation] Loan [Group] [Subgroup [ ]] was approximately [
] months.
LOAN PURPOSE FOR THE MORTGAGE LOANS IN
[STATISTICAL CALCULATION] LOAN [GROUP] [SUBGROUP [ ]]
-------------------------------------------------------
Number of Aggregate
Mortgage Principal Balance
Loan Purpose Loans Outstanding
------------ ----- -----------
Refinance-Cash Out ......
Purchase ................
Refinance-Rate/Term .....
TOTALS: ............
Assignment of the Mortgage Loans
In accordance with the pooling and servicing agreement dated as of
[_______], 200[_] (the "Pooling and Servicing Agreement"), among the Depositor,
the Master Servicer, the Seller, and [Name of Trustee], as trustee (the
"Trustee"), the Depositor on the Closing Date will sell, transfer, assign, set
over and otherwise convey without recourse to the Trustee in trust for the
benefit of the Certificateholders all right, title and interest of the Depositor
in and to each [Initial] Mortgage Loan and all right, title and interest in and
to all other assets included in the Trust Fund[, including all principal and
interest received on or with respect to the [Initial] Mortgage Loans on and
after the [Initial] Cut-off Date, exclusive of any scheduled principal due on or
before the [Initial] Cut-off Date and any interest accruing before the [Initial]
Cut-off Date, and the Pre-Funded Amount (as defined in this prospectus
supplement) deposited in the Pre-Funded Account on the Closing Date (as defined
in this prospectus supplement)].
S-54
<PAGE>
In connection with such transfer and assignment of the Mortgage Loans, the
Depositor will deliver the following documents (collectively constituting the
"Trustee's Mortgage File") with respect to each [Initial] Mortgage Loan [and
Subsequent Mortgage Loan (as defined below) (collectively, the "Mortgage
Loans")]:
(1) the original Mortgage Note, including any modifications or amendments,
endorsed in blank without recourse, except that the Depositor may
deliver or cause to be delivered a lost note affidavit in lieu of any
original Mortgage Note that has been lost,
(2) the original Mortgage with evidence of recording,
(3) an assignment of the Mortgage in blank in recordable form,
(4) either the title policy with respect to the related Mortgaged
Property, if available, or if the title policy is not available, a
written commitment or interim binder or preliminary report of title
issued by the title insurance or escrow company with respect to the
Mortgaged Property, provided that the title policy will be delivered
as soon as it becomes available, and
(5) if applicable, all recorded intervening assignments of the Mortgage
and any riders or modifications to the Mortgage Note and Mortgage,
except for any documents not returned from the public recording office or an
original or certified copy of the applicable title policy, to the extent
unavailable, each of which will be delivered to the Trustee as soon as the same
is available to the Depositor.
[Notwithstanding the foregoing, in lieu of providing the documents
described in clause (3) above, the Depositor may at its discretion provide
evidence that the related Mortgage is held through the MERS' System. In
addition, the Mortgages for some or all of the Mortgage Loans in the Trust Fund
that are not already held through the MERS' System may, at the discretion of the
Master Servicer, in the future be held through the MERS' System. For any
Mortgage held through the MERS' System, the Mortgage is recorded in the name of
Mortgage Electronic Registration Systems, Inc., or MERS, as nominee for the
owner of the Mortgage Loan, and subsequent assignments of the Mortgage were, or
in the future may be, at the discretion of the Master Servicer, registered
electronically through the MERS' System. For each of these Mortgage Loans, MERS
serves as mortgagee of record on the Mortgage solely as a nominee in an
administrative capacity on behalf of the Trustee, and does not have any interest
in the Mortgage Loan.]
In accordance with the Pooling and Servicing Agreement, the Depositor will
be required to deliver (or cause delivery of) the Trustee's Mortgage Files:
. not later than the Closing Date, with respect to at least [50]% of the
[Initial] Mortgage Loans;
S-55
<PAGE>
. not later than [twenty one] days after the Closing Date, with respect
to at least an additional [40]% of the [Initial] Mortgage Loans, [and
not later than [twenty one] days after the relevant Subsequent
Transfer Date (as defined below) with respect to at least [90]% of the
Subsequent Mortgage Loans conveyed on that Subsequent Transfer Date;]
and
. not later than [thirty] days after the Closing Date, with respect to
the remaining [10]% of the [Initial] Mortgage Loans[, and not later
than [thirty] days after the relevant Subsequent Transfer Date with
respect to the remaining [10]% of the Subsequent Mortgage Loans
conveyed on the related Subsequent Transfer Date.
Assignments of the Mortgage Loans to the Trustee or its nominee will be
recorded in the appropriate public office for real property records in each
state where recording is required in order to protect the Trustee's interests in
the Mortgage Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor or the Seller.
The Trustee will review the [Initial] Mortgage Loan documents on or before
the Closing Date (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date), [and the Subsequent Mortgage
Loan documents promptly after the Trustee's receipt of those documents after the
related Subsequent Transfer Date as described above,] and will hold those
documents in trust for the benefit of the holders of the Certificates. After
review of the Mortgage Loan Documents, if any document is found to be missing or
defective in any material respect, the Trustee is required to notify the Master
Servicer and First Horizon in writing. If First Horizon cannot or does not cure
that omission or defect within 90 days of its receipt of notice from the
Trustee, or within such longer period not to exceed 720 days after the Closing
Date as provided in the Pooling and Servicing Agreement in the case of missing
documents not returned from the public recording office or in the case of the
original or certified copy of the applicable title policy, First Horizon is
required to repurchase the related Mortgage Loan from the Trust Fund at a price
(the "Purchase Price") equal to 100% of the Stated Principal Balance of that
Mortgage Loan plus accrued and unpaid interest thereon, at a rate equal to the
difference between the Mortgage Rate and the Servicing Fee Rate (as defined in
this prospectus supplement) (the "Net Mortgage Rate") (or, if First Horizon is
no longer the Master Servicer, at the applicable Mortgage Rate) to the first day
of the month in which the Purchase Price is to be distributed to holders of the
Certificates. Rather than repurchase the Mortgage Loan as provided above, First
Horizon may remove that Mortgage Loan (a "Deleted Mortgage Loan") from the Trust
Fund and substitute in its place another Mortgage Loan of like kind (a
"Replacement Mortgage Loan"); however, such substitution is only permitted
within two years after the Closing Date, and may not be made unless an opinion
of counsel is provided to the effect that such substitution would not disqualify
any REMIC election made by the Trust or result in a prohibited transaction tax
under the Code. Any Replacement Mortgage Loan generally will, on the date of
substitution, among other characteristics set forth in the Pooling and Servicing
Agreement:
. have a Stated Principal Balance, after deduction of the principal
portion of the scheduled payment due in the month of substitution, not
in excess of, and not less than 90% of, the Stated Principal Balance
of the Deleted Mortgage Loan (the
S-56
<PAGE>
amount of any shortfall to be deposited by First Horizon in the
Certificate Account not later than the succeeding Determination Date
and held for distribution to the holders of the Certificates on the
related Distribution Date);
. if the Deleted Mortgage Loan that is being replaced is an Adjustable
Rate Mortgage Loan, have a Maximum Mortgage Rate not more than 1% per
annum higher or lower than the Maximum Mortgage Rate of the Deleted
Mortgage Loan;
. if the Deleted Mortgage Loan that is being replaced is an Adjustable
Rate Mortgage Loan, have a minimum Mortgage Rate specified in its
related Mortgage Note (such rate, the "Minimum Mortgage Rate") not
more than 1% per annum higher or lower than the Minimum Mortgage Rate
of the Deleted Mortgage Loan;
. if the Deleted Mortgage Loan that is being replaced is an Adjustable
Rate Mortgage Loan, have the same Mortgage Index and Periodic Rate Cap
as the Deleted Mortgage Loan and a Gross Margin not more than 1% per
annum higher or lower than that of the Deleted Mortgage Loan;
. have the same or higher credit quality characteristics than that of
the Deleted Mortgage Loan;
. be accruing interest at a rate not more than 1% per annum higher or
lower than that of the Deleted Mortgage Loan;
. have a Combined Loan-to-Value Ratio or Loan-to-Value Ratio, as
applicable, no higher than that of the Deleted Mortgage Loan;
. have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan;
. not permit conversion of the Mortgage Rate from a fixed rate to a
variable rate or vice versa;
. provide for a prepayment charge on terms substantially similar to
those of the prepayment charge, if any, of the Deleted Mortgage
Loan;
. constitute the same occupancy type as the Deleted Mortgage Loan;
and
. comply with all of the representations and warranties set forth
in the Pooling and Servicing Agreement as of the date of
substitution.
This cure, repurchase or substitution obligation constitutes the sole
remedy available to the Certificateholders, the Trustee or the Depositor for
omission of, or a material defect in, a Mortgage Loan document.
S-57
<PAGE>
[Pre-Funding
On the Closing Date the excess of the proceeds from the issuance and sale
of the Certificates over the Initial Cut-off Date Pool Principal Balance (the
"Pre-Funded Amount") (which Pre-Funded Amount is not expected to exceed
$[_______]) will be deposited in a pre-funding account (the "Pre-Funding
Account") established and maintained by the Trustee on behalf of the
Certificateholders. Any investment income earned from amounts in the Pre-Funding
Account shall be paid to the Depositor, and will not be available for payments
on the Certificates. Approximately [___]% of the Pre-Funded Amount will be
allocated to purchase Fixed Rate Mortgage Loans, approximately [___]% of the
Pre-Funded Amount will be allocated to purchase Adjustable Rate Mortgage Loans
to be included in Loan Subgroup [__], and approximately [___]% of the Pre-Funded
Amount will be allocated to purchase Adjustable Rate Mortgage Loans to be
included in Loan Subgroup [__]. During the period from the Closing Date to
[________], 200[_] (the "Funding Period"), the Depositor is expected to purchase
conventional mortgage loans originated by the Seller after [________], 200[_]
("Subsequent Mortgage Loans") from the Seller and sell those Subsequent Mortgage
Loans to the Trust Fund as described below. The purchase price for each
Subsequent Mortgage Loan will equal the Stated Principal Balance of that
Subsequent Mortgage Loan as of the date of origination of that Subsequent
Mortgage Loan (unless that Subsequent Mortgage Loan was originated before
[________], 200[_], in which case, as of [_________], 200[_]) (the related
"Subsequent Cut-off Date") and will be paid from the Pre-Funding Account.
Accordingly, the purchase of Subsequent Mortgage Loans will decrease the amount
on deposit in the Pre-Funding Account and increase the Stated Principal Balance
of the Mortgage Pool.
In accordance with the Pooling and Servicing Agreement and a Subsequent
Transfer Agreement (a "Subsequent Transfer Agreement") to be executed by the
Seller, the Depositor and the Trustee, the conveyance of Subsequent Loans may be
made on any Business Day during the Funding Period (a "Subsequent Transfer
Date"), subject to the fulfillment of certain conditions in the Pooling and
Servicing Agreement, including that:
. the Subsequent Mortgage Loans conveyed on that Subsequent Transfer
Date satisfy the same representations and warranties in the Pooling
and Servicing Agreement applicable to all Mortgage Loans, and that as
of the Subsequent Cut-off Date, the Subsequent Mortgage Loans conveyed
on that Subsequent Transfer Date were selected in a manner reasonably
believed not to be adverse to the interests of the Certificateholders;
. the Trustee receives an opinion of counsel with respect to the
validity of the conveyance of the Subsequent Mortgage Loans conveyed
on that Subsequent Transfer Date;
. the conveyance of the Subsequent Mortgage Loans on that Subsequent
Date will not result in a reduction or withdrawal of any ratings
assigned to the Offered Certificates;
S-58
<PAGE>
. no Subsequent Mortgage Loan conveyed on that Subsequent Transfer Date
was 60 or more days delinquent;
. each Subsequent Mortgage Loan conveyed on that Subsequent Transfer
Date that is an Adjustable Rate Mortgage Loan is secured by a first
lien on the related Mortgaged Property; and
. following the conveyance of the Subsequent Mortgage Loans on that
Subsequent Transfer Date to the related Loan Group [or Subgroup, as
applicable,] the characteristics of that Loan Group [or Subgroup] will
not vary by more or less than 10% from the characteristics listed
below (which characteristics listed below are the characteristics of
the related Statistical Calculation Loan Group [or Subgroup]);
provided that for the purpose of making those calculations, the
characteristics for any Initial Mortgage Loan made will be taken as of
the Initial Cut-off Date and the characteristics for any Subsequent
Mortgage Loan will be taken as of the Subsequent Cut-off Date:
[Fixed Rate Loan Group/Loan Subgroup [ ]]:
Average Principal Balance: .............................. $[ ]
Weighted Average Mortgage Rate: ......................... %
Weighted Average Combined Loan-to-Value Ratio: .......... %
Weighted Average Remaining Amortization Term to Maturity: [ ] months
[Adjustable Rate Loan Group/Loan Subgroup [ ]]:
Average Principal Balance: .............................. $[ ]
Current Weighted Average Mortgage Rate: ................. %
Weighted Average Loan-to-Value Ratio: ................... %
Weighted Average Scheduled Remaining Term to Maturity: .. [ ] months
Neither the Seller nor the Depositor will exercise any discretion in the
selection of Subsequent Mortgage Loans conveyed to the Trust Fund. The selection
will be made with respect to loans that satisfy the eligibility criteria
described above using a mechanical procedure generally as follows. Mortgage
loans eligible for purchase will be aggregated by the date on which they were
funded. These mortgage loans will be purchased in date order up through the day
substantially all of the funds in the Pre Funding Account allocated for the
related Loan Group [or Subgroup (as applicable)] are expended. Purchases of
loans funded on the same day will be ordered alphabetically by the last name of
the primary obligor. Adjustable rate mortgage loans that conform to the criteria
specified for loan subgroup [__] will first be allocated for inclusion in loan
subgroup [__] before being allocated for inclusion in loan subgroup [__].
Acquisitions may occur in one or more closings after the Closing Date.]
S-59
<PAGE>
SERVICING OF THE MORTGAGE LOANS
General
[First Horizon Home Loan Corporation ("First Horizon")] will act as Master
Servicer and will service the Mortgage Loans in accordance with the terms set
forth in the Pooling and Servicing Agreement. The Master Servicer may perform
any of its obligations under the Pooling and Servicing Agreement through one or
more subservicers. Regardless of any subservicing arrangement, the Master
Servicer will remain liable for its servicing duties and obligations under the
Pooling and Servicing Agreement as if the Master Servicer alone were servicing
the Mortgage Loans. [As of the Closing Date, the Master Servicer will service
the Mortgage Loans without subservicing arrangements.]
The Master Servicer
First Horizon is a Kansas corporation and a wholly-owned indirect
subsidiary of First Tennessee National Corporation. First Horizon is engaged
primarily in the mortgage banking business, and as such, originates, purchases,
sells and services mortgage loans. First Horizon originates mortgage loans
through a retail branch system and through mortgage loan brokers and
correspondents nationwide. First Horizon's mortgage loans are principally first
and second lien, fixed or adjustable rate mortgage loans secured by single-
family residences.
As of [________], 200[_], First Horizon provided servicing for mortgage
loans with an aggregate principal balance of approximately $[_________],
substantially all of which are being serviced for unaffiliated persons.
The principal executive offices of First Horizon are located at 4000
Horizon Way, Irving, Texas 75063. Its telephone number is (214) 441- 4000. First
Horizon conducts operations from its headquarters in Irving and from offices
throughout the nation.
Loan Servicing
[First Horizon services substantially all of the mortgage loans it
originates or acquires. First Horizon has established standard policies for the
servicing and collection of mortgages. Servicing includes, but is not limited
to:
. collecting, aggregating and remitting mortgage loan payments,
. accounting for principal and interest,
. holding escrow (impound) funds for payment of taxes and insurance,
. making inspections as required of the mortgaged properties,
. preparation of tax related information in connection with the mortgage
loans,
S-60
<PAGE>
. supervision of delinquent mortgage loans,
. loss mitigation efforts,
. foreclosure proceedings and, if applicable, the disposition of
mortgaged properties, and
. generally administering the mortgage loans, for which it receives
servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
First Horizon. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by First
Horizon to the mortgagor with those statements. All payments are due by the
first day of the month.]
Foreclosure and Delinquency Experience
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of all mortgage loans serviced or master
serviced by the master servicer, including certain mortgage loans for which the
servicing rights have been sold by the master servicer but not yet transferred.
These mortgage loans have a variety of underwriting, payment and other
characteristics, many of which differ from those of the Mortgage Loans, and no
assurances can be given that the delinquency and foreclosure experience
presented in the table below will be indicative of the experience of the
Mortgage Loans.
Delinquency and Foreclosure Experience in First Horizon's Total Portfolio
of One-to-Four Family, Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31, As of December 31,
------------------ ------------------
1998 1999
---- ----
No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance($) Balance Loans Loans Balance Balance
----- ----- ---------- ------- ----- ----- ------- -------
TOTAL SERVICING
PORTFOLIO
<S> <C> <C> <C> <C>
Total Portfolio 408,877 39,646,269 465,667 48,855,787
Period of Delinquency
30-59 Days 13,319 3.26 1,078,000 2.72 15,192 3.26 1,332,172 2.73
60-89 Days 2,909 0.71 227,208 0.57 3,624 0.78 299,359 0.61
90 Days or more 10,434 2.55 716,961 1.81 9,702 2.08 657,899 1.35
Foreclosures Pending 2,175 0.53 185,692 0.47 2,001 0.43 171,913 0.35
Total Delinquencies 28,837 7.05 2,207,861 5.57 30,519 6.55 2,461,343 5.04
</TABLE>
S-61
<PAGE>
As of June 30,
--------------
2000
----
No. of % of Principal % of
Loans Loans Balance($) Balance
----- ----- ---------- -------
TOTAL SERVICING
PORTFOLIO
Total Portfolio 500,876 53,977,415
Period of Delinquency
30-59 Days 16,063 3.21 1,525,375 2.83
60-89 Days 3,878 0.77 340,489 0.63
90 Days or more 9,470 1.89 626,020 1.16
Foreclosures Pending 1,916 0.38 167,581 0.31
Total Delinquencies 31,327 6.25 2,659,466 4.93
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of all second lien mortgage loans serviced
or master serviced by the master servicer, including certain second lien
mortgage loans for which the servicing rights have been sold by the master
servicer but not yet transferred. These second lien mortgage loans have a
variety of underwriting, payment and other characteristics, many of which differ
from those of the Mortgage Loans, and no assurances can be given that the
delinquency and foreclosure experience presented in the table below will be
indicative of the experience of the Mortgage Loans.
Delinquency and Foreclosure Experience in First Horizon's Portfolio
of One-to-Four Family, Second Lien Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31, As of June 30,
------------------ --------------
1999 2000
---- ----
No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance Balance Loans Loans Balance($) Balance
----- ----- ------- ------- ----- ----- ---------- -------
SECOND LIEN MORTGAGE
SERVICING PORTFOLIO
<S> <C> <C> <C> <C>
Total Portfolio 11,867 338,108,704 14,138 405,006,352
Period of Delinquency
30-59 Days 127 1.07 3,725,599 1.10 196 1.39 5,941,449 1.47
60-89 Days 8 0.07 232,263 0.07 17 0.12 496,548 0.12
90 Days or more 1 0.01 35,533 0.01 2 0.01 61,540 0.02
Foreclosures Pending 1 0.01 24,377 0.01 - 0.00 - 0.00
Total Delinquencies 137 1.15 4,017,732 1.19 215 1.52 6,499,537 1.60
</TABLE>
The above tables show mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands.
S-62
<PAGE>
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on first and
second lien mortgage loans. There can be no assurance that factors beyond First
Horizon's control, such as national or local economic conditions or downturn in
the real estate markets of its lending areas, will not result in increased rates
of delinquencies and foreclosure losses in the future.
Servicing Compensation and Payment of Expenses
The Master Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan (as well as from any liquidation proceeds from a
Liquidated Mortgage Loan that are applied to accrued and unpaid interest) equal
to one-twelfth of the Stated Principal Balance of that Mortgage Loan multiplied
by the Servicing Fee Rate (the "Servicing Fee"). The "Servicing Fee Rate" for
each Mortgage Loan will equal [ ]% per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described in this prospectus supplement under "-- Adjustment to Servicing Fee
in Connection with Certain Prepaid Mortgage Loans." The Master Servicer is also
entitled to receive, as additional servicing compensation, amounts in respect of
interest paid on principal prepayments received from the [2nd] day through the
[15th] day of a month ("Prepayment Interest Excess"), all late payment fees,
assumption fees, prepayment penalties and other similar charges and all
reinvestment income earned on amounts on deposit in the Certificate Account and
Distribution Account. The Master Servicer is obligated to pay certain ongoing
expenses associated with the Mortgage Loans and incurred by the Trustee in
connection with its responsibilities under the Pooling and Servicing Agreement.
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans
When a borrower prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the borrower pays interest on the
amount prepaid only to the date of prepayment and not thereafter. Except for
the month of the Cut-off Date, principal prepayments received from the [1/st/]
day through the [15th] day of a month are included in the related distribution
on the [25th] day of the same month, and accordingly no shortfall in interest
otherwise distributable to holders of the Offered Certificates results.
Conversely, principal prepayments received from the [16th] day of a month or, in
the case of the first Distribution Date, from the Cut-off Date through the last
day of a calendar month are not distributed until the [25th] day of the
following month, and accordingly an interest shortfall (a "Prepayment Interest
Shortfall") would result. The period from the [16th] day of the month before a
Distribution Date (or, in the case of the first Distribution Date, from the
[Initial] Cut-off Date) to and including the [15th] day of the month in which
that Distribution Date occurs is referred to in this prospectus supplement as
the "Prepayment Period." In order to mitigate the effect of any Prepayment
Interest Shortfall to holders of the Offered Certificates on any Distribution
Date, [one-tenth] of the amount of the Servicing Fee otherwise payable to the
Master Servicer for that month (the "Compensating Interest") will, to the extent
of that Prepayment Interest Shortfall, be deposited by the Master Servicer in
the Certificate Account for distribution to holders of the Offered Certificates
entitled thereto on that Distribution Date. However, that reduction, if any, in
the Servicing Fee will be made only to the extent of [one-tenth] of the
Servicing Fee otherwise payable to the Master Servicer with respect to Scheduled
Payments on Mortgage Loans having
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the Due Date to which that Distribution Date relates. That deposit, if any, by
the Master Servicer will be reflected in the distributions to holders of the
Offered Certificates entitled thereto made on the Distribution Date on which the
principal prepayment received would be distributed. Regardless of the foregoing,
the Master Servicer will not be required to pass-through Compensating Interest
to the Certificateholders in respect of partial principal prepayments.
Advances
Subject to the following limitations, on the Business Day before each
Distribution Date, the Master Servicer will be required to advance its own
funds, or funds in the Certificate Account that are not required to be
distributed on that Distribution Date, in an amount equal to the aggregate of
payments of principal and interest on the Mortgage Loans (adjusted to the
applicable Net Mortgage Rate) that were due on the related Due Date and
delinquent on the related Determination Date, together with an amount equivalent
to interest (adjusted to the applicable Net Mortgage Rate) deemed due on each
Mortgage Loan as to which the related Mortgaged Property has been acquired by
the Master Servicer through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan ("REO Property"), that latter amount
to be calculated after taking into account any rental income from that Mortgaged
Property (any such advance, an "Advance," and the date of any such Advance, as
described in this prospectus supplement, a "Master Servicer Advance Date").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Offered Certificates rather than to guarantee or
insure against losses. The Master Servicer is obligated to make Advances with
respect to delinquent payments of principal of or interest on each Mortgage Loan
(with those payments of interest adjusted to the related Net Mortgage Rate) to
the extent that those Advances are, in its judgment, reasonably recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, that Advance will be included with the
distribution to holders of the Offered Certificates on the related Distribution
Date. Any failure by the Master Servicer to make an Advance as required under
the Pooling and Servicing Agreement will constitute an event of default
thereunder, in which case the Trustee, as successor master servicer, or any
other entity that may be appointed as successor master servicer, will be
obligated to make any such Advance in accordance with the terms of the Pooling
and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates (defined below) will be issued in accordance with the
Pooling and Servicing Agreement. Set forth below are summaries of the material
terms and provisions in accordance with which the Offered Certificates will be
issued. The following summaries are subject to, and are qualified in their
entirety by reference to, the provisions of the Pooling and Servicing Agreement.
When particular provisions or terms used in the Pooling and Servicing Agreement
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
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The First Horizon Home Loan, Series 200[ ]-[ ], Asset-Backed Certificates,
Series 200[ ]-[ ] (the "Certificates") will consist of:
. the following certificates relating to the Fixed Rate Loan Group:
. Class AF-[ ] Certificates (collectively the "Class A Fixed Rate
Certificates"),
. Class MF-[1] Certificates,
. Class MF-[2] Certificates (together with the Class MF-[1]
Certificates, the "Mezzanine Fixed Rate Certificates"),
. Class BF Certificates (together with the Mezzanine Fixed Rate
Certificates, the "Subordinated Offered Fixed Rate
Certificates"), and
. Class BF-IO Certificates;
. the following certificates relating to the Adjustable Rate Loan Group:
. Class AV-[ ] Certificates (the "Class A Adjustable Rate
Certificates" and, together with the Class A Fixed Rate
Certificates, the "Class A Certificates"),
. Class MV-[1] Certificates (together with the Class MF-[1]
Certificates, the "Class M-1 Certificates"),
. Class MV-[2] Certificates (together with the Class MV-[1]
Certificates, the "Mezzanine Adjustable Rate Certificates;" and
together with the Class MF-[2] Certificates, the "Class M-2
Certificates"),
. Class BV Certificates (together with the Mezzanine Adjustable
Rate Certificates, the "Subordinated Offered Adjustable Rate
Certificates;" and together with the Class BF Certificates, the
"Class B Certificates"), and
. Class BV-IO Certificates (together with the Class BF-IO
Certificates, the "Class B-IO Certificates"); and
. Class R Certificates (the "Residual Certificates").
The Mezzanine Fixed Rate Certificates and the Mezzanine Adjustable Rate
Certificates are referred to collectively as the "Mezzanine Certificates." The
Subordinated Offered Fixed Rate Certificates and the Subordinated Offered
Adjustable Rate Certificates are referred to collectively as the "Subordinated
Offered Certificates." As used in this prospectus supplement, a "Certificate
Group" is either the Fixed Rate Certificates or the Adjustable Rate
Certificates, as the context requires. The Class B-IO Certificates are interest-
only Certificates issued with a
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notional principal balance as provided in the Pooling and Servicing Agreement.
Only the Fixed Rate Certificates other than the Class BF-IO Certificates
(collectively the "Offered Fixed Rate Certificates") and the Adjustable Rate
Certificates other than the Class BV-IO Certificates (the "Offered Adjustable
Rate Certificates" and collectively with the Offered Fixed Rate Certificates,
the "Offered Certificates") are offered hereby. Distributions on the Fixed Rate
Certificates will be based primarily on amounts available for distribution in
respect of the Fixed Rate Mortgage Loans. Distributions on the Adjustable Rate
Certificates, as a Certificate Group, will be based primarily on amounts
available for distribution in respect of the Adjustable Rate Mortgage Loans.
[Among the Adjustable Rate Certificates, distributions on the Class AV-[1]
Certificates will be based primarily on amounts available for distribution in
respect of the Adjustable Rate Mortgage Loans in Loan Subgroup [__], and
distributions on the Class AV-[2] Certificates will be based primarily on
amounts available for distribution in respect of the Adjustable Rate Mortgage
Loans in Loan Subgroup [__], in each case as described below under "--
Distributions."]
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $[25,000] and integral multiples of $[1,000] in excess of $[25,000].
Book-Entry Certificates
The Offered Certificates will be book-entry certificates (the "Book-Entry
Certificates"). Each class of Book-Entry Certificates will be issued in one or
more certificates which equal the aggregate initial Certificate Principal
Balance of the Class of Certificates and which will be held by a depository,
initially a nominee of The Depository Trust Company. Beneficial interests in
the Book-Entry Certificates will be held indirectly by investors through the
book-entry facilities of the depository, as described in this prospectus
supplement. Investors may hold beneficial interests in the Book-Entry
Certificates in the minimum denominations set forth on page S-[ ]and integral
multiples of $[ ] in excess of that minimum denomination. One investor
of each Class of Book-Entry Certificates may hold a beneficial interest in a
Book Entry Certificate that is not an integral multiple of $[ ]. The
Depositor has been informed by the depository that its nominee will be CEDE &
Co. Accordingly, CEDE & Co. is expected to be the holder of record of the Book-
Entry Certificates. Except as described in the prospectus under "Description of
the Securities -- Book-Entry Securities," no beneficial owner of a Book-Entry
Certificate will be entitled to receive a physical certificate.
Unless and until definitive certificates are issued, it is anticipated that
the only Certificateholder of the Book-Entry Certificates will be CEDE & Co., as
nominee of the depository. Beneficial owners of the Book-Entry Certificates
will not be Certificateholders, as that term is used in the Pooling and
Servicing Agreement. Beneficial owners are only permitted to exercise the
rights of Certificateholders indirectly through financial intermediaries and the
depository. Monthly and annual reports on the trust fund provided to CEDE &
Co., as nominee of the depository, may be made available to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose
depository accounts the Book-Entry Certificates of the beneficial owners are
credited.
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For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities -- Book-Entry Securities" in
the prospectus.
Deposits to the Certificate Account
The Master Servicer will establish and initially maintain a certificate
account (the "Certificate Account") for the benefit of the Trustee on behalf of
the Certificateholders. On a daily basis within one Business Day after receipt,
the Master Servicer will deposit or cause to be deposited into the Certificate
Account the following payments and collections received or made or to be applied
by it on or subsequent to the relevant Cut-off Date[, including all principal
and interest received with respect to the Mortgage Loans after the relevant Cut-
off Date (exclusive of any scheduled principal due on or before that Cut-off
Date and any interest accruing before that Cut-off Date)]:
. all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
. all payments on account of interest (other than interest accruing on
the Mortgage Loans before the related Cut-Off Date) on the Mortgage
Loans, net of the related Servicing Fee;
. all proceeds of any insurance policies (to the extent those proceeds
are not applied to the restoration of the property or released to the
mortgagor in accordance with the Master Servicer's normal servicing
procedures), other than proceeds that represent reimbursement of the
Master Servicer's costs and expenses incurred in connection with
presenting claims under the related insurance policies ("Insurance
Proceeds"), all other net proceeds received in connection with the
partial or complete liquidation of Mortgage Loans (whether through
trustee's sale, foreclosure sale or otherwise) or in connection with
any condemnation or partial release of a Mortgaged Property, together
with the net proceeds received with respect to any Mortgaged
Properties acquired by the Master Servicer by foreclosure or deed in
lieu of foreclosure in connection with defaulted Mortgage Loans (other
than the amount of those net proceeds representing any profit realized
by the Master Servicer in connection with the disposition of any of
those properties) (together with Insurance Proceeds, "Liquidation
Proceeds");
. all payments made by the Master Servicer in respect of Prepayment
Interest Shortfalls;
. any amount required to be deposited by the Master Servicer in
connection with any losses on investment of funds in the Certificate
Account;
. any amounts required to be deposited by the Master Servicer with
respect to any deductible clause in any blanket hazard insurance
policy maintained by the Master
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Servicer in lieu of requiring each mortgagor to maintain a primary
hazard insurance policy;
. all amounts required to be deposited in connection with shortfalls in
the principal amount of Replacement Mortgage Loans; and
. all Advances.
Withdrawals from the Certificate Account
The Master Servicer may from time to time withdraw funds from the
Certificate Account before the related Distribution Account Deposit Date for the
following purposes:
(1) to pay to the Master Servicer the Servicing Fee to the extent not
previously paid to or withheld by the Master Servicer (subject to
reduction as described above under "Servicing of the Mortgage Loans --
Adjustment to Servicing Fee in Connection with Prepaid Mortgage
Loans") and, as additional servicing compensation, prepayment
penalties, assumption fees, late payment charges, net earnings on or
investment income with respect to funds in or credited to the
Certificate Account and the amount of Prepayment Interest Excess for
the related Prepayment Period;
(2) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Mortgage Loan in accordance with
this clause (2) being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the related
Mortgage Loan (or Insurance Proceeds or Liquidation Proceeds with
respect to the related Mortgage Loan) with respect to which that
Advance was made;
(3) to reimburse the Master Servicer for any Advances previously made that
the Master Servicer has determined to be nonrecoverable;
(4) to reimburse the Master Servicer from Insurance Proceeds for expenses
incurred by the Master Servicer and covered by the related insurance
policies;
(5) to pay the Master Servicer any unpaid Servicing Fees and to reimburse
it for any unreimbursed ordinary and necessary out-of-pocket costs and
expenses incurred by the Master Servicer in the performance of its
master servicing obligations, such right of reimbursement in
accordance with this clause (5) being limited to amounts received
representing late recoveries of the payments of those costs and
expenses (or Liquidation Proceeds, purchase proceeds or repurchase
proceeds with respect thereto);
(6) to pay to the Seller or the Master Servicer, as applicable, with
respect to each Mortgage Loan or the respective Mortgaged Property
that has been purchased by the Seller or the Master Servicer from the
Trust Fund in accordance with the Pooling and Servicing Agreement, all
amounts received thereon and not taken
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into account in determining the related Stated Principal Balance of
that repurchased Mortgage Loan;
(7) to reimburse the Seller, the Master Servicer or the Depositor for fees
and expenses incurred and reimbursable in accordance with the Pooling
and Servicing Agreement (including in the case of the Master Servicer,
the Extra Master Servicing Fee);
(8) to withdraw any amount deposited in the Certificate Account and not
required to be deposited in the Certificate Account; and
(9) to clear and terminate the Certificate Account upon termination of the
Pooling and Servicing Agreement.
In addition, not later than 1:00 p.m. Pacific Time on the Business Day
immediately preceding each Distribution Date (the "Distribution Account Deposit
Date"), the Master Servicer shall withdraw from the Certificate Account and
remit to the Trustee the amount of Interest Funds and Principal Funds for each
Loan Group [or Loan Subgroup, as applicable,] to the extent on deposit, and the
Trustee shall deposit that amount in the Distribution Account, as described
below.
The "Interest Funds" with respect to each Loan Group [or Loan Subgroup
(as applicable)] are equal to:
. the sum, without duplication, of:
. all scheduled interest collected during the related Due Period
less the related Servicing Fee,
. all Advances relating to interest,
. all Compensating Interest, and
. Liquidation Proceeds (to the extent those Liquidation Proceeds
relate to interest), less
. all non-recoverable Advances relating to interest and those expenses
reimbursed during the related Due Period, in each case with respect to
the Mortgage Loans in that Loan Group [or Loan Subgroup (as
applicable)].
The "Principal Funds" with respect to each Loan Group [or Loan Subgroup (as
applicable)] are equal to:
. the sum, without duplication, of:
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<PAGE>
. the scheduled principal collected during the related Due Period
or advanced on or before the related Master Servicer Advance
Date,
. prepayments collected in the related Prepayment Period,
. the Stated Principal Balance of each Mortgage Loan that was
repurchased by the Seller or the Master Servicer,
. the amount, if any, by which the aggregate unpaid principal
balance of any Replacement Mortgage Loans is less than the
aggregate unpaid principal balance of any Deleted Mortgage Loans
delivered by the Seller in connection with a substitution of a
Mortgage Loan, and
. all Liquidation Proceeds collected during the related Due Period
(to the extent those Liquidation Proceeds related to principal),
less
. all non-recoverable Advances relating to principal and those expenses
reimbursed during the related Due Period, in each case with respect to
the Mortgage Loans in that Loan Group [or Loan Subgroup (as
applicable)].
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the calendar month preceding the calendar month
in which that Distribution Date occurs and ending on the Due Date in the month
in which that Distribution Date occurs.
Deposits to the Distribution Account
The Trustee will establish and maintain a distribution account (the
"Distribution Account") on behalf of the Certificateholders. The Trustee will,
promptly upon receipt, deposit in the Distribution Account and retain therein:
. the aggregate amount remitted by the Master Servicer to the Trustee,
. any amount required to be deposited by the Master Servicer in
connection with any losses on investment of funds in the Distribution
Account[, and]
. [the amount, if any, remaining in the Pre-Funding Account at the end
of the Funding Period].
Withdrawals from the Distribution Account
The Trustee will withdraw funds from the Distribution Account for
distribution to the Certificateholders as described below under "--
Distributions" and may from time to time make withdrawals from the Distribution
Account:
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<PAGE>
. to pay to the Master Servicer, as additional servicing compensation,
earnings on or investment income with respect to funds in or credited
to the Distribution Account,
. to withdraw any amount deposited in the Distribution Account and not
required to be deposited in the Distribution Account, and
. to clear and terminate the Distribution Account upon the termination
of the Pooling and Servicing Agreement.
Distributions
General
Distributions on the Certificates will be made by the Trustee on each
Distribution Date to the persons in whose names those certificates are
registered at the close of business on the Record Date. The "Record Date" is the
last business day of the month preceding the month of that Distribution Date. A
"Distribution Date" is the [__]th day of each month, or if that day is not a
Business Day, on the first Business Day thereafter, commencing in [______]. A
"Business Day" is any day other than:
. a Saturday or Sunday, or
. a day on which banking institutions in the state of New York or
California are required or authorized by law to be closed.
Distributions will be made by check mailed to the address of the person
entitled to the distribution as it appears on the Certificate Register or, in
the case of any Certificateholder that holds 100% of a Class of Certificates or
who holds a Class of Certificates with an aggregate initial Certificate
Principal Balance of $1,000,000 or more and that has so notified the Trustee in
writing in accordance with the Pooling and Servicing Agreement, by wire transfer
in immediately available funds to the account of that Certificateholder at a
bank or other depository institution having appropriate wire transfer
facilities; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of those
Certificates at the Corporate Trust Office of the Trustee. On each Distribution
Date, a holder of a Certificate will receive that holder's Percentage Interest
of the amounts required to be distributed with respect to the applicable Class
of Certificates. The "Percentage Interest" evidenced by a Certificate will equal
the percentage derived by dividing the denomination of that Certificate by the
aggregate denominations of all Certificates of the applicable Class.
Distributions of Interest
On each Distribution Date, the interest distributable with respect to the
Offered Fixed Rate Certificates (other than the Class AF-[1] Certificates) is
the interest which has accrued thereon at the related Pass-Through Rate during
the calendar month immediately preceding the calendar month in which that
Distribution Date occurs; and the interest distributable with respect
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to the Offered Adjustable Rate Certificates and the Class AF-[1] Certificates is
the interest which has accrued thereon at the then applicable related
Pass-Through Rate from and including the preceding Distribution Date (or from
the Closing Date in the case of the first Distribution Date) to and including
the day before the current Distribution Date. Each period referred to in the
prior sentence relating to the accrual of interest is the "Accrual Period" for
the related Class of Offered Certificates.
All calculations of interest of the Offered Fixed Rate Certificates (other
than the Class AF-[1] Certificates) will be made on the basis of a 360-day year
assumed to consist of twelve 30-day months. All calculations of interest on the
Offered Adjustable Rate Certificates and the Class AF-[1] Certificates will be
made on the basis of a 360-day year and the actual number of days elapsed in the
applicable Accrual Period.
On each Distribution Date, the Interest Funds for that Distribution Date
with respect to each Loan Group [or Loan Subgroup (as applicable)] are required
to be distributed in the following order of priority, until those Interest Funds
have been fully distributed:
(1) (A) with respect to the Interest Funds for the Fixed Rate Loan Group,
to the Class AF-[__] Certificates, the Current Interest and any
Carry Forward Amount for each such Class; provided, however, that
if the Interest Funds for the Fixed Rate Loan Group are not
sufficient to make a full distribution of the aggregate Current
Interest and the aggregate Interest Carry Forward Amount for the
Class AF-[__] Certificates, those Interest Funds will be
distributed pro rata among each such Class based upon the ratio
of (x) the Current Interest and any Interest Carry Forward Amount
for that Class to (y) the aggregate Current Interest and the
aggregate Interest Carry Forward Amount for all those Classes;
and
(B) (i) with respect to Interest Funds for the Loan Subgroup [__],
to the Class AV-[1] Certificates, the Current Interest and
any Carry Forward Amount for that Class; and
(ii) with respect to Interest Funds for Loan Subgroup [__], the
Class AV-[2] Certificates, the Current Interest and any
Carry Forward Amount for that Class;
(2) to the Class M-1 Certificates of the related Certificate Group, the
Current Interest for that Class;
(3) to the Class M-2 Certificates of the related Certificate Group, the
Current Interest for that Class;
(4) to the Class B Certificates of the related Certificate Group, the
Current Interest for that Class; and
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(5) any remainder to be distributed as described below under "--
Overcollateralization and Cross-Collateralization Provisions."
"Current Interest," with respect to each Class of the Offered Certificates
and each Distribution Date, is the interest accrued at the applicable Pass-
Through Rate for the applicable Accrual Period on the Certificate Principal
Balance of that Class plus any amount previously distributed with respect to
interest for that Class that is recovered as a voidable preference by a trustee
in bankruptcy.
"Interest Carry Forward Amount," with respect to each Class of the Offered
Certificates and each Distribution Date, is the sum of:
. the excess of:
. Current Interest for that Class with respect to prior
Distribution Dates over
. the amount actually distributed to that Class with respect to
interest on those prior Distribution Dates; and
. interest on that excess (to the extent permitted by applicable law) at
the applicable Pass-Through Rate.
The "Pass-Through Rate" per annum for each Class of Offered Fixed Rate
Certificates (other than the Class AF-[1] Certificates) is the respective per
annum fixed rate as set forth and described on page S-10 of this prospectus
supplement. On any Distribution Date, the Pass-Through Rate for each Class of
Offered Fixed Rate Certificates will be subject to an interest rate cap equal to
the weighted average Net Mortgage Rates on the Fixed Rate Mortgage Loans, as in
effect on the related Due Date (such weighted average rate, the "Fixed Net Rate
Cap").
The "Pass-Through Rate" per annum for the Class AF-[1] Certificates will be
equal to the lesser of:
. the London interbank offered rate for one month United States dollar
deposits ("One-Month LIBOR") (calculated as described below under "--
Calculation of One-Month LIBOR") plus the Pass-Through Margin (as
defined below) for that Class, and
. the Fixed Net Rate Cap then in effect.
The "Pass-Through Rate" per annum for each Class of Offered Adjustable Rate
Certificates will be equal to the least of:
. One-Month LIBOR (calculated as described below under "-- Calculation
of One-Month LIBOR") plus the Pass-Through Margin for that Class,
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. the weighted average of [the lesser of] the Maximum Mortgage Rates on
the Adjustable Rate Mortgage Loans [in either Loan Subgroup [__] or in
Loan Subgroup [__] ] (adjusted to an effective rate reflecting the
accrual of interest calculated on the basis of a 360-day year and the
actual number of days elapsed) less the Servicing Fee, and
. the Adjustable Rate Available Funds Cap for the Offered Adjustable
Rate Certificates.
The "Adjustable Rate Available Funds Cap" for the Offered Adjustable Rate
Certificates for any Distribution Date will be a per annum rate equal to 12
times the quotient of:
. [the lesser of (x) the total scheduled interest on the Adjustable Rate
Mortgage Loans in Loan Subgroup [__] and (y) the total scheduled
interest on the Adjustable Rate Mortgage Loans in Loan Subgroup [__],
in each case,] based on the Net Mortgage Rates in effect on the
related Due Date divided by
. the Certificate Principal Balance of the Offered Adjustable Rate
Certificates (adjusted to an effective rate reflecting the accrual of
interest calculated on the basis of a 360-day year and the actual
number of days elapsed).
The "Pass-Through Margin" for each Class of Offered Adjustable Rate
Certificates is as follows:
. for any Distribution Date on or before the Optional Termination Date
for the Adjustable Rate Loan Group: Class AV-[1], [___]%; Class
AV-[2], [___]%; Class MV-[1]; [___]%; Class MV-[2], [___]%; and Class
BV, [___]%; and
. for any Distribution Date after the Optional Termination Date for the
Adjustable Rate Loan Group: Class AV-[1], [___]%; Class AV-[2],
[___]%; Class MV-[1], [___]%; Class MV-[2], [___]%; and Class BV,
[___]%.
The "Pass-Through Margin" for the Class AF-[1] Certificates for any
Distribution Date, is [___]%.
The "Adjustable Rate Certificate Carryover" for a Class of Offered
Adjustable Rate Certificates on any Distribution Date on which the Pass-Through
Rate for that Class is based upon the Adjustable Rate Available Funds Cap is the
excess of:
. the amount of interest that such Class would have been entitled to
receive on that Distribution Date had the Pass-Through Rate for that
Class not been calculated based on the Adjustable Rate Available Funds
Cap over
. the amount of interest that Class received on that Distribution Date
based on the Adjustable Rate Available Funds Cap, up to but not
exceeding [the lesser of (x)
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<PAGE>
the weighted average of the maximum lifetime Mortgage Rates on the
Mortgage Loans in the Loan Subgroup [__] and (y) the weighted average
maximum lifetime Mortgage Rates on the Mortgage Loans in Loan Subgroup
[__]] (in each case, adjusted to an effective rate reflecting the
accrual of interest calculated on the basis of a 360-day year and the
actual number of days elapsed), less the Servicing Fee Rate, together
with the unpaid portion of that excess, if any, from prior
Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate, without giving effect to the Adjustable
Rate Available Funds Cap).
The "Fixed Net Rate Carryover" for any Class of Offered Fixed Rate
Certificates on any Distribution Date on which the Pass-Through Rate for that
Class is based upon the Fixed Net Rate Cap is the excess of:
. the amount of interest that such Class would have been entitled to
receive on that Distribution Date had the Pass-Through Rate for that
Class not been calculated based on the Fixed Net Rate Cap over
. the amount of interest that Class received on that Distribution Date
based on the Fixed Net Rate Cap, together with the unpaid portion of
that excess, if any, from prior Distribution Dates (and interest
accrued thereon at the then applicable Pass-Through Rate, without
giving effect to the Fixed Net Rate Cap).
Distributions of Principal
On each Distribution Date, the Principal Distribution Amount for that
Distribution Date with respect to each Loan Group is required to be distributed
as follows until such Principal Distribution Amount has been fully distributed:
. For each Distribution Date before the related Stepdown Date or on
which a related Trigger Event is in effect:
. (i) from the Principal Distribution Amount for the Fixed Rate
Loan Group, to the Fixed Rate Class A Certificates, in the order
and the priorities set forth below, and (ii) from the Principal
Distribution Amount for the Adjustable Rate Loan Group, to the
Adjustable Rate Class A Certificates in the order and priorities
set forth below;
. to the Class M-1 Certificates in the related Certificate Group,
until the Certificate Principal Balance of the Class M-1
Certificates of that Certificate Group is reduced to zero;
. to the Class M-2 Certificates in the related Certificate Group,
until the Certificate Principal Balance of the Class M-2
Certificates of that Certificate Group is reduced to zero;
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. to the Class B Certificates in the related Certificate Group,
until the Certificate Principal Balance of the Class B
Certificates of that Certificate Group is reduced to zero;
. any remainder to be distributed as described under "--
Overcollateralization and Cross-Collateralization Provisions"
below.
. For each Distribution Date on and after the related Stepdown Date and
so long as a related Trigger Event is not in effect:
. (i) the Class A Principal Distribution Amount for the Fixed Rate
Loan Group, to the Class A Fixed Rate Certificates in the order
and priorities set forth below, and (ii) the Class A Principal
Distribution Amount for the Adjustable Rate Loan Group, to the
Adjustable Rate Class A Certificates in the order and priorities
set forth below;
. to the Class M-1 Certificates in the related Certificate Group,
the Class M-1 Principal Distribution Amount until the Certificate
Principal Balance of the Class M-1 Certificates of that
Certificate Group is reduced to zero;
. to the Class M-2 Certificates in the related Certificate Group,
the Class M-2 Principal Distribution Amount until the Certificate
Principal Balance of the Class M-2 Certificates of that
Certificate Group is reduced to zero;
. to the Class B Certificates in the related Certificate Group, the
Class B Principal Distribution Amount until the Certificate
Principal Balance of the Class B Certificates of that Certificate
Group is reduced to zero; and
. any remainder to be distributed as described under "--
Overcollateralization and Cross-Collateralization Provisions"
below.
The Principal Distribution Amount or the Class A Principal Distribution
Amount, as applicable, for the Fixed Rate Loan Group is required to be
distributed to the Fixed Rate Class A Certificates sequentially, to the Class
AF-[__] and AF-[__] Certificates, in that order, until the respective
Certificate Principal Balances of those Classes of Certificates are reduced to
zero.
Notwithstanding the foregoing order of priority, on any Distribution Date
on which the aggregate Certificate Principal Balances of the Fixed Rate Class A
Certificates are greater than the Stated Principal Balances of all Mortgage
Loans in the Fixed Rate Loan Group, the Principal Distribution Amount or the
Class A Principal Distribution Amount, as applicable, for the Fixed Rate Loan
Group will be distributed pro rata and not sequentially.
The Principal Distribution Amount or the Class A Principal Distribution
Amount, as applicable, for the Adjustable Rate Loan Group is required to be
distributed to the Adjustable Rate Class A Certificates in the following order
of priority:
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. (i) the Loan Subgroup [__] Percentage thereof to the Class AV-[1]
Certificates until the Certificate Principal Balance of the Class AV-
[1] Certificates is reduced to zero; and (ii) the Loan Subgroup [__]
Percentage thereof to the Class AV-[2] Certificates until the
Certificate Principal Balances of the Class AV-[2] is reduced to zero;
and
. if the Certificate Principal Balance of either Class of Adjustable
Rate Class A Certificates is reduced to zero, the portion of the
Principal Distribution Amount or Class A Principal Distribution
Amount, as applicable, that would have been distributed to that Class
in accordance with the foregoing clause (1) shall be distributed to
the remaining Class of Class A Adjustable Rate Certificates until the
Certificate Principal Balance of those Classes of Certificates is
reduced to zero.
Regardless of the foregoing priority [(i) on the [________] Distribution
Date, the portion of the related Principal Distribution Amount allocable to
amounts remaining on deposit in the Pre-Funding Account with respect to a Loan
Subgroup shall be distributed to the related Class of Adjustable Rate Class A
Certificates and (ii)] on any Distribution Date on which the Certificate
Principal Balances of the Adjustable Rate Class A Certificates are greater than
the Stated Principal Balances of the Mortgage Loans in the Adjustable Rate Loan
Group, the Principal Distribution Amount or Class A Principal Distribution
Amount, as applicable, for the Adjustable Rate Loan Group will be distributed to
the Class AV-[1] Certificates and the Class AV-[2] Certificates pro rata on the
basis of their respective Certificate Principal Balances.
[As to any Distribution Date: the "Loan Subgroup [__] Percentage" will
equal (i) for any Distribution Date before the related Stepdown Date or as to
which a related Trigger Event is in effect the percentage equivalent of a
fraction, the numerator of which is the Principal Funds for Loan Subgroup [__]
for that Distribution Date and the denominator of which is the aggregate
Principal Funds for the Adjustable Rate Loan Group for that Distribution Date
and (ii) for any Distribution Date on or after the related Stepdown Date and so
long as a related Trigger Event is not in effect, the percentage equivalent of a
fraction, the numerator of which is the Certificate Principal Balance of the
Class AV-[1] Certificates immediately before that Distribution Date, and the
denominator of which is the aggregate Certificate Principal Balances of the
Adjustable Rate Class A Certificates.]
"Principal Distribution Amount," with respect to each Distribution Date and
a Loan Group, is the sum of:
. the Principal Funds for that Distribution Date for that Loan Group,
. any Extra Principal Distribution Amount for that Distribution Date for
the related Loan Group[, and]
. for the [________] Distribution Date, any amounts remaining in the
Pre- Funding Account after the end of the Funding Period that were
allocated to purchase
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Subsequent Mortgage Loans to be included in that Loan Group (net of
any investment income therefrom)].
"Class A Principal Distribution Amount," for a Loan Group is the excess of:
. the Certificate Principal Balance of the Class A Certificates for the
related Certificate Group immediately before that Distribution Date
over
. the lesser of:
. [___]% for the Fixed Rate Loan Group and [___]% for the
Adjustable Rate Loan Group, of the Stated Principal Balances for
that Distribution Date of the Mortgage Loans in that Loan Group,
and
. the Stated Principal Balances for that Distribution Date of the
Mortgage Loans in that Loan Group less the OC Floor for the
related Loan Group.
"Class AF-[_] Distribution Amount," for any Distribution Date, is the
product of:
. a fraction, the numerator of which is the Certificate Principal
Balance of the Class AF-[__] Certificates and the denominator of which
is the aggregate Certificate Principal Balances of the Fixed Rate
Class A Certificates, in each case immediately before that
Distribution Date;
. the Principal Distribution Amount or the Class A Principal
Distribution Amount, as applicable, with respect to the Fixed Rate
Certificate Group for that Distribution Date; and
. the applicable percentage for that Distribution Date set forth in the
following table:
DISTRIBUTION DATE PERCENTAGE
----------------- ----------
[ ]..........................................[ ]%
[ ]..........................................[ ]%
[ ]..........................................[ ]%
[ ]..........................................[ ]%
[ ] and thereafter...........................[ ]%
"Class M-1 Principal Distribution Amount," for a Loan Group is the excess
of:
. the sum for that Loan Group of:
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. the Certificate Principal Balance of the related Class A
Certificates (after taking into account distributions of the
related Class A Principal Distribution Amount for that
Distribution Date), and
. the Certificate Principal Balance of the related Class M-1
Certificates immediately before that Distribution Date, over
. the lesser of:
. [___]% for the Fixed Rate Loan Group and [___]% for the
Adjustable Rate Loan Group of the Stated Principal Balances for
that Distribution Date of the Mortgage Loans in that Loan Group,
and
. the Stated Principal Balances for that Distribution Date of the
Mortgage Loans in that Loan Group less the OC Floor for the
related Loan Group.
"Class M-2 Principal Distribution Amount," for a Loan Group is the excess
of:
. of the sum for that Loan Group of:
. the Certificate Principal Balance of the related Class A
Certificates (after taking into account distributions of the
related Class A Principal Distribution Amount for that
Distribution Date),
. the Certificate Principal Balance of the related Class M-1
Certificates (after taking into account distribution of the
related Class M-1 Principal Distribution Amount for that
Distribution Date), and
. the Certificate Principal Balance of the related Class M-2
Certificates immediately before that Distribution Date, over
. the lesser of:
. [___]% for the Fixed Rate Loan Group and [___]% for the
Adjustable Rate Loan Group, of the aggregate Stated Principal
Balances for that Distribution Date of the Mortgage Loans in that
Loan Group, and
. the Stated Principal Balances of the Mortgage Loans for that
Distribution Date in that Loan Group less the OC Floor for the
related Loan Group.
"Class B Principal Distribution Amount," for a Loan Group is the excess of:
. of the sum for that Loan Group of:
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. the Certificate Principal Balance of the related Class A
Certificates (after taking into account distributions of the
related Class A Principal Distribution Amount for that
Distribution Date),
. the Certificate Principal Balance of the related Class M-1
Certificates (after taking into account distribution of the
related Class M-1 Principal Distribution Amount for that
Distribution Date),
. the Certificate Principal Balance of the related Class M-2
Certificates (after taking into account distributions of the
related Class M-2 Principal Distribution Amount for that
Distribution Date), and
. the Certificate Principal Balance of the related Class B
Certificates immediately before that Distribution Date over
. the lesser of:
. [___]% for the Fixed Rate Loan Group and [___]% for the
Adjustable Rate Loan Group, of the Stated Principal Balances for
that Distribution Date of the Mortgage Loans in that Loan Group,
and
. the Stated Principal Balances for that Distribution Date of the
Mortgage Loans in that Loan Group less the OC Floor for the
related Loan Group;
provided, however, that after the Certificate Principal Balances of the Class A,
Class M-1 and Class M-2 Certificates for that Certificate Group are reduced to
zero, the Class B Principal Distribution Amount for that Distribution Date will
equal 100% of the Principal Distribution Amount for the related Loan Group.
"Extra Principal Distribution Amount," for a Loan Group and with respect to
any Distribution Date, is the lesser of:
. the excess, if any, of:
. Specified Overcollateralization Amount for that Loan Group and
Distribution Date over
. the Overcollateralization Amount (after giving effect to
distributions of principal on the related Certificate Group other
than any Extra Principal Distribution Amount) for that Loan Group
and Distribution Date, and
. the Excess Cashflow for that Loan Group and Distribution Date
available therefor in the priority set forth in this prospectus
supplement.
"Excess Cashflow," for a Loan Group and with respect to any Distribution
Date, is the excess, if any, of the Interest Funds and Principal Funds for that
Loan Group and Distribution
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Date over required distributions of interest and principal (excluding any Extra
Principal Distribution Amount) on the Offered Certificates in the related
Certificate Group on that Distribution Date.
"OC Floor" for either Loan Group equals [___]% of the sum of the [Initial]
Cut-off Date Principal Balance of the Mortgage Loans in the related Loan Group
[plus the amount of the Pre-Funded Amount originally allocated to purchase
Subsequent Mortgage Loans to be included in that Loan Group.]
"Remainder Excess Cashflow," for a Loan Group and with respect to any
Distribution Date, is the excess, if any, of the Excess Cashflow for that Loan
Group and Distribution Date over the portion, if any, applied to the Offered
Certificates in the related Certificate Group in accordance with clauses (2)
through (7) under the third paragraph under "-- Over-collateralization and
Cross-Collateralization Provisions" below.
"Specified Overcollateralization Amount" means:
. with respect to each Loan Group before the Stepdown Date for the
related Certificate Group, an amount equal to [___]% for the Fixed
Rate Loan Group and [___]% for the Adjustable Rate Loan Group of the
sum of the [Initial] Cut-off Date Principal Balance of the Mortgage
Loans in the related Loan Group [plus the amount of the Pre-Funded
Amount originally allocated to purchase Subsequent Mortgage Loans to
be included in that Loan Group]; and
. with respect to each Loan Group on and after the Stepdown Date for the
related Certificate Group, an amount equal to [___]% for the Fixed
Rate Loan Group and [___]% for the Adjustable Rate Loan Group of the
Stated Principal Balances for the current Distribution Date of the
Mortgage Loans in that Loan Group, subject to a minimum amount equal
to the applicable OC Floor;
provided, however, that, if on any Distribution Date, a Trigger Event for a
Certificate Group has occurred, the Specified Overcollateralization Amount shall
not be reduced to the applicable percentage of the current Stated Principal
Balance of the Mortgage Loans in the related Loan Group until the Distribution
Date on which a Trigger Event for that Certificate Group no longer exists.
"Overcollateralization Amount," with respect to any Distribution Date and
Loan Group, is the excess, if any, of:
. the sum of the aggregate Stated Principal Balances for that
Distribution Date of the Mortgage Loans in that Loan Group [plus, the
amount (if any) in the Pre-Funding Account allocated to purchase
Subsequent Mortgage Loans to be included in that Loan Group] over
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. the Class Certificate Balance of the Offered Certificates in the
related Certificate Group as of that date (after taking into account
the payment of principal on those Certificates on that Distribution
Date).
"Stepdown Date," with respect to each Certificate Group, is the later to
occur of:
. the Distribution Date in [__________], or
. the first Distribution Date on which the Class A Certificate Principal
Balance of that Certificate Group is less than or equal to[___]% for
the Fixed Rate Loan Group and [___]% for the Adjustable Rate Loan
Group, of the Stated Principal Balances for that Distribution Date of
the Mortgage Loans in the related Loan Group.
A "Trigger Event," with respect to each Certificate Group and a
Distribution Date after the Stepdown Date, exists if the product of:
. [__] times for the Fixed Rate Loan Group and [__] times for the
Adjustable Rate Loan Group, and
. the quotient (expressed as a percentage) of:
. the numerator of which is the aggregate Stated Principal Balance
for that Distribution Date of all Mortgage Loans in that Loan
Group 60 or more days delinquent as of the preceding Due Date
(including Mortgage Loans in foreclosure and REO Properties), and
. the denominator of which is the Stated Principal Balance for that
Distribution Date of that Loan Group equals or exceeds the
Required Percentage.
A "Required Percentage," with respect to each Certificate Group and a
Distribution Date after the Stepdown Date is equal to the quotient (expressed as
a percentage) of:
. the excess of:
. the Stated Principal Balance for that Distribution Date of that
Loan Group over
. the Certificate Principal Balance of the most senior Class of
Certificates of that Certificate Group outstanding as of the
preceding Master Servicer Advance Date, and
. the Stated Principal Balance for that Distribution Date of that Loan
Group.
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Overcollateralization and Cross-Collateralization Provisions
As set forth below, the Excess Cashflow for a Loan Group will be required
to be applied as an Extra Principal Distribution Amount with respect to the
related Certificate Group whenever the Overcollateralization Amount for that
Loan Group is less than the related Specified Overcollateralization Amount. In
addition, any Remainder Excess Cashflow with respect to a Loan Group will be
required to be applied as an Extra Principal Distribution Amount with respect to
the Certificate Group related to the other Loan Group whenever the
Overcollateralization Amount for that other Loan Group is less than the related
Specified Overcollateralization Amount. If on any Distribution Date, after
giving effect to any Extra Principal Distribution Amount, the aggregate
Certificate Principal Balances of the Offered Certificates with respect to a
Certificate Group exceed the [sum of (x)] the Stated Principal Balances of the
Mortgage Loans in the related Loan Group [and (y) the amount on deposit in the
Pre-Funded Account (if any) allocated to purchase Subsequent Mortgage Loans to
be included in that Loan Group], the Certificate Principal Balances of the
Subordinated Offered Certificates (but not the Class A Certificates) of that
Certificate Group will be reduced, in inverse order of seniority (beginning with
the Class B Certificates) by an amount equal to that excess. That reduction, if
any, is an "Applied Realized Loss Amount."
If the Certificate Principal Balance of a Class of Subordinated Offered
Certificates is reduced, that Class thereafter will be entitled to distributions
of interest and principal only with respect to the Certificate Principal Balance
as so reduced. On subsequent Distribution Dates, however, as described below,
Excess Cashflow from the related Loan Group and Remainder Excess Cashflow from
the other Loan Group will be applied to reduce Unpaid Realized Loss Amounts
previously allocated to those Certificates in order of seniority.
On each Distribution Date, the Excess Cashflow with respect to a Loan Group
will be required to be distributed as follows:
(1) the Extra Principal Distribution Amount for that Loan Group, to the
related Certificate Group as described under "-- Distribution of Principal"
above,
(2) to the Class M-1 Certificates of that Certificate Group, any Interest
Carry Forward Amount for that Class,
(3) to the Class M-1 Certificates of that Certificate Group, any Unpaid
Realized Loss Amount for that Class,
(4) to the Class M-2 Certificates of that Certificate Group, any Interest
Carry Forward Amount for that Class,
(5) to the Class M-2 Certificates of that Certificate Group, any Unpaid
Realized Loss Amount for that Class,
(6) to the Class B Certificates of that Certificate Group, any Interest
Carry Forward Amount for that Class, and
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(7) to the Class B Certificates of that Certificate Group, the Unpaid
Realized Loss Amount for that Class.
On each Distribution Date, the Remainder Excess Cashflow with respect to a
Loan Group will be required to be distributed as follows:
(1) for distribution to the Certificates in the other Certificate Group to
the extent that any of the amounts listed in clauses (2) through (7) in the
immediately preceding paragraph with respect to the other Certificate Group
have not otherwise been funded in full for that Distribution Date in
accordance with the priorities set forth above;
(2) in the case of the Fixed Rate Loan Group to the Offered Fixed Rate
Certificates, on a pro rata basis among all Classes, the Fixed Net Rate
Carryover (to be treated as paid from and to the extent of funds on deposit
in the Fixed Rate Carryover Reserve Fund, and, in the case of the Fixed Net
Rate Carryover for the Class AF-[1] Certificates only, if that amount on
deposit in the Fixed Rate Carryover Reserve Fund is not enough to pay that
Fixed Net Rate Carryover then from the Adjustable Rate Carryover Reserve
Fund after payment of any Adjustable Rate Certificate Carryover in
accordance with clause (3) below, in each case after giving effect to
distributions in accordance with clause (4) below);
(3) in the case of the Adjustable Rate Loan Group, to the Offered
Adjustable Rate Certificates, on a pro rata basis among all Classes, the
Adjustable Rate Certificate Carryover (to be treated as paid from and to
the extent of funds on deposit in the Adjustable Rate Carryover Reserve
Fund, after giving effect to distributions in accordance with clause (4)
below);
(4) first, (a) to the Class BF-IO Certificates, for deposit in the Fixed
Rate Carryover Reserve Fund (for distribution (if any) in accordance with
clause (2) above) in an amount equal to the Fixed Rate Carryover Reserve
Fund Deposit, and (b) to the Class BV-IO Certificates, for deposit in the
Adjustable Rate Carryover Reserve Fund (for distribution (if any) in
accordance with clause (3) above) in an amount equal to the Adjustable Rate
Carryover Reserve Fund Deposit; and second, to the Class BF-IO and Class
BV-IO Certificates for distribution to the holders of those Certificates,
in each case as provided in the Pooling and Servicing Agreement;
(5) to pay the Master Servicer an extra master servicing fee as provided in
the Pooling and Servicing Agreement (the "Extra Master Servicing Fee"); and
(6) to the Residual Certificates, any remaining amount.
"Applied Realized Loss Amount," with respect to any Class of the
Subordinated Offered Certificates and as to any Distribution Date, means the sum
of the Realized Losses with respect to Mortgage Loans which have been applied in
reduction of the Certificate Principal Balance of that Class.
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"Realized Loss" is the excess of the Stated Principal Balance of a
defaulted Mortgage Loan over the net liquidation proceeds of that Mortgage Loan
that are allocated to principal.
"Unpaid Realized Loss Amount," with respect to any Class of the
Subordinated Offered Certificates and as to any Distribution Date, is the excess
of:
. Applied Realized Loss Amounts with respect to that Class over
. the sum of all distributions in reduction of the Applied Realized Loss
Amounts on all previous Distribution Dates.
Any amounts distributed to a Class of Subordinated Offered Certificates in
respect of any Unpaid Realized Loss Amount will not be applied to reduce the
Certificate Principal Balance of that Class.
If a Specified Overcollateralization Amount is permitted to decrease or
"step down" on a Distribution Date in the future, or if an Excess
Overcollateralization Amount (as defined below) for a Certificate Group
otherwise exists, then any amounts relating to principal which would otherwise
be distributed to the holders of the Certificates in the related Certificate
Group on that Distribution Date will (to the extent not otherwise required to be
applied to the other Certificate Group) instead be distributed to the holders of
the related Class B-IO Certificates, to the Master Servicer as an Extra Master
Servicing Fee and to the holders of the Residual Certificates (in each case as
provided in the Pooling and Servicing Agreement) on that Distribution Date until
the applicable Excess Overcollateralization Amount is reduced to zero. This has
the effect of decelerating the amortization of the Certificates in the related
Certificate Group relative to the amortization of the Mortgage Loans in the
related Loan Group, and of reducing the related Overcollateralization Amount to
the applicable Specified Overcollateralization Amount. With respect to a
Certificate Group and any Distribution Date, the excess, if any, of (a) the
Overcollateralization Amount on that Distribution Date over (b) the Specified
Overcollateralization Amount is the "Excess Overcollateralization Amount" with
respect to that Distribution Date.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Offered Adjustable Rate Certificates
and the Class AF-[1] Certificates (each such date, an "Interest Determination
Date"), the Trustee will determine the One-Month LIBOR for that Accrual Period
on the basis of such rate as it appears on Telerate Screen Page 3750, as of
11:00 a.m. (London time) on that Interest Determination Date. If that rate does
not appear on such page (or some other page as may replace that page on that
service, or if that service is no longer offered, some other service for
displaying LIBOR or comparable rates as may be reasonably selected by the
Trustee), One-Month LIBOR for the applicable Accrual Period will be the
Reference Bank Rate as defined in this prospectus supplement. If those
quotations cannot be obtained and no Reference Bank Rate is available, One-Month
LIBOR will be the One-Month LIBOR applicable to the preceding Accrual Period.
The
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"Reference Bank Rate" with respect to any Accrual Period, means the arithmetic
mean (rounded upwards, if necessary, to the nearest whole multiple of 0.03125%)
of the offered rates for United States dollar deposits for one month that are
quoted by the Reference Banks as of 11:00 a.m., New York City time, on the
related Interest Determination Date to prime banks in the London interbank
market for one month in amounts approximately equal to the aggregate Certificate
Principal Balance of all Adjustable Rate Certificates and the Class AF-[1]
Certificates for that Accrual Period, provided that at least two of those
Reference Banks provide that rate. If fewer than two offered rates appear, the
Reference Bank Rate will be the arithmetic mean (rounded upwards, if necessary,
to the nearest whole multiple of 0.03125%) of the rates quoted by one or more
major banks in New York City, selected by the Trustee, as of 11:00 a.m., New
York City time, on that date for loans in U.S. dollars to leading European banks
for one month in amounts approximately equal to the Certificate Principal
Balance of all Adjustable Rate Certificates and the Class AF-[1] Certificates
for that Accrual Period. As used in this section, "LIBOR Business Day" means a
day on which banks are open for dealing in foreign currency and exchange in
London and New York City; and "Reference Banks" means leading banks selected by
the Trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market:
. with an established place of business in London,
. which have been designated as that by the Trustee, and
. which are not controlling, controlled by, or under common control
with, the Depositor, First Horizon or any successor Master Servicer.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Offered Adjustable Rate Certificates and the Class AF-[1] Certificates for
the related Accrual Period shall (in the absence of manifest error) be final and
binding.
Fixed Rate Carryover Reserve Fund
The Pooling and Servicing Agreement establishes an account (the "Fixed Rate
Carryover Reserve Fund"), which is held in trust by the Trustee on behalf of the
Offered Fixed Rate Certificateholders. The Fixed Rate Carryover Reserve Fund
will not be an asset of any REMIC. Holders of the Offered Fixed Rate
Certificates will be entitled to receive payments from the Fixed Rate Carryover
Reserve Fund in an amount equal to any Fixed Net Rate Carryover for those
Offered Fixed Rate Certificates as described in this prospectus supplement under
"-- Overcollateralization and Cross-Collateralization Provisions." The amount
required to be deposited in the Fixed Rate Carryover Reserve Fund on any
Distribution Date (the "Fixed Rate Carryover Reserve Fund Deposit") will equal
the greater of:
. any Fixed Net Rate Carryover for that Distribution Date, and
. an amount such that when added to other amounts already on deposit in
the Fixed Rate Carryover Reserve Fund, the aggregate amount on deposit
therein is equal to
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$[5,000] (that amount on deposit in the Fixed Rate Carryover Reserve
Fund being subject to increase or decrease under certain
circumstances, as provided in the Pooling and Servicing Agreement).
Any investment earnings on amounts on deposit in the Fixed Rate Carryover
Reserve Fund will be paid to (and for the benefit of) the holders of the Class
BF-IO Certificates and will not be available to pay any Fixed Net Rate
Carryover.
Adjustable Rate Carryover Reserve Fund
The Pooling and Servicing Agreement also establishes an account (the
"Adjustable Rate Carryover Reserve Fund"), which is held in trust by the Trustee
on behalf of the Offered Adjustable Rate Certificateholders and the Class AF-[1]
Certificateholders. The Adjustable Rate Carryover Reserve Fund will not be an
asset of any REMIC. Holders of the Offered Adjustable Rate Certificates and, on
a subordinated basis, the Class AF-[1] Certificateholders, will be entitled to
receive payments from the Adjustable Rate Carryover Reserve Fund in an amount
equal to any Adjustable Rate Certificate Carryover for those Certificates (and
in the case of the Class AF-[1] Certificates, the Fixed Net Rate Carryover for
those Certificates not paid from amounts on deposit in the Fixed Rate Carryover
Reserve Fund) as described in this prospectus supplement under "--
Overcollateralization and Cross-Collateralization Provisions." The amount
required to be deposited in the Adjustable Rate Carryover Reserve Fund on any
Distribution Date (the "Adjustable Rate Carryover Reserve Fund Deposit") will
equal the greater of:
. any Adjustable Rate Certificate Carryover for that Distribution Date
plus the Fixed Net Rate Carryover for the Class AF-[1] Certificates
for that Distribution Date, and
. an amount such that when added to other amounts already on deposit in
the Adjustable Rate Carryover Reserve Fund, the aggregate amount on
deposit therein is equal to $[5,000] (that amount on deposit in the
Adjustable Rate Carryover Reserve Fund being subject to increase or
decrease under certain circumstances, as provided in the Pooling and
Servicing Agreement).
Any investment earnings on amounts on deposit in the Adjustable Rate
Carryover Reserve Fund will be paid to (and for the benefit of) the holders of
the Class BV-IO Certificates and will not be available to pay any Adjustable
Rate Certificate Carryover.
Reports to Certificateholders
On each Distribution Date, the Trustee will forward to each
Certificateholder, the Master Servicer and the Depositor a statement generally
setting forth, among other information:
. the amount of the related distribution to holders of the Offered
Certificates allocable to principal, separately identifying:
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. the aggregate amount of any principal prepayments included in
that amount,
. the aggregate of all scheduled payments of principal included in
that amount, and
. Extra Principal Distribution Amount,
. the amount of that distribution to holders of the Offered Certificates
allocable to interest,
. the Interest Carry Forward Amounts for each Class of Offered
Certificates (if any),
. the Certificate Principal Balance of the Offered Certificates after
giving effect to the distribution of principal on that Distribution
Date,
. the Pool Stated Principal Balance for the following Distribution Date,
. the amount of the Servicing Fee paid to or retained by the Master
Servicer for the related Due Period,
. the Pass-Through Rate for each Class of Offered Adjustable Rate
Certificates and the Class AF-[1] Certificates for that Distribution
Date,
. the amount of Advances included in the distribution on that
Distribution Date,
. the number and aggregate principal amounts of Mortgage Loans in each
Loan Group [and each Loan Subgroup]:
. delinquent (exclusive of related Mortgage Loans in foreclosure):
--30 days,
--31 to 60 days,
--61 to 90 days, and
--91 or more days, and
. in foreclosure and delinquent:
--30 days,
--31 to 60 days,
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--61 to 90 days, and
--91 or more days,
in each case as of the close of business on the last day of the
calendar month preceding that Distribution Date,
. with respect to any Mortgage Loan in each Loan Group [and each Loan
Subgroup] that became an REO Property during the preceding calendar
month, the loan number and Stated Principal Balance for that
Distribution Date of that Mortgage Loan and the date of acquisition of
that Mortgage Loan,
. with respect to each Loan Group, whether a Trigger Event exists,
. the total number and principal balance of any REO Properties in each
Loan Group [and each Loan Subgroup] as of the close of business on the
Determination Date preceding that Distribution Date,
. any Adjustable Rate Certificate Carryover paid and all remaining
Adjustable Rate Certificate Carryover remaining on each Class of the
Offered Adjustable Rate Certificates on that Distribution Date, and
. any Fixed Net Rate Carryover paid and all remaining Fixed Net Rate
Carryover remaining on each Class of the Offered Fixed Rate
Certificates on that Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each Certificateholder of
record during the previous calendar year a statement containing information
necessary to enable Certificateholders to prepare their tax returns. Such
statements will not have been examined and reported upon by an independent
public accountant.
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer, the Seller and the Trustee, without the consent of
Certificateholders, for any of the purposes set forth under "The Agreements --
Amendment" in the prospectus. In addition, the Pooling and Servicing Agreement
may be amended by the Depositor, the Master Servicer, the Seller and the Trustee
and the holders of a Majority in Interest of each Class of Certificates affected
thereby for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement or of
modifying in any manner the rights of the Certificateholders; provided, however,
that no such amendment may:
(1) reduce in any manner the amount of, or delay the timing of, payments
required to be distributed on any Certificate without the consent of the
holder of that Certificate,
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(2) adversely affect in any material respect the interests of the holders
of any Class of Certificates in a manner other than as described in clause
(1) above, without the consent of the holders of Certificates of that Class
evidencing, as to that Class, Percentage Interests aggregating 66%, or
(3) reduce the aforesaid percentage of aggregate outstanding principal
amounts of Certificates of each Class, the holders of which are required to
consent to any such amendment, if any, without the consent of the holders
of all Certificates of that Class.
Optional Termination
The Master Servicer will have the right to repurchase all remaining
Mortgage Loans and REO Properties [in each Loan Group] and thereby effect early
retirement of all the Certificates [of the related Certificate Group], subject
to the Stated Principal Balance of the Mortgage Loans and REO Properties [in
that Loan Group] at the time of repurchase being less than or equal to [10]% of
[the sum of (i) the Initial Cut-off Date Principal Balance of that Loan Group
and (ii) the portion of the Pre-Funded Amount allocated to purchase Subsequent
Mortgage Loans to be included in that Loan Group] (each, an "Optional
Termination Date"). If that option is exercised by the Master Servicer, the
repurchase will be made at a price equal to the sum of:
. 100% of the Stated Principal Balance of each Mortgage Loan [in that
Loan Group] (other than in respect of REO Property) plus accrued
interest thereon at the applicable Mortgage Rate, net of the Servicing
Fee;
. the appraised value of any REO Property (up to the Stated Principal
Balance of the related Mortgage Loan) [in that Loan Group]; and
. any unreimbursed out-of-pocket costs and expenses and the principal
portion of Advances [for that Loan Group];
in each case previously incurred by the Master Servicer in the performance of
its servicing obligations. Proceeds from that repurchase will be distributed to
the Certificateholders [in the related Certificate Group] in the priority
described above. The proceeds from that distribution, if any, may not be
sufficient to distribute the full amount to which each Class of Certificates [on
a Certificate Group] is entitled if, [with respect to the related Loan Group,]
the purchase price is based in part on the appraised value of any REO Property
and that appraised value is less than the Stated Principal Balance of the
related Mortgage Loan. Any repurchase of the Mortgage Loans and REO Properties
[of a Loan Group] will result in an early retirement of the Certificates [in the
related Certificate Group].
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 91 days or more,
the Master Servicer may, at its option, purchase that Mortgage Loan at a price
equal to 100% of the Stated Principal Balance of that Mortgage Loan plus accrued
interest thereon at the applicable Mortgage
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Rate, from the date through which interest was last paid by the related
mortgagor or advanced to the first day of the month in which that amount is to
be distributed.
Events of Default
Events of Default will consist of:
. any failure by the Master Servicer to deposit in the Certificate
Account or the Distribution Account the required amounts or remit to
the Trustee any payment (including an Advance required to be made
under the terms of the Pooling and Servicing Agreement) which
continues unremedied for five Business Days after written notice of
that failure shall have been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer and the Trustee by
the holders of Certificates evidencing not less than 25% of the Voting
Rights evidenced by the Certificates;
. any failure by the Master Servicer to observe or perform in any
material respect any other of its covenants or agreements, or any
breach of a representation or warranty made by the Master Servicer, in
the Pooling and Servicing Agreement, which continues unremedied for 60
days after the giving of written notice of that failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer
and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights evidenced by the Certificates; or
. insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on
behalf of the Master Servicer indicating its insolvency or inability
to pay its obligations.
As of any date of determination, holders of the Offered Certificates will
be allocated 95% of all Voting Rights, allocated among the Offered Certificates
in proportion to their respective outstanding Certificate Principal Balances and
holders of the Class B-IO Certificates and the Residual Certificates will be
allocated all of the remaining Voting Rights.
Voting Rights will be allocated among the Certificates of each of those
Classes in accordance with their respective Percentage Interests.
Rights Upon Event of Default
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee shall, but only upon the receipt of instructions
from the holders of Certificates having not less than 25% of the Voting Rights
evidenced by the Certificates, terminate all of the rights and obligations of
the Master Servicer under the Pooling and Servicing Agreement and in and to the
Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities and duties of the Master Servicer under the Pooling and
Servicing Agreement, including the obligation to make Advances. No assurance can
be given that termination of the rights and obligations of the Master Servicer
under the Pooling and Servicing Agreement would
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not adversely affect the servicing of the Mortgage Loans, including the
delinquency experience of the Mortgage Loans.
No Certificateholder, solely by virtue of that holder's status as a
Certificateholder, will have any right under the Pooling and Servicing Agreement
to institute any proceeding with respect to the Pooling and Servicing Agreement,
unless that holder previously has given to the Trustee written notice of the
continuation of an Event of Default and unless the holders of Certificates
having not less than 25% of the Voting Rights evidenced by the Certificates have
made written request to the Trustee to institute that proceeding in its own name
as Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
The Trustee
[Name of Trustee] will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and First Horizon may maintain other banking
relationships in the ordinary course of business with the Trustee. Offered
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at [Address of Trustee, Attention: Name of Officer] or at any other
address the Trustee may designate from time to time.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The weighted average life of, and the yield to maturity on each Class of
the Offered Certificates generally will be directly related to the rate of
payment of principal (including prepayments) of the Mortgage Loans in the
related Loan Group[, or in the case of the Class AV-[1] and Class AV-[2]
Certificates, in the related Loan Subgroup]. The actual rate of principal
prepayments on pools of mortgage loans is influenced by a variety of economic,
tax, geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans, the extent of the mortgagor's equity in those
properties, and changes in the mortgagors' housing needs, job transfers and
employment status. Furthermore, as described under "The Mortgage Pool --
Assignment of the Mortgage Loans," with respect to up to [50]% of the [Initial]
Mortgage Loans [and all of the Subsequent Mortgage Loans] (the "Delay Delivery
Mortgage Loans"), the Depositor may deliver the related Trustee Mortgage Files
after the Closing Date [or Subsequent Transfer Date, as applicable]. Should the
Seller fail to deliver all or a portion of any such Trustee Mortgage Files to
the Depositor or other designee of the Depositor or, at the Depositor's
direction, to the Trustee within the time periods described under "The Mortgage
Pool-- Assignment of the Mortgage Loans," the Seller will be required to use its
best efforts to deliver a Substitute Mortgage Loan for the related Delay
Delivery Mortgage Loan or repurchase the related Delay Delivery Mortgage Loan.
Any repurchases in accordance with this provision would also have the effect of
accelerating the rate of prepayments on the Mortgage
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Loans. [In addition, approximately [____]% of the Mortgage Loans in the Fixed
Rate [Statistical Calculation] Loan Group and approximately [____]% of the
Mortgage Loans in the Adjustable Rate [Statistical Calculation] Loan Group
require the payment of a penalty in connection with some prepayments, generally
during the first five years following origination of the related Mortgage Loan.
These penalties, if enforced by the Master Servicer, may affect the rate of
prepayments on the Mortgage Loans.]
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors who purchase the Offered Certificates at prices
other than par, even if the average rate of principal prepayments is consistent
with the expectations of investors. In general, the earlier the payment of
principal of the Mortgage Loans the greater the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments. Investors must make their own decisions as to
the appropriate prepayment assumptions to be used in deciding whether to
purchase any of the Offered Certificates. The Depositor does not make any
representations or warranties as to the rate of prepayment or the factors to be
considered in connection with those determinations.
The weighted average life and yield to maturity of each Class of Offered
Certificates will also be influenced by the amount of Excess Cashflow generated
by the Mortgage Loans and applied in reduction of the Certificate Principal
Balances of those Certificates. The level of Excess Cashflow available on any
Distribution Date to be applied in reduction of the Certificate Principal
Balances of the Offered Certificates will be influenced by, among other factors:
. the overcollateralization level of the assets in the Loan Group at
that time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Stated Principal Balance than the Certificate
Principal Balance of the related Offered Certificates),
. the delinquency and default experience of the Mortgage Loans,
. the level of One-Month LIBOR and the Mortgage Index for the Adjustable
Rate Mortgage Loans, and
. the provisions of the Pooling and Servicing Agreement that permit any
principal to be distributed to the Class B-IO Certificates and the
Residual Certificates and to the Master Servicer as an Extra Master
Servicing Fee (in each case as provided in the Pooling and Servicing
Agreement) when required overcollateralization levels have been met.
To the extent that greater amounts of Excess Cashflow are distributed in
reduction of the Certificate Principal Balances of a Class of Offered
Certificates, the weighted average life of that Class can be expected to
shorten. No assurance, however, can be given as to the amount of
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Excess Cashflow distributed at any time or in the aggregate. See "Description of
the Offered Certificates -- Overcollateralization and Cross-Collateralization
Provisions" in this prospectus supplement.
The Class AF-[ ] Certificates will not be entitled to distributions of
principal until the Distribution Date in [ ] (except as otherwise
described in this prospectus supplement). Thereafter, the relative entitlement
of the Class AF-[ ] Certificates to payments in respect of principal is subject
to increase in accordance with the calculation of the Class AF-[ ] Distribution
Amount. See "Description of the Certificates -- Distributions" in this
prospectus supplement.
Prepayments and Yields for Offered Certificates
The extent to which the yield to maturity of the Offered Certificates may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and, correspondingly, the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the Mortgage Loans in the related Loan Group [or Loan Subgroup, as
applicable]. In particular, in the case of an Offered Certificate purchased at a
discount, an investor should consider the risk that a slower than anticipated
rate of principal payments, liquidations and purchases of the Mortgage Loans in
the related Loan Group [or Loan Subgroup, as applicable], could result in an
actual yield to that investor that is lower than the anticipated yield and, in
the case of an Offered Certificate purchased at a premium, the risk that a
faster than anticipated rate of principal payments, liquidations and purchases
of those Mortgage Loans in the related Loan Group [or Loan Subgroup, as
applicable], could result in an actual yield to that investor that is lower than
the anticipated yield.
All of the Mortgage Loans in the Fixed Rate Loan Group are fixed rate
Mortgage Loans. In general, if prevailing interest rates fall significantly
below the interest rates on fixed rate mortgage loans, those mortgage loans are
likely to be subject to higher prepayment rates than if prevailing rates remain
at or above the interest rates on those mortgage loans. Conversely, if
prevailing interest rates rise appreciably above the interest rates on fixed
rate mortgage loans, those mortgage loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below the interest rates
on those mortgage loans. If Fixed Rate Mortgage Loans with higher mortgage
rates prepay at rates higher than other Fixed Rate Mortgage Loans, the Fixed
Rate Net Cap may be lower than otherwise would be the case. As a result, the
interest payable on the Fixed Rate Certificates on a Distribution Date could be
reduced because of the imposition of the Fixed Rate Net Cap. In addition, the
pass-through rate on the Class AF-[1] Certificates adjusts monthly based on One-
Month LIBOR while the mortgage rates on the Fixed Rate Mortgage Loans are fixed,
except for certain mortgage rates that may decline based on payment history.
Although amounts deposited in the Fixed Rate Carryover Reserve Fund will be
available to pay any Fixed Net Rate Carryover, there is no assurance that funds
will be available or sufficient to pay that amount. The ratings assigned
Offered Fixed Rate Certificates do not address the likelihood of the payment of
that amount.
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The effective yield to the holders of the Fixed Rate Certificates (other
than the Class AF-[1] Certificates) will be lower than the yield otherwise
produced by the applicable rate at which interest is passed through to those
holders and the purchase price of such Certificates because monthly
distributions will not be payable to those holders until the [___]th day (or, if
that day is not a business day, the following business day) of the month
following the month in which interest accrues on the related Mortgage Loans
(without any additional distribution of interest or earnings thereon in respect
of that delay).
All of the Mortgage Loans in the Adjustable Rate Loan Group are adjustable
rate Mortgage Loans. As is the case with conventional fixed rate mortgage
loans, adjustable rate mortgage loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed rate mortgage loans at lower
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to a lower fixed interest rate. Prepayments on the [1/29],
[2/28] and [3/27] Mortgage Loans may differ as they approach their respective
First Adjustment Dates. No assurance can be given as to the level of prepayment
that the Mortgage Loans will experience.
Although the Mortgage Rates on the Adjustable Rate Mortgage Loans are
subject to adjustment, those Mortgage Rates adjust less frequently than the
Pass-Through Rate on the related Offered Adjustable Rate Certificates and adjust
by reference to the Mortgage Index. Changes in One-Month LIBOR may not correlate
with changes in the Mortgage Index and also may not correlate with prevailing
interest rates. It is possible that an increased level of One-Month LIBOR could
occur simultaneously with a lower level of prevailing interest rates which would
be expected to result in faster prepayments, thereby reducing the weighted
average life of the Offered Adjustable Rate Certificates. The Mortgage Rate
applicable to all or substantially all of the Adjustable Rate Mortgage Loans and
any Adjustment Date will be based on the Mortgage Index value most recently
announced generally as of a date [45] days before that Adjustment Date. Thus, if
the Mortgage Index value with respect to an Adjustable Rate Mortgage Loan rises,
the lag in time before the corresponding Mortgage Rate increases will, all other
things being equal, slow the upward adjustment of the Adjustable Rate Available
Funds Cap on the related Offered Adjustable Rate Certificates. [In addition, a
substantial portion of the Mortgage Loans in Adjustable Rate [Statistical
Calculation] Loan Group have Mortgage Rates which will not adjust for a
substantial period of time after origination.] See "The Mortgage Pool" in this
prospectus supplement.
Although amounts deposited in the Adjustable Rate Carryover Reserve Fund
will be available to pay any Adjustable Rate Carryover, there is no assurance
that funds will be available to pay that amount. The ratings assigned to the
Offered Adjustable Rate Certificates do not address the likelihood of the
payment of that amount.
The "Last Scheduled Distribution Date" for (A) the Class AF-[ ]
Certificates is the Distribution Date on which the Certificate Principal Balance
of those Certificates would be reduced to zero assuming, among other things,
that: no prepayments are received on the Mortgage Loans in the related Loan
Group, scheduled monthly payments of principal of and
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interest on each of those Mortgage Loans are timely received and Excess Cashflow
and any Remainder Excess Cashflow is not used to make accelerated payments of
principal; or (B) the Class AF-[ ], Class MF-[1], Class MF-[2] and Class BF
Certificates and the Offered Adjustable Rate Certificates is the Distribution
Date falling in the [_____] calendar month after the calendar month in which the
last scheduled monthly payment is due on the Mortgage Loans in (i) the Fixed
Rate [Statistical Calculation] Loan Group, (ii) [Statistical Calculation] Loan
Subgroup [ ], in the case of the Class AV-[1] Certificates, (iii) [Statistical
Calculation] Loan Subgroup [ ], in the case of the Class AV-[2] Certificates and
(iv) the Adjustable Rate [Statistical Calculation] Loan Group, in the case of
the Class MV-[1], Class MV-[2] and Class BV Certificates.
The actual final Distribution Date with respect to each Class of Offered
Certificates could occur significantly earlier than its Last Scheduled
Distribution Date because:
. prepayments are likely to occur which will be applied to the payment
of the Certificate Principal Balances of those Classes,
. Excess Cashflow to the extent available will be applied as an
accelerated payment of principal on the Offered Certificates as
described in this prospectus supplement, and
. the Master Servicer may purchase all the Mortgage Loans [in a Loan
Group] when outstanding Stated Principal Balances thereof has declined
to [10]% or less of [the sum of (i) the Initial Cut-off Date Principal
Balance of that Loan Group and (ii) the Pre-Funded Amount allocated to
purchase Subsequent Mortgage Loans to be included in that Loan Group].
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment models used in this prospectus
supplement ("Prepayment Models") are based on an assumed rate of prepayment each
month of the then unpaid principal balance of a pool of mortgage loans similar
to the Mortgage Loans in each Loan Group. For the Fixed Rate Mortgage Loans, the
Prepayment Model used in this prospectus supplement (the "Prepayment Vector" or
"PV") is a prepayment assumption which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of those mortgage loans. For example, a [22]%
Prepayment Vector assumes prepayment rates of [2.2]% per annum of the then
outstanding principal balance of the Fixed Rate Mortgage Loans in the first
month of the life of such Mortgage Loans and an additional [2.2]% per annum
(i.e. [ 1/10] of the final per annum rate) in each month thereafter up to and
including the [tenth] month. Beginning in the [eleventh] month and in each month
thereafter during the life of such Fixed Rate Mortgage Loans, a [22]% Prepayment
Vector assumes a constant prepayment rate of [22]% per annum. The other
percentages of the Prepayment Vector identified in this prospectus supplement
assume that the Fixed Rate Mortgage Loans will prepay at rates which start and
increase in a similar manner (i.e., [1/10] of the final per annum rate) until
they reach such respective percentages of constant rates of prepayment per
annum. For the Adjustable Rate Mortgage Loans, the Prepayment Model used in this
prospectus supplement ("Constant Prepayment Rate" or "CPR") is a prepayment
assumption which represents a constant assumed rate of prepayment each month
relative of the then outstanding principal balance of a pool of
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mortgage loans for the life of those mortgage loans. [27]% CPR assumes a
constant prepayment rate of [27]% per annum.
There is no assurance, however, that prepayments on the Mortgage Loans will
conform to any level of the Prepayment Model, and no representation is made that
the Mortgage Loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates. Other factors affecting prepayment of
mortgage loans include changes in obligors' housing needs, job transfers and
unemployment. In the case of mortgage loans in general, if prevailing interest
rates fall significantly below the interest rates on those mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by those mortgage
loans. Conversely, if prevailing interest rates rise above the interest on those
mortgage loans, the rate of prepayment would be expected to decrease.
The following tables have been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"):
. the Mortgage Loans prepay at the indicated percentage of the related
Prepayment Model,
. distributions on the Offered Certificates are received, in cash, on
the [___]th day of each month, commencing in [_______], in accordance
with the payment priorities defined in this prospectus supplement,
. no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the Mortgagors of principal and
interest on the Mortgage Loans occur,
. scheduled payments are assumed to be received on the first day of each
month commencing in [_______], and prepayments represent payment in
full of individual Mortgage Loans and are assumed to be received on
the last day of each month, commencing in [_______], and include 30
days' interest thereon,
. the level of the six-month LIBOR Mortgage Index remains constant at
[___]% per annum, the level of one-year CMT remains constant at [___]%
per annum and the level of One-Month LIBOR remains constant at [___]%
per annum,
. the Pass-Through Margin for the Offered Adjustable Rate Certificates
remains constant at the rates applicable before the [related] Optional
Termination Date and the Pass-Through Margin for the Offered
Adjustable Rate Certificates is adjusted accordingly on any
Distribution Date following the [related] Optional Termination Date,
. the Closing Date for the Certificates is [_____],
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. the Mortgage Rate for each Adjustable Rate Mortgage Loan is adjusted
on its next Mortgage Rate Adjustment Date (and on subsequent Mortgage
Rate Adjustment Dates, if necessary) to equal the sum of
. the assumed level of the six-month LIBOR Mortgage Index, and
. the respective Gross Margin (that sum being subject to the
applicable periodic adjustment caps and floors and the applicable
lifetime adjustment caps and floors),
. a Servicing Fee Rate of [0.50]% for each Loan Group,
. except as indicated with respect to the weighted average lives, no
optional termination is exercised [with respect to either Loan Group]
on the [respective] Optional Termination Date, and
. [all of Pre-Funded Amount is used to purchase Subsequent Mortgage
Loans for inclusion in the related Loan Group or Subgroup (as
applicable) during the Funding Period, and]
. each Loan Group [or Loan Subgroup] consists of Mortgage Loans having
the approximate characteristics described below:
FIXED RATE LOAN GROUP
[LOAN SUBGROUP [ ]]
Original Remaining
Amortization Original Term Term To
Principal Mortgage Term to Maturity Maturity
Balance ($) Rate (%) (in Months) (in Months) (in Months)
------------- ---------- ------------- -------------- -----------
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ADJUSTABLE RATE LOAN GROUP
[LOAN SUBGROUP [ ]]
<TABLE>
<CAPTION>
Original Original Remaining
Amortization Term Term To
Principal Mortgage Term to Maturity Maturity Periodic Initial
Balance ($) Rate (%) (in Months) (in Months) (in Months) Cap (%) Periodic Cap (%)
----------- -------- ----------- ----------- ----------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS AF-[1] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class AF-[1] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial............................ 100 100 100 100 100
Weighted Average Life (in years)(1)
Weighted Average Life (in years)(2)
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS AF-[__] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class AF-[__] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial............................ 100 100 100 100 100
Weighted Average Life (in years)(1)........
Weighted Average Life (in years)(2)........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS MF-[1] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class MF-[1] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS MF-[2] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class MF-[2] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS BF CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class BF Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS AV-[1] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class AV-[1] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS AV-[2] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS MV-[1] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class MV-[1] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS MV-[2] CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class MV-[2] Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighed Average Life (in years)(2)............
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
S-107
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS BV CERTIFICATES AT THE FOLLOWING CONSTANT
PERCENTAGES OF SPA
Class BV Certificates
Distribution Date % % % % %
----------------- ----- ----- ---- ---- ----
Initial........... 100 100 100 100 100
Weighted Average Life (in years)(1)...........
Weighted Average Life (in years)(2)...........
____________
(1) The weighted average life of the Offered Certificates is determined by:
(a) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate Principal
Balance for that Class of Offered Certificates.
(2) To the [respective] Optional Termination Date.
Additional Information
The Depositor intends to file additional yield tables and other
computational materials with respect to the Class A Certificates with the
Securities and Exchange Commission in a report on Form 8-K. Those tables and
materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, those prospective investors. Those tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, those tables and other materials may not be relevant
to or appropriate for investors other than those specifically requesting them.
S-108
<PAGE>
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund, exclusive
of the assets held in the Fixed Rate Carryover Reserve Fund and Adjustable Rate
Carryover Reserve Fund, will comprise several Lower Tier REMICs (as defined in
the Pooling and Servicing Agreement) and an Upper Tier REMIC (as defined in the
Pooling and Servicing Agreement) organized in a tiered REMIC structure. Each
Lower Tier REMIC will issue uncertificated regular interests and those interests
will be held entirely by the REMIC immediately above it in the tiered structure.
Each of the Lower Tier REMICs and the Upper Tier REMIC will designate a single
class of interests as the residual interest in that REMIC. The Residual
Certificate will represent ownership of the residual interests in each of the
REMICs. Elections will be made to treat each Lower Tier REMIC and the Upper Tier
REMIC as a REMIC for federal income tax purposes.
Each class of Offered Certificates and the Class B-IO Certificates will
represent beneficial ownership of regular interests issued by the Upper Tier
REMIC. In addition, each of the Offered Adjustable Rate Certificates will
represent a beneficial interest in the right to receive payments from the
Adjustable Rate Carryover Reserve Fund in accordance with an interest rate cap
agreement included in the Pooling and Servicing Agreement (an "Interest Rate Cap
Agreement"). Due to their entitlement to Fixed Net Rate Carryover, the Offered
Fixed Rate Certificates will be treated as also representing beneficial
interests in contractual rights that would either be treated for United States
federal income tax purposes as an interest rate cap agreement treated as a
notional principal contract or as an interest in an entity taxable as a
partnership for federal income tax purposes.
Upon the issuance of the Offered Certificates, Andrews & Kurth L.L.P. ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each Lower
Tier REMIC and the Upper Tier REMIC will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code")
and the Offered Certificates represent regular interests in a REMIC. In
addition, Tax Counsel will deliver an opinion concluding that the Adjustable
Rate Carryover Reserve Fund is an "outside reserve fund" that is beneficially
owned by the holders of the Class BV-IO Certificates. Moreover, Tax Counsel will
deliver an opinion concluding that the rights of the holders of the Offered
Adjustable Rate Certificates to receive payments from the Adjustable Rate
Carryover Reserve Fund in accordance with the Interest Rate Cap Agreement
represents, for federal income tax purposes, contractual rights coupled with a
REMIC regular interest within the meaning of Treasury regulations 91.860G-2(i).
S-109
<PAGE>
Taxation of Regular Interests
A holder of an Offered Certificate of any Class of Offered Certificates
will be treated for federal income tax purposes as owning an interest in regular
interests in the Upper Tier REMIC. The Offered Adjustable Rate Certificates will
also represent beneficial ownership of an interest in a limited recourse
interest rate cap agreement. The treatment of the rights of the Offered Fixed
Rate Certificates to any Fixed Net Rate Carryover is unclear for federal income
tax purposes. The rights of those Certificates to Fixed Net Rate Carryover may
be treated as representing beneficial interests in the right to receive payments
from the Fixed Rate Carryover Reserve Fund in accordance with an Interest Rate
Cap Agreement. Alternatively, the rights of those Certificates to Fixed Net Rate
Carryover may be treated as representing the beneficial interests in an entity
taxable as a partnership for federal income tax purposes with the Class BF-IO
Certificates in respect of each Class BF-IO Certificates' entitlement to
interest, which may result in different tax timing consequences to
Certificateholders and in withholding on those amounts to Certificateholders who
are non-U.S. Persons. Prospective investors in the Offered Fixed Rate
Certificates should consult their tax advisors regarding the tax treatment of
the rights of those Certificates to Fixed Net Rate Carryover.
A holder of an Offered Certificate must allocate its purchase price for
that Offered Certificate between its two components -- the REMIC regular
interest component and the Interest Rate Cap Agreement component or the
partnership interest component, as applicable. For information reporting
purposes, the Trustee will assume that, with respect to any Offered Certificate,
the Interest Rate Cap Agreement component or the partnership interest component,
as applicable, will have only nominal value relative to the value of the regular
interest component. The IRS could, however, argue that the Interest Rate Cap
Agreement component or the partnership interest component, as applicable, has
significant value, and if that argument were to be sustained, the regular
interest component could be viewed as having been issued with an additional
amount of original issue discount ("OID") (which could cause the total amount of
discount to exceed a statutorily defined de minimis amount). See "Federal Income
Tax Consequences -- Taxation of Regular Interest Certificates" in the
prospectus.
Upon the sale, exchange, or other disposition of an Offered Certificate the
holder must allocate the amount realized between the two components of the
Offered Certificate based on the relative fair market values of those components
at the time of sale. Assuming that an Offered Certificate is held as a "capital
asset" within the meaning of section 1221 of the Code, gain or loss on the
disposition of an interest in the Interest Rate Cap Agreement component or the
partnership interest component, as applicable, should be capital gain or loss,
and, gain or loss on the disposition of the regular interest component should,
subject to the limitation described below, be capital gain or loss. Gain
attributable to the regular interest component of an Offered Certificate will be
treated as ordinary income, however, to the extent that gain does not exceed the
excess, if any, of:
. the amount that would have been includable in the holder's gross
income with respect to the regular interest component had income
thereon accrued at a rate equal to 110% of the applicable federal rate
as defined in section 1274(d) of the Code determined as of the date of
purchase of the Offered Certificate over
. the amount actually included in that holder's income.
S-110
<PAGE>
Interest on a regular interest must be included in income by a holder under
the accrual method of accounting, regardless of the holder's regular method of
accounting. In addition, a Regular interest could be considered to have been
issued with OID. See "Federal Income Tax Consequences -- Taxation of Regular
Interest Certificates" in the prospectus. The prepayment assumption that will be
used in determining the accrual of any OID, market discount, or bond premium, if
any, will be a rate equal to a [22]% Prepayment Vector in the case of the
Offered Fixed Rate Certificates and [27]% CPR in the case of the Offered
Adjustable Rate Certificates, each as described above. No representation is made
that the Mortgage Loans will prepay at that rate or at any other rate. OID must
be included in income as it accrues on a constant yield method, regardless of
whether the holder receives currently the cash attributable to that OID.
Status of the Offered Certificates
The Regular Interest component of the Offered Certificates will be treated
as assets described in Section 7701(a)(19)(C) of the Code, and as "real estate
assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust Fund, exclusive of the Adjustable Rate
Carryover Reserve Fund, or the Fixed Rate Carryover Reserve Fund, as applicable,
would be so treated. In addition, to the extent a regular interest represents
real estate assets under section 856(c)(5)(B) of the Code, the interest derived
from that component would be interest on obligations secured by interests in
real property for purposes of section 856(c)(3) of the Code. The Interest Rate
Cap Agreement or partnership interest component of an Offered Certificate will
not, however, qualify as an asset described in Section 7701(a)(19)(C) of the
Code or as a real estate asset under Section 856(c)(5)(B) of the Code.
The Fixed Rate Carryover Reserve Fund and Adjustable Rate Carryover Reserve
Fund
As indicated above, a portion of the purchase price paid by a holder to
acquire an Offered Adjustable Rate Certificate will be attributable to the
Interest Rate Cap Agreement component of the Offered Certificate. The portion of
the overall purchase price attributable to the Interest Rate Cap Agreement
component must be amortized over the life of that Offered Certificate, taking
into account the declining balance of the related Regular Interest component.
Treasury regulations concerning notional principal contracts provide alternative
methods for amortizing the purchase price of an interest rate cap contract.
Under one method -- the level yield constant interest method -- the price paid
for an interest rate cap agreement is amortized over the life of the cap as
though it were the principal amount of a loan bearing interest at a reasonable
rate. Holders are urged to consult their tax advisors concerning the methods
that can be employed to amortize the portion of the purchase price paid for the
Interest Rate Cap Agreement component of an Offered Adjustable Rate Certificate.
Any payments made to a holder of an Offered Adjustable Rate Certificate
from the Adjustable Rate Carryover Reserve Fund from the Adjustable Rate
Carryover Reserve Fund or Fixed Rate Carryover Reserve Fund will be treated as
periodic payments on an interest rate cap agreement. To the extent the sum of
those periodic payments for any year exceed that year's amortized cost of the
Interest Rate Cap Agreement component, that excess is ordinary income. If for
any year the amount of that year's amortized cost exceeds the sum of the
periodic payments, that excess is allowable as an ordinary deduction. The
foregoing discussion will describe the treatment of the Fixed
S-111
<PAGE>
Rate Carryover Reserve Fund with respect to the Offered Fixed Rate Certificates
if the latter is treated as an Interest Rate Cap Agreement (rather than an
interest in a partnership) for federal income tax purposes. Prospective
investors in the Offered Fixed Rate Certificates should consult their tax
advisors regarding the tax treatment of the rights of those Certificates to
Fixed Net Rate Carryover.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, some contributions to a trust fund that elects to be treated
as a REMIC made after the day on which that trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to that tax.
In addition, a trust fund that elects to be treated as a REMIC may also be
subject to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. "Net income from foreclosure property" generally means
gain from the sale of a foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on the REMIC arises out of a breach of the Master Servicer's or the
Trustee's obligations, as the case may be, under the Pooling and Servicing
Agreement and in respect of compliance with then applicable law, that tax will
be borne by the Master Servicer or Trustee in either case out of its own funds.
If either the Master Servicer or the Trustee, as the case may be, fails to pay
or is not required to pay any that tax as provided above, that tax will be paid
by the Trust Fund first with amounts otherwise distributable to the holders of
Certificates in the manner provided in the Pooling and Servicing Agreement. It
is not anticipated that any material state or local income or franchise tax will
be imposed on the Trust Fund.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Material Federal Income Tax Consequences --
REMIC Certificates" in the prospectus.
S-112
<PAGE>
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding those tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
that Plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that Section (collectively with
employee benefit plans subject to ERISA, "Plans"); ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire the Offered Certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of those Certificates. See "ERISA
Considerations" in the prospectus.
Some employee benefit plans, including governmental plans and some church
plans, are not subject to ERISA's requirements. Accordingly, assets of those
plans may be invested in the Offered Certificates without regard to the ERISA
considerations described in this prospectus supplement and in the prospectus,
subject to the provisions of other applicable federal and state law. Those plans
which are qualified and exempt from taxation under Sections 401(a) and 501(a) of
the Code may nonetheless be subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Class A Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to [Underwriter] an administrative
exemption (Prohibited Transaction Exemption[ ]; Exemption Application
No.[______], Fed. Reg. [___] ([___]) (the "Exemption") from some of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations and the servicing,
operation and management of those asset-
S-113
<PAGE>
backed pass-through trusts; provided that the conditions and requirements of the
Exemption are met. The Exemption applies to mortgage loans such as the Mortgage
Loans in the Trust Fund.
For a general description of the Exemption and the conditions that must be
satisfied for the exemption to apply, see "ERISA Considerations" in the
prospectus.
It is expected that the Exemption will apply to the acquisition and holding
of the Class A Certificates by Plans and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single Mortgagor that is the obligor on five
percent (5%) of the Mortgage Loans included in the Trust Fund by aggregate
unamortized principal balance of the assets of the Trust Fund.
The Exemption does not apply to the initial purchase, the holding or the
subsequent resale of the Subordinated Offered Certificates because the
Subordinated Offered Certificates are subordinate to some other Classes of
Certificates. Consequently, transfers of the Subordinated Offered Certificates
will not be registered by the Trustee unless the Trustee receives:
. a representation from the transferee of that Certificate, acceptable
to and in form and substance satisfactory to the Trustee, to the
effect that such transferee is not an employee benefit plan subject to
Section 406 of ERISA or a plan or arrangement subject to Section 4975
of the Code, nor a person acting on behalf of any of those plans or
arrangements or using the assets of any of those plans or arrangements
to effect that transfer,
. (if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing those
Certificates with funds contained in an "insurance company general
account" (as that term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the
purchase and holding of those Certificates are covered under Sections
I and III of PTCE 95-60, or
. an opinion of counsel satisfactory to the Trustee that the purchase
and holding of that Certificate by a Plan, any person acting on behalf
of a Plan or using that Plan's assets, will not result in the assets
of the Trust Fund being deemed to be "plan assets" and subject to the
prohibited transaction requirements of ERISA and the Code and will not
subject the Trustee to any obligation in addition to those undertaken
in the Pooling and Servicing Agreement.
The representation described above shall be deemed to have been made to the
Trustee by the transferee's acceptance of a Subordinated Offered Certificate. If
that representation is violated, or any attempt to transfer to a Plan or person
acting on behalf of a Plan or using that Plan's assets is attempted without such
opinion of counsel, that attempted transfer or acquisition shall be void and of
no effect.
S-114
<PAGE>
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the prospectus and the Exemption, and the potential consequences in
their specific circumstances, before making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Depositor, [Underwriter] [and [_____________]] (an affiliate of the
Depositor, the Seller and the Master Servicer) (collectively, the
"Underwriters"), the Depositor has agreed to sell the Offered Certificates to
the Underwriters, and the Underwriters have respectively agreed to purchase from
the Depositor the initial Certificate Principal Balance of each Class of the
Offered Certificates from the Depositor set forth below. It is expected that
the proceeds to the Depositor from the sale of the Offered Certificates will be
approximately $[_______], plus accrued interest, before deducting issuance
expenses payable by the Depositor, estimated to be approximately $[_____].
Class [Underwriter] [Underwriter]
----- ------------- -------------
AF-1
AF-
AF-
MF-1
MF-2
BF
AV-1
AV-2
MV-1
MV-2
BV
Totals
The Depositor has been advised that the Underwriters propose initially to
offer the Offered Certificates to certain dealers at that price less a selling
concession not to exceed the percentage of the Certificate denomination set
forth below, and that the Underwriters may allow and those dealers may reallow a
reallowance discount not to exceed the percentage of the Certificate
denomination set forth below:
Class of Certificates Selling Concession Reallowance Discount
--------------------- ------------------ --------------------
Class AF-1 Certificates
Class AF- Certificates
Class AF- Certificates
Class MF-1 Certificates
Class MF-2 Certificates
Class BF Certificates
Class AV-1 Certificates
Class AV-2 Certificates
S-115
<PAGE>
Class MV-1 Certificates
Class MV-2 Certificates
Class BV Certificates
Totals
After the initial public offering, the public offering price, those
concessions and those discounts may be changed.
The Depositor has been advised by each Underwriter that such Underwriter
intends to make a market in the Offered Certificates, but neither of the
Underwriters has any obligation to do so. There can be no assurance that a
secondary market for the Offered Certificates (or any particular Class of the
Offered Certificates) will develop or, if it does develop, that it will continue
or that such market will provide sufficient liquidity to Certificateholders.
Until the distribution of the Offered Certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and some selling group members to bid for and purchase the Offered Certificates.
As an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Offered Certificates. Those
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases.
Neither the Depositor nor either of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Offered
Certificates. In addition, neither the Depositor nor either of the Underwriters
makes any representation that the Underwriters will engage in those transactions
or that those transactions, once commenced, will not be discontinued without
notice.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
After the initial distribution of the Offered Certificates, this prospectus
and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets], an affiliate of the Depositor,
the Seller and the Master Servicer, in connection with market making
transactions in such Certificates. [First Tennessee Securities
Corporation][First Tennessee Capital Markets] may act as principal or agent in
these transactions. These transactions will be at market prices at the time of
sale and not at the prices of the initial offering.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect to the Certificates, will be passed upon for the
Depositor by Andrews & Kurth L.L.P. [______] will pass upon certain legal
matters on behalf of the Underwriters.
S-116
<PAGE>
RATINGS
It is a condition of the issuance of the Offered Certificates that each
Class of Offered Certificates be assigned the ratings designated below by
[Rating Agency] and [Rating Agency] (the "Rating Agencies").
Class [Rating Agency Rating] [Rating Agency Rating]
----- ---------------------- ----------------------
AF-1
AF-
AF-
MF-1
MF-2
BF
AV-1
AV-2
MV-1
MV-2
BV
Totals
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans, the
payment of the Fixed Net Rate Carryover or Adjustable Rate Certificate Carryover
(as the case may be) or the anticipated yields in light of prepayments.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than [Rating Agency] and [Rating Agency]. However, there can
be no assurance as to whether any other rating agency will rate the Offered
Certificates or, if it does, what ratings would be assigned by that other rating
agency. The ratings assigned by another rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-117
<PAGE>
INDEX OF DEFINED TERMS
"Accrual Period" ..............................................S-13, S-72
"Adjustable Rate Available Funds Cap" ......................... S-75
"Adjustable Rate Carryover Reserve Fund Deposit" .............. S-88
"Adjustable Rate Carryover Reserve Fund" ...................... S-87
"Adjustable Rate Certificate Carryover" ....................... S-75
"Adjustable Rate Mortgage Loans" .............................. S-31
"Adjustment Date" ............................................. S-34
"Book-Entry Certificates" ..................................... S-67
"Business Day" ................................................ S-72
"Certificate Account" ......................................... S-68
"Certificate Group" ........................................... S-66
"Certificates" ................................................ S-66
"Class A Adjustable Rate Certificates" ........................ S-66
"Class A Certificates" ........................................ S-66
"Class B Certificates" ........................................ S-66
"Class B-IO Certificates" ..................................... S-66
"Class M-1 Certificates" ...................................... S-66
"Class M-2 Certificates" ...................................... S-66
"Code" ........................................................ S-110
"Collateral Value" ............................................ S-36
"Combined Loan-to-Value Ratio" ................................ S-35
"Compensating Interest" ....................................... S-64
"Constant Prepayment Rate" .................................... S-97
"Contributions Tax" ........................................... S-113
"CPR" ......................................................... S-97
"Cut-off Date" ................................................ S-36
"Delay Delivery Mortgage Loans" ............................... S-93
"Deleted Mortgage Loan" ....................................... S-57
"Depositor" ................................................... S-30
"Distribution Account Deposit Date" ........................... S-70
"Distribution Account" ........................................ S-71
"Distribution Date" ........................................... S-72
"Due Dates" ................................................... S-64
"Due Period" .................................................. S-71
"ERISA" ....................................................... S-114
"Excess Overcollateralization Amount" ......................... S-86
"Exemption" ................................................... S-114
"Extra Master Servicing Fee" .................................. S-85
"First Horizon" ............................................... S-60
"Fixed Net Rate Cap" ..........................................S-12, S-74
"Fixed Net Rate Carryover" .................................... S-76
"Fixed Rate Carryover Reserve Fund Deposit" ................... S-87
"Fixed Rate Carryover Reserve Fund" ........................... S-87
"Fixed Rate Loan Group" ....................................... S-31
S-118
<PAGE>
"Fixed Rate Mortgage Loans" ................................... S-31
"Fixed Rate [Statistical Calculation] Loan Group" ............. S-30
"Funding Period" .............................................. S-59
"Gross Margin" ................................................ S-34
"Initial Cut-off Date Pool Principal Balance" ................. S-29
"Insurance Proceeds" .......................................... S-68
"Interest Determination Date" ................................. S-86
"Interest Funds" .............................................. S-70
"Interest Rate Cap Agreement" ................................. S-110
"LIBOR Business Day" .......................................... S-86
"Liquidation Proceeds" ........................................ S-68
"Loan Group" .................................................. S-31
"Loan Subgroup" ............................................... S-31
"Loan-to-Value Ratio" ......................................... S-35
"Master Servicer Advance Date" ................................ S-65
"Maximum Mortgage Rate" ....................................... S-35
"Mezzanine Fixed Rate Certificates" ........................... S-66
"Minimum Mortgage Rate" ....................................... S-58
"Modeling Assumptions" ........................................ S-97
"Mortgage Index" .............................................. S-34
"Mortgage Loans" .............................................. S-56
"Mortgage Notes" .............................................. S-31
"Mortgaged Properties" ........................................ S-31
"Net Mortgage Rate" ........................................... S-57
"OC Floor"S-81
"Offered Adjustable Rate Certificates" ........................S-10, S-67
"Offered Certificates" ........................................ S-67
"Offered Fixed Rate Certificates" .............................S-10, S-67
"OID" ......................................................... S-111
"One-Month LIBOR" ............................................. S-74
"Optional Termination Date" ................................... S-90
"Pass-Through Margin" ......................................... S-75
"Percentage Interest" ......................................... S-72
"Periodic Rate Cap" ........................................... S-34
"Plans" ....................................................... S-114
"Pooling and Servicing Agreement" ............................. S-55
"Prepayment Interest Excess" .................................. S-64
"Prepayment Interest Shortfall" ............................... S-64
"Prepayment Models" ........................................... S-97
"Prepayment Vector" ........................................... S-97
"Pre-Funded Amount" ........................................... S-59
"Principal Funds" ............................................. S-70
"Prohibited Transactions Tax" ................................. S-113
"PTCE 95-60" .................................................. S-115
"Purchase Price" .............................................. S-57
"PV" .......................................................... S-97
S-119
<PAGE>
"Rating Agencies" ............................................. S-118
"Realized Loss" ............................................... S-85
"Record Date" ................................................. S-72
"Reference Bank Rate" ......................................... S-86
"Reference Banks" ............................................. S-86
"REO Property" ................................................ S-65
"Replacement Mortgage Loan" ................................... S-57
"Residual Certificates" ....................................... S-66
"Scheduled Payments" .......................................... S-31
"Servicing Fee" ............................................... S-64
"Specified Overcollateralization Amount" ...................... S-82
"Stated Principal Balance" .................................... S-36
"Statistical Calculation Loan Group" .......................... S-29
"Statistical Calculation Loan Subgroup" ....................... S-29
"Subsequent Cut-off Date" ..................................... S-59
"Subsequent Mortgage Loans" ................................... S-59
"Subsequent Transfer Agreement" ............................... S-59
"Subsequent Transfer Date" .................................... S-59
"Tax Counsel" ................................................. S-110
"Trustee's Mortgage File" ..................................... S-56
"Underwriters" ................................................ S-116
"[1/29] Mortgage Loans" ....................................... S-34
"[2/28] Mortgage Loans" ....................................... S-34
"[3/27] Mortgage Loans" ....................................... S-35
"[Initial] Mortgage Loans" .................................... S-29
S-120
<PAGE>
[LOGO] First
Horizon
Home Loan Corporation
(Seller and Master Servicer)
First Horizon [ ] Trust 200[_]-[_]
(Issuer)
$[_______]
(Approximate)
Asset-Backed Certificates, Series 200[_]-[_]
______________________________
PROSPECTUS SUPPLEMENT
___________________________
[UNDERWRITER]
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus until [__________].
[______], 200[_]
<PAGE>
SUBJECT TO COMPLETION; DATED JANUARY 5, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________)
$[__________________]
(Approximate)
First Tennessee Bank National Association
Seller and Master Servicer
First Horizon Home Equity Loan Trust 200[_]-[_]
Issuer
Revolving Home Equity Loan Asset-Backed Certificates, Series 200[_]-[_]
Distributions payable monthly commencing in ________
Class [__] Certificates
------------------------
You should carefully
consider the risk
factors beginning on
page S-[__] of this The Certificates
prospectus supplement
and on page [__] of The Class [__] Certificates have an original
the accompanying principal balance of $[______], subject to a
prospectus. permitted variance of plus or minus [10]%.
------------------------
The Trust Fund
The trust fund will own a pool consisting of [two] loan groups of home
equity revolving credit line loans made or to be made in the future under
certain home equity revolving credit line loan agreements. The loans will be
secured by first or second deeds of trust or mortgages on one-to four-family
residential properties and will bear interest at rates that adjust based on the
prime rate. The trust fund will also initially include funds from the sale of
the certificates in excess of the cut-off date principal balances. These excess
funds are expected to be used to acquire additional home equity revolving credit
line loans after the cut-off date. The Class [_]Certificates will represent an
interest in loan group [_] only.
The Policy
[Certificate Insurer] will issue an irrevocable and unconditional
certificate guaranty insurance policy which will guarantee certain payments to
certificateholders.
[CERTIFICATE INSURER LOGO]
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus supplement or the prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
[Underwriter] will offer the certificates subject to prior sale and subject
to its right to reject orders in whole or in part. The certificates will be
issued in book-entry form on or about [ ], 200[_] and will be offered in the
United States and Europe.
[UNDERWRITER]
[ ], 200[_]
<PAGE>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
After the initial distribution of the certificates offered hereby, this
prospectus and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets], an affiliate of the depositor,
the seller and the master servicer, in connection with market making
transactions in such certificates. [First Tennessee Securities
Corporation][First Tennessee Capital Markets] may act as principal or agent in
these transactions. These transactions will be at market prices at the time of
sale and not at the prices of the initial offering. Certain information in this
prospectus supplement will be updated from time to time.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important notice about information
presented in this prospectus supplement and the accompanying prospectus..................................... S-2
SUMMARY.......................................................................................................... S-5
Trust Fund.................................................................................................. S-5
The Offered Certificates.................................................................................... S-6
Other Certificates.......................................................................................... S-6
Depositor................................................................................................... S-6
Seller and Master Servicer.................................................................................. S-6
Trustee..................................................................................................... S-6
Certificate Insurer......................................................................................... S-6
Pooling and Servicing Agreement............................................................................. S-7
Cut-off Date................................................................................................ S-7
Closing Date................................................................................................ S-7
Distribution Dates.......................................................................................... S-7
Record Date................................................................................................. S-7
Denominations............................................................................................... S-7
Registration of Certificates................................................................................ S-7
The Mortgage Loans.......................................................................................... S-7
The Class [ ] Certificates............................................................................... S-9
Certificate Principal Balance............................................................................... S-10
Prefunding Account.......................................................................................... S-10
Termination................................................................................................. S-10
Credit Enhancement.......................................................................................... S-11
Material Federal Income Tax Consequences.................................................................... S-12
ERISA Considerations........................................................................................ S-12
Legal Investment Considerations............................................................................. S-12
Certificate Rating.......................................................................................... S-13
RISK FACTORS..................................................................................................... S-14
You May Have Difficulty Selling
Your Certificates.............
Cash Flow Disruptions Could Cause Payment
Delays and Losses...................................................................................... S-14
Yield And Reinvestment May Be Adversely
Affected by Unpredictability of
Prepayments............................................................................................ S-14
Withdrawal or Downgrading of
Initial Ratings Will Affect The Value of
The Certificates....................................................................................... S-15
Junior Lien Priority Could Result in
Payment Delay or Loss.................................................................................. S-16
Trust Fund May Be Unsecured
Creditor under Certain Mortgage Loans
since Mortgage Loan Assignments Not
Recorded.............................................................................................. S-16
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Developments in [California] Could Have
Disproportionate Effect on The Pool of
Mortgage Loans Due to Geographic
Concentration of
Mortgaged Properties.............................................................................................. S-17
Master Servicer Has Ability to Change The
Terms of The Mortgage Loans....................................................................................... S-17
Your Return Could Be Adversely Affected by
Delinquent Mortgage Loans......................................................................................... S-17
Effect of Loan Rates on The
Certificates...................................................................................................... S-18
[Certain Rights May Be Affected by The
Issuance of [Two] Classes of
Certificates From a Single
Trust Fund........................................................................................................ S-18
FORWARD LOOKING STATEMENTS.................................................................................................. S-20
THE MASTER SERVICER......................................................................................................... S-20
General................................................................................................................ S-20
The Master Servicer.................................................................................................... S-20
THE HOME EQUITY LOAN PROGRAM
....................................................................................................................... S-21
Underwriting Procedures Relating to Home Equity Loans.................................................................. S-21
Servicing of the Mortgage Loans........................................................................................ S-22
Foreclosure and Delinquency Experience................................................................................. S-23
DESCRIPTION OF THE MORTGAGE LOANS........................................................................................... S-25
General................................................................................................................ S-25
Mortgage Loan Terms.................................................................................................... S-25
[The Prefunding Account................................................................................................ S-39
MATURITY AND PREPAYMENT CONSIDERATIONS...................................................................................... S-39
POOL FACTOR AND TRADING INFORMATION......................................................................................... S-41
DESCRIPTION OF THE CERTIFICATES............................................................................................. S-41
General................................................................................................................ S-42
Book-entry Certificates................................................................................................ S-44
Assignment of Mortgage Loans........................................................................................... S-45
Amendments to Credit Line Agreements................................................................................... S-47
Optional Transfers of Mortgage Loans to the Transferor................................................................. S-47
Payments on Mortgage Loans; Deposits to Collection Account............................................................. S-48
Allocations and Collections............................................................................................ S-49
Distributions on the Certificates...................................................................................... S-50
Limited Subordination of Transferor Interest........................................................................... S-55
Rapid Amortization Events.............................................................................................. S-55
The Policy............................................................................................................. S-56
The Certificate Insurer................................................................................................ S-58
Reports to Certificateholders.......................................................................................... S-58
Collection and Other Servicing Procedures on Mortgage Loans............................................................ S-60
Hazard Insurance....................................................................................................... S-60
Realization upon Defaulted Mortgage Loans.............................................................................. S-61
Optional Purchase of Defaulted Loan.................................................................................... S-61
Servicing Compensation and Payment of Expenses......................................................................... S-61
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Evidence as to Compliance............................................ S-61
Certain Matters Regarding the Master Servicer and the Transferor..... S-62
Events of Servicing Termination...................................... S-63
Rights upon an Event of Servicing Termination........................ S-64
Amendment............................................................ S-64
Termination; Retirement of the Certificates.......................... S-65
The Trustee.......................................................... S-66
Certain Activities................................................... S-66
DESCRIPTION OF THE PURCHASE AGREEMENT..................................... S-66
Transfers of Mortgage Loans.......................................... S-67
Representations and Warranties....................................... S-67
Assignment to Trust Fund............................................. S-67
Termination.......................................................... S-67
USE OF PROCEEDS........................................................... S-67
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................. S-67
General.............................................................. S-67
Characterization of the Certificates as Indebtedness................. S-67
Taxation of Interest Income of Certificate Owners.................... S-68
Possible Classification of the Certificates as a Partnership or
Association Taxable as a Corporation............................ S-69
Possible Classification as a Taxable Mortgage Pool................... S-69
Foreign Investors.................................................... S-70
Backup Withholding................................................... S-71
STATE TAXES............................................................... S-71
ERISA CONSIDERATIONS...................................................... S-71
LEGAL INVESTMENT CONSIDERATIONS........................................... S-74
UNDERWRITING.............................................................. S-74
LEGAL MATTERS............................................................. S-75
EXPERTS................................................................... S-75
RATINGS................................................................... S-75
INDEX OF DEFINED TERMS.................................................... S-76
</TABLE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the
certificates, read carefully this entire document and the accompanying
prospectus.
Trust Fund
First Horizon Home Equity Loan Trust 200[ ]-[ ]. The trust fund will own a
pool of home equity revolving credit line loans made or to be made in the future
under certain home equity revolving credit line loan agreements. The loans will
be secured by first or second deeds of trust or mortgages on one- to four-family
residential properties and will bear interest at rates that adjust based on the
prime rate. We sometimes refer to these loans as home equity loans or
S-5
<PAGE>
mortgage loans. [The original principal balance of the certificates will exceed
the aggregate cut-off date principal balances of the home equity loans initially
transferred to the trust fund. Funds in an amount equal to this excess are
expected to be used to acquire additional home equity loans that are not
included in the cut-off date pool. Until they are so used, they will be held in
the trust fund.]
[We will be dividing the mortgage loans in the trust fund into [two]
groups. Each will be referred to as a loan group. The ownership interest of each
loan group will be allocated between the Class [ ] Certificates and the Class [
] Certificates, as applicable, and a single transferor interest. The Class [ ]
Certificates will initially represent approximately a 100% interest in loan
group [ ] and the Class [ ] Certificates will initially represent approximately
a 100% interest in loan group [ ].] The percentage interests in each loan group
represented by the certificates will vary over time. The percentage interests in
the trust fund not represented by the certificates will be represented by the
transferor interest, which will also vary over time.
The Offered Certificates
First Horizon Home Equity Loan Trust 200[ ]-[ ] will issue [ ] classes of
Revolving Home Equity Loan Asset Backed Certificates and a Transferor's
Interest. Only the Class [ ] Certificates are offered by this prospectus
supplement.
Other Certificates
First Horizon Home Equity Loan Trust 200[ ]-[ ] is also issuing the Class [
] Certificates and the Transferor's Interest. As described in this prospectus
supplement, except for limited cross-collateralization, the Class [ ]
Certificates are not supported by the mortgage loans in loan group [ ], the
group that supports the offered certificates. As described in this prospectus
supplement, a portion of the Transferor's Interest is subordinated in right of
payment to the Class [ ] and Class [ ] Certificates. Information regarding
the Class [ ] Certificates and the Transferor's Interest is included in this
prospectus supplement chiefly to provide you with a better understanding of the
Class [ ] Certificates.
Depositor
First Horizon Asset Securities Inc., a limited purpose finance subsidiary
of First Horizon Home Loan Corporation. Its address is 4000 Horizon Way,
Irving, Texas 75063, and its telephone number is (214) 441-4000.
See "The Depositor" in the prospectus.
Seller and Master Servicer
[First Tennessee Bank National Association, a national banking
association].
See "The Master Servicer" in this prospectus supplement.
Trustee
[Name of Trustee].
Certificate Insurer
[Certificate Insurer], will insure the Class [ ] Certificates as
described in this prospectus supplement.
S-6
<PAGE>
See "Description of the Certificates -- The Certificate Insurer" in this
prospectus supplement.
Pooling and Servicing Agreement
The certificates will be issued pursuant to the pooling and servicing
agreement among the seller and master servicer, the depositor and the trustee
under which the trust fund will be formed.
Cut-off Date
[ ], 200[ ].
Closing Date
On or about [ ], 200[ ].
Distribution Dates
The trustee will make distributions on the [ ]th day of each calendar
month beginning in [ ] 200[ ]. If the [ ]th day of a month is not a
business day, then distributions will be made on the next business day after the
[ ]th day of the month.
Record Date
The [last] day preceding a distribution date or, if the certificates are no
longer book-entry certificates, the last day of the month preceding a
distribution date.
Denominations
The Class [ ] Certificates will be issued in minimum denominations of
$[25,000] and multiples of $[1,000] in excess thereof.
Registration of Certificates
The Class [ ] Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in the Class [ ]
Certificates may elect to hold their beneficial interests through The Depository
Trust Company, in the United States, or Clearstream, Luxembourg or the Euroclear
System, in Europe.
See "Description of Certificates -- Book-Entry Certificates" in this
prospectus supplement.
The Mortgage Loans
General
The mortgage loans are revolving lines of credit. During the applicable
draw period, each borrower may borrow amounts from time to time up to the
maximum amount of that borrower's line of credit. If borrowed amounts are
repaid, they can again be borrowed.
The pool balance equals the aggregate of the principal balances of all
mortgage loans in [both] loan groups. The loan group balance of a loan group
equals the aggregate of the principal balances of all mortgage loans in that
loan group. The principal balance of a mortgage loan (other than a liquidated
mortgage loan) on any day is equal to its cut-off date principal balance, plus
any additional balances in respect of that mortgage loan, minus all collections
credited against the
S-7
<PAGE>
principal balance of that mortgage loan prior to that day. Once a mortgage loan
is finally liquidated, its principal balance will be zero.
Loan Rate
Interest on each mortgage loan is payable monthly and computed on the
related daily outstanding principal balance for each day in the billing cycle.
The loan rate is a variable rate per annum equal to the sum of the highest prime
rate published in the Money Rates table of The Wall Street Journal as of the
first business day of each calendar month and a margin.
The loan rate is subject to applicable usury limits and certain maximum
rates. Loan rates are adjusted monthly on the first business day of the calendar
month preceding the due date. As to each mortgage loan, the due date is the
fifteenth day of each month.
Principal Payments
Each home equity loan features a draw period during which the loan may be
drawn upon, immediately followed by a repayment period during which the loan
must be repaid. In general, home equity loans with [ ]-year draw periods have [
]-year repayment periods. These [ ]-year draw periods are generally extendible
for an additional [ ] years with the approval of the master servicer.
Statistics
The statistical information presented in this prospectus supplement
concerning the pool of mortgage loans does not reflect all of the mortgage loans
which will be included in the pool on the closing date. Instead, such
statistical information relates to statistical calculation loan groups which
include the number and principal balances of only mortgage loans originated by
the seller through the statistic calculation date and included in the applicable
loan group. The aggregate principal balance of each statistic calculation loan
group as of the statistic calculation date is the statistic calculation loan
group balance. The statistic calculation date is [ ], 200[ ].
Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by the aggregate principal balance of the applicable
statistic calculation loan group on the statistic calculation date.
See "Description of the Mortgage Loans" in this prospectus supplement for
additional information concerning the statistic calculation pool and the
mortgage loans in general.
SUMMARY OF LOANS IN STATISTIC CALCULATION LOAN GROUP [ ]
(AS OF STATISTIC CALCULATION DATE)
<TABLE>
<S> <C>
Loan Group [ ] Statistic Calculation Date
Balance..................................................... $
Weighted Average Combined Loan-to-Value
Ratio....................................................... %
Weighted Average Margin.......................................... %
Range of Principal Balances........................ $ 0.00 to $
Average Principal Balance........................................ $
Range of Credit Limits............................. $ to $
Average Credit Limit............................................. $
Origination Period.................................... through
Range of Loan Rates................................... % to %
Weighted Average Loan Rate............................ %
Weighted Average Maximum Loan Rate.................... %
Weighted Average Minimum Loan Rate.................... %
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Maximum Credit Utilization Rate................................. %
Average Credit Utilization Rate................................. %
Weighted Average Credit Utilization Rate........................ %
Percentage of Pool Secured by 1st liens......................... %
Percentage of Pool Secured by 2nd liens......................... %
Weighted Average Second Mortgage Ratio.......................... %
Percentage with Mortgaged Properties in:
[California].......................................... %
[Michigan]............................................ %
[Colorado]............................................ %
[Illinois]............................................ %
[Florida]............................................. %
Range of Remaining Term to Scheduled
Maturity..................................... months to months
Weighted Average Remaining Term to Scheduled
Maturity......................................... months
Percentage Single Family Residences................... %
Percent Owner Occupied................................ %
</TABLE>
The Class [ ] Certificates
Certificate Rate
The certificate rate on the Class [ ] Certificates may change from
distribution date to distribution date. On any distribution date the certificate
rate for the Class [ ] Certificates will equal the least of:
. LIBOR plus [ ]% per annum,
. the weighted average of the loan rates on the mortgage loans in loan
group [ ] minus certain fees, expenses and minimum spread requirements, and
. [ ]% per annum.
However, on any payment date for which the certificate rate for the Class [
] Certificates has been determined pursuant to the weighted average of the net
loan rates on the mortage loans in loan group [ ], the excess, if any, of the
lesser of
. [ ]% per annum and
. LIBOR + [ ]% per annum
over the certificate rate will be paid (with interest at the rate of LIBOR + [
]% per annum, but not at a rate in excess of [ ]% per annum) to the Class [
] Certificates on subsequent distribution dates to the extent that funds are
available in the priority described in this prospectus supplement.
See "Description of the Certificates -- Interest" in this prospectus
supplement.
Interest Period
For each distribution date and class of certificates, the period beginning
on the prior distribution date (or in the case of the first distribution date,
beginning on the closing date) and ending on the day before the applicable
distribution date. The trustee will calculate interest based on the actual
number of days in the interest period and a year assumed to consist of 360 days.
S-9
<PAGE>
Certificate Principal Balance
The original principal balance of either class of certificates may be
reduced or increased by not more than [10]% depending on the aggregate principal
balance of the mortgage loans in the related loan group actually delivered on
the closing date.
Principal
The amount of principal distributed on a class of certificates on a
distribution date will depend on whether the distribution date occurs during the
managed amortization period or the rapid amortization period.
The managed amortization period begins on the closing date and ends on the
earlier of the distribution date in [ ] and the existence of a rapid
amortization event.
The rapid amortization period begins on the first distribution date after
the end of the managed amortization period.
See "Description of Certificates -- Principal" in this prospectus
supplement.
[Prefunding Account
On the closing date approximately $[ ] will be deposited into a
prefunding account held as a part of the trust fund. These funds represent the
excess of the original principal balance of the Class [ ] Certificates over
the cut-off date principal balance of the mortgage loans in loan group [ ]
initially transferred to the trust fund. These funds are expected to be used
through [ ] to acquire additional home equity loans that are not
included in the cut-off date pool. Any additional home equity loans acquired by
the trust fund after the cut-off date will have been underwritten using
generally the same guidelines as were used to select the initial mortgage loans
in the trust fund, and the trust fund will have the benefit of substantially the
same representations and warranties covering the initial mortgage loans in the
trust fund. The seller and master servicer will not exercise any discretion in
the selection of the additional home equity loans to be acquired by the trust
fund. The selection will be made by a mechanical procedure on a first-in, first-
out basis. The purchase of these additional home equity loans is in addition to
the ongoing purchase of additional balances during the managed amortization
period with the proceeds of principal repayments received on the trust fund's
mortgage loan portfolio. Any funds remaining in the prefunding account on [
] will be used to prepay the Class [ ] Certificates on the first Distribution
Date.]
Termination
The trust fund will terminate on the distribution date following the later
of
. payment in full of all amounts owing to the certificate insurer [and any
third party credit enhancer] and
. the earliest of
. the distribution date on which the principal balance of both classes
of certificates have been reduced to zero,
. the final payment or other liquidation of the last mortgage loan in
the trust fund,
. the optional transfer of the mortgage loans to the owner of the
transferor interest, as described below, and
S-10
<PAGE>
. the distribution date in [ ].
The mortgage loans in the trust fund will be subject to optional transfer
to the owner of the transferor interest on any distribution date on or after
which the combined principal balance of both classes of certificates is reduced
to any amount less than or equal to 10% of the original combined principal
balance of the certificates and all amounts due and owing to the certificate
insurer [and any third party credit enhancer], including any unreimbursed draws
on the policy [and any third party enhancement], together with interest on such
amounts, have been paid as provided [either] in the insurance agreement under
which the policy is issued [or in accordance with any third party credit
enhancement].
See "Description of the Certificates -- Termination; Retirement of the
Certificates" in this prospectus supplement and "The Agreements -- Termination;
Optional Termination" in the prospectus.
Credit Enhancement
General
The trust fund includes various mechanisms that are intended to protect
certificateholders against losses on the mortgage loans.
Excess Interest
The trustee will distribute certain interest collections on the mortgage
loans in each loan group to cover losses which would otherwise be allocated to
the certificates related to that loan group, and to the extent described in this
prospectus supplement, to the certificates related to the other loan group.
Limited Subordination of Transferor Interest
The portion of each loan group in the trust fund that is not represented by
the certificates is the transferor interest. [Initially, the transferor interest
will be $0. The transferor interest is expected to grow as interest collections
in excess of trustee fees, amounts due the certificate insurer, interest accrued
on the certificates and certain loss amounts due on the certificates are applied
as principal distributions on the certificates, thereby creating
overcollateralization of the certificates. For each loan group, once the
required level of overcollateralization is reached, the acceleration feature for
the related Class of Class [ ] Certificates will cease, unless it is necessary
to maintain the required level of overcollateralization.] The transferor
interest also is the mechanism which absorbs changes in the amount of the
mortgage loans in the related loan group due to new borrowings and repayments.
In certain circumstances, amounts that would be distributed on the transferor
interest will instead be distributed on the certificates. The seller (or one of
its affiliates) will be the owner of the transferor interest on the closing
date.
See "Description of the Certificates -- Limited Subordination of Transferor
Interest" in this prospectus supplement.
The Policy
The policy will irrevocably and unconditionally guarantee on each
distribution date to the trustee for the benefit of the certificateholders the
full and complete payment of the guaranteed distributions consisting of the
guaranteed principal distribution amount with respect to the certificates for
such distribution date, and accrued and unpaid interest due on the certificates.
The effect of the policy is to guarantee the timely payment of interest on, and
the ultimate payment of
S-11
<PAGE>
the principal amount of, the certificates. The policy does not cover payment of
basis risk carryforward.
In addition, the policy will guarantee the payment of the outstanding
certificate principal balance on the distribution date in [ ] (after
giving effect to all other amounts distributable and allocable to principal on
that distribution date).
In the absence of payments under the policy, certificateholders will
directly bear the credit and other risks associated with their percentage
interest in the trust fund.
See "Description of the Certificates -- The Policy" in this prospectus
supplement.
[Limited Crosscollateralization
The pooling and servicing agreement will allow for some limited cross-
collateralization, in that certain excess cashflows from either loan group on
any distribution date will be applied to the funding of certain deficiencies in
interest and principal with respect to the certificates related to the other
loan group.]
[Reserve Fund
On the closing date, an account will be set up in the name of the trustee
on behalf of the certificateholders, but will not be funded. Once the required
level of overcollateralization for a loan group has been reached, excess
cashflow from that loan group may be deposited in the reserve fund on future
distribution dates until the amount reaches a specified level. Amounts in the
reserve fund may be used to cover shortfalls in amounts required to be
distributed as interest to either Class of Class [ ] Certificates or to cover
losses on the mortgage loans in either loan group.]
Material Federal Income Tax Consequences
Subject to the qualifications described under "Material Federal Income Tax
Consequences" in this prospectus supplement, Andrews & Kurth, L.L.P., special
tax counsel to the depositor, is of the opinion that, under existing law, a
certificate will be treated as a debt instrument for federal income tax purposes
as of the closing date. Furthermore, special tax counsel to the depositor is of
the opinion that neither the trust fund nor any portion of the trust fund will
be treated as either an association or a publicly traded partnership taxable as
a corporation or as a taxable mortgage pool.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for additional information concerning the
application of federal income tax laws.
ERISA Considerations
The certificates may be purchased by a pension or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974 or Section
4975 of the Internal Revenue Code of 1986, or by an entity investing the assets
of an employee benefit plan, so long as certain conditions are met. A fiduciary
of an employee benefit plan must determine that the purchase of a certificate is
consistent with its fiduciary duties under applicable law and does not result in
a nonexempt prohibited transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment Considerations
S-12
<PAGE>
The Class [ ] Certificates will not constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984, because not all of the mortgages securing the loans are first mortgages.
Accordingly, many institutions with legal authority to invest in comparably
rated securities based solely on first mortgages may not be legally authorized
to invest in the Class [ ] Certificates.
See "Legal Investment" in the prospectus.
Certificate Rating
The certificates will not be offered unless they are each rated [ ] by
[Rating Agency] and [ ] by [Rating Agency] A rating is not a recommendation
to buy, sell or hold securities. These ratings may be lowered or withdrawn at
any time by either of the rating agencies.
See "Ratings" in this prospectus supplement and "Risk Factors -- Rating of
Securities" in the prospectus.
S-13
<PAGE>
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth under
"Risk Factors" in the prospectus.
You May Have Difficulty Selling Your
Certificates........................ The underwriter intends to make a
secondary market in the certificates
purchased by it, but has no obligation
to do so. We cannot assure you that a
secondary market will develop or, if it
develops, that it will continue.
Consequently, you may not be able to
sell your certificates readily or at
prices that will enable you to realize
your desired yield. The market values of
the certificates are likely to
fluctuate; these fluctuations may be
significant and could result in
significant losses to you. The secondary
markets for asset backed securities have
experienced periods of illiquidity and
can be expected to do so in the future.
Illiquidity can have a severely adverse
effect on the prices of securities that
are especially sensitive to prepayment,
credit, or interest rate risk, or that
have been structured to meet the
investment requirements of limited
categories of investors.
Cash Flow Disruptions Could Cause
Payment Delays and Losses........... Substantial delays could result while
liquidating delinquent mortgage loans.
Resulting shortfalls in distributions to
certificateholders could occur if the
certificate insurer were unable to
perform its obligations under the
policy. Further, liquidation expenses
(such as legal fees, real estate taxes,
and maintenance and preservation
expenses) will reduce the security for
the related mortgage loans and in turn
reduce the proceeds payable to
certificateholders. In the event any of
the mortgaged properties fail to provide
adequate security for the related
mortgage loans, you could experience a
loss if the certificate insurer were
unable to perform its obligations under
the policy.
Yield And Reinvestment May Be Adversely
Affected by Unpredictability of
Prepayments......................... During the period that a borrower may
borrow money under the borrower's line
of credit, the borrower may make monthly
payments only for the accrued interest
or may also repay some or all of the
amount previously borrowed. In addition,
borrowers may borrow additional amounts
up to the maximum amounts of their lines
of credit. As a result, the amount each
loan group receives in any month (and in
turn the amount distributed to the
holders of the related class of
certificates) may change significantly.
Even during the repayment period,
borrowers generally may prepay their
mortgage loans at any time without
penalty. However, prepayments on loans
secured by property in
S-14
<PAGE>
California and certain other
jurisdictions may be subject to account
termination fees during the first five
years after origination of the loan.
Generally, revolving home equity loans
are not viewed by borrowers as permanent
financing. The mortgage loans may be
repaid at faster rates than traditional
mortgage loans. The trust fund's
prepayment experience may be affected by
a wide variety of factors, including:
general economic conditions, interest
rates, the availability of alternative
financing and homeowner mobility. In
addition, substantially all of the
mortgage loans contain due-on-sale
provisions and the master servicer
intends to enforce those provisions
unless doing so is not permitted by
applicable law or the master servicer,
in a manner consistent with reasonable
commercial practice, permits the
purchaser of the mortgaged property in
question to assume the mortgage loan.
See "Description of the Certificates" in
this prospectus supplement and "Legal
Aspects of the Loans -- Due-on-Sale
Clauses" in the prospectus for a
description of certain provisions of the
credit line agreements that may affect
the prepayment experience on the
mortgage loans.
The yield to maturity and weighted
average life of your certificates will
be affected primarily by the rate and
timing of repayments and prepayments on
the mortgage loans in your loan group as
compared with the creation and amount,
if any, of additional balances and, the
realization of liquidation loss amounts.
You bear the reinvestment risks
resulting from a faster or slower rate
of principal payments than you expected.
[You also bear the reinvestment risk if
by [ ] all of the funds in the
prefunding account have not been used to
acquire additional home equity loans,
which would result in a prepayment of
the Class [ ] Certificates in an amount
equal to the amount remaining in the
prefunding account on that date.] See
"Maturity and Prepayment Considerations"
in this prospectus supplement and "Yield
and Prepayment Considerations" in the
prospectus.
Withdrawal or Downgrading of
Initial Ratings Will Affect The Value
of The Certificates................. The rating of the certificates will
depend primarily on an assessment by the
rating agencies of the mortgage loans
and upon the financial strength of the
certificate insurer. Any reduction in a
rating assigned to the financial
strength of the certificate insurer may
result in a reduction in the rating of
the certificates. A reduction in the
rating assigned to the certificates
probably would reduce the market value
of the certificates and may affect your
ability to sell them.
The rating by each of the rating
agencies of the certificates is not a
recommendation to purchase, hold
S-15
<PAGE>
or sell the certificates since that
rating does not address the market price
or suitability for a particular
investor. The rating agencies may reduce
or withdraw the ratings on the
certificates at any time they deem
appropriate. In general, the ratings
address credit risk and do not address
the likelihood of prepayments.
Junior Lien Priority Could Result in
Payment Delay or Loss............... The mortgage loans are secured by
mortgages which generally are second
mortgages. The master servicer has the
power under certain circumstances to
consent to a new mortgage lien on the
mortgaged property having priority over
the mortgage loan in the trust fund.
Mortgage loans secured by second
mortgages are entitled to proceeds that
remain from the sale of the related
mortgaged property after any related
senior mortgage loan and prior statutory
liens have been satisfied. In the event
that the remaining proceeds are
insufficient to satisfy the mortgage
loans secured by second mortgages and
prior liens in the aggregate and, the
certificate insurer is unable to perform
its obligations under the policy, you
will bear the risk of delay in
distributions while any deficiency
judgment against the borrower is sought
and the risk of loss if the deficiency
judgment cannot be obtained or is not
realized upon. See "Legal Aspects of the
Loans" in the prospectus.
Trust Fund May Be Unsecured
Creditor under Certain Mortgage Loans
since Mortgage Loan Assignments Not
Recorded............................ Although the mortgage notes relating to
the mortgage loans will be delivered to
the trustee within [30] days of the
closing date [(or within 30 days after
receipt by the trust fund, with respect
to the additional home equity loans)],
assignments of mortgage loans to the
trustee will not be recorded unless
recording is required to protect the
trustee's right, title and interest in
and to the related mortgage loan or, in
case a court should recharacterize the
sale of the mortgage loans as a
financing, to perfect a first priority
security interest in favor of the
trustee in the related mortgage loan.
In certain states in which the mortgage
properties are located, failure to
record the assignments of the related
mortgages to the trustee will have the
result of making the sale of the
mortgage loans potentially ineffective
against any creditors of the seller who
may have been fraudulently or
inadvertently induced to rely on the
mortgage loans as assets of the seller,
or any purchaser of a mortgage loan who
had no notice of the prior conveyance to
the trust fund if such purchaser
perfects his interest in the mortgage
loan by taking possession of the related
documents or other evidence of
indebtedness or otherwise.
S-16
<PAGE>
In such events, the trust fund would be
an unsecured creditor of the seller.
Developments in [California] Could Have
Disproportionate Effect on The Pool of
Mortgage Loans Due to Geographic
Concentration of
Mortgaged Properties................ Approximately [ ]% of the mortgage loans
in statistic calculation loan group [ ]
and approximately [ ]% of the mortgage
loans in statistic calculation loan
group [ ] are secured by mortgaged
properties which are located in the
State of [California]. After the
statistic calculation date, the
geographic concentration could change as
a result of the addition or removal of
mortgage loans, prepayments and/or the
creation of additional balances.
Property in [California] may be more
susceptible than homes located in other
parts of the country to certain types of
uninsurable hazards, such as
earthquakes, floods, mudslides and other
natural disasters. In addition: economic
conditions in [California] (which may or
may not affect real property values) may
affect the ability of borrowers to repay
their loans on time; declines in the
[California] residential real estate
market may reduce the values of
properties located in [California],
which would result in an increase in the
loan-to-value ratios; and any increase
in the market value of properties
located in [California] would reduce the
loan-to-value ratios and could,
therefore, make alternative sources of
financing available to the borrowers at
lower interest rates, which could result
in an increased rate of prepayment of
the mortgage loans.
Master Servicer Has Ability to Change The
Terms of The Mortgage Loans......... The master servicer may agree to changes
in the terms of a credit line agreement,
provided that such changes do not
materially and adversely affect the
interest of the related
certificateholders[, any third party
credit enhancer or] the certificate
insurer, and are consistent with prudent
businesspractice.
In addition, the master servicer, within
certain limitations, may increase the
credit limit of the related mortgage
loan or reduce the loan rate for that
mortgage loan. Any such increase in the
credit limit of a mortgage loan would
increase the combined loan-to-value
ratio of that mortgage loan and,
accordingly, would increase the risk of
the related class of certificates
investment in such mortgage loan. In
addition, any reduction in the loan rate
of a mortgage loan would reduce the
related loan group's excess cash flow
available to absorb losses.
Your Return Could Be Adversely Affected by
Delinquent Mortgage Loans........... The trust fund may include mortgage
loans which are 59 or fewer days
delinquent as of [ ] (the cut-
S-17
<PAGE>
off date for the pool of mortgage
loans). We expect that the principal
balance of mortgage loans which are
between 30 days and 59 days delinquent
as of the cut-off date will not exceed
approximately $[ ]. Mortgage loans that
are already delinquent may increase the
risk that the trust fund will experience
a loss if there are not sufficient funds
from the investor interest collections
to cover the investor loss amounts for
any distribution date, amounts intended
to provide protection for the
certificates that are otherwise payable
to the owner of the transferor interest
have been exhausted and the certificate
insurer fails to perform its obligations
under the policy.
Effect of Loan Rates on The
Certificates........................ The certificates accrue interest at a
rate based on the one-month LIBOR index
plus a specified margin, but are subject
to a cap [based, in part, on the
interest rates on the mortgage loans].
The mortgage loans have interest rates
that are based on the prime rate, and
have periodic and maximum limitations on
adjustments to the loan rate. As a
result, the certificates may accrue less
interest than they would accrue if the
certificate rate were based solely on
the LIBOR index plus the specified
margin.
A variety of factors could limit the
certificate rate. Some of these factors
are described below:
Each certificate rate adjusts [monthly]
while the loan rates on the mortgage
loans may adjust less frequently.
Consequently, the loan rates may limit
increases in one or both certificate
rates for extended periods in a rising
interest rate environment.
The prime rate may respond to different
economic and market factors than LIBOR
and thus may increase or decrease at
different times. As a result, it is
possible that the loan rates may decline
while LIBOR is stable or rising. It is
also possible that both the loan rates
and LIBOR may either decline or increase
during the same period, but that the
loan rates may decline more rapidly or
increase more slowly than LIBOR.
These factors may adversely affect the
yield to maturity on the certificates.
For a discussion of additional risks
pertaining to the certificates, see
"Risk Factors" in the prospectus.
[Certain Rights May Be Affected by The
Issuance of [Two] Classes of
Certificates From a Single
Trust Fund.......................... The ability to declare an event of
master servicing termination or to amend
the pooling and servicing agreement
rests with the certificate insurer and
the
S-18
<PAGE>
holders of specified percentages of the
certificates in both groups. In
addition, under certain circumstances
the third party credit enhancer will
have such rights as they relate to the
Class [ ] Certificates. As a result you
may have less ability to control certain
actions than you would have had if only
a single class of certificates had been
issued from the trust fund.]
S-19
<PAGE>
FORWARD LOOKING STATEMENTS
We caution you that certain statements contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus consist
of forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by the
use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words. Forward-
looking statements are subject to a variety of risks and uncertainties that
could cause actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences, effects of prepayments, changes in interest rates and various other
matters, many of which are beyond our control. Because we cannot predict the
future, what actually happens may be very different from what we predict in our
forward-looking statements.
THE MASTER SERVICER
General
First Tennessee Bank National Association ("First Tennessee") will service
the mortgage loans consisting of [adjustable] rate home equity revolving credit
line loans made or to be made in the future in accordance with the terms set
forth in the pooling and servicing agreement. The mortgage loans will be secured
by either first or second deeds of trust or mortgages on the residential
properties that are one- to four-family properties, condominiums and planned
unit developments (the "Mortgaged Properties").
First Tennessee may perform any of its obligations under the pooling and
servicing agreement dated as of [ ], 200[ ] among First Horizon Asset Securities
Inc., as depositor, First Tennessee, as seller and master servicer [Name of
third party enhancer, if any] and [Name of trustee], as trustee, through one or
more subservicers. Notwithstanding any such subservicing arrangement, the master
servicer will remain liable for its servicing duties and obligations under the
pooling and servicing agreement as if the master servicer alone were servicing
the mortgage loans. As of the Closing Date, the master servicer will service the
mortgage loans without subservicing arrangements.
The Master Servicer
First Tennessee, a national banking association, will act as master
servicer for the mortgage loans under the sale and servicing agreement. First
Tennessee is an indirect wholly owned subsidiary of First Tennessee National
Corporation, a Tennessee corporation. First Tennessee National Corporation,
headquartered in Memphis, Tennessee, is a national, diversified financial
services institution, and one of the fifty largest bank holding companies in the
United States. Through its principal subsidiary, First Tennessee, and other
subsidiaries, it provides banking and other financial services to its customers
through various regional and national lines of business.
First Tennessee's mortgage loan servicing portfolio consists primarily of
first and second lien, fixed or adjustable rate mortgage loans secured by
single-family residences. First Tennessee began servicing home equity lines of
credit in [ ]. At [ ], 200[ ] First Tennessee provided servicing for
approximately $[ ] aggregate principal amount of mortgage loans, substantially
all of which are being serviced for unaffiliated persons. At [ ], First
Tennessee provided servicing for approximately $[ ] aggregate principal amount
of first and second lien mortgage loans originated under its home equity lines
of credit program.
S-20
<PAGE>
The principal executive offices of First Tennessee are located at 165
Madison Avenue, Memphis, Tennessee 38103. Its telephone number is (800) 364-
7662. First Tennessee conducts operations from its headquarters in Memphis,
Tennessee.
THE HOME EQUITY LOAN PROGRAM
Underwriting Procedures Relating to Home Equity Loans
[The following is a description of the underwriting procedures customarily
employed by the seller with respect to home equity loans. The underwriting
process is intended to assess the applicant's credit standing and repayment
ability, and the value and adequacy of the real property security as collateral
for the proposed loan. Exceptions to the seller's underwriting guidelines will
be made when compensating factors are present. Such factors include the
borrower's employment stability, favorable credit history, equity in the related
property and the nature of the underlying first mortgage loan.
Each applicant for a home equity loan is required to complete an
application which lists the applicant's assets, liabilities, income, and
employment history and other demographic and personal information. If
information in the loan application demonstrates that the applicant has
sufficient income and there is sufficient equity in the real property to justify
making a home equity loan, the seller will conduct a further credit
investigation of the applicant. This investigation includes obtaining and
reviewing an independent credit bureau report on the credit history of the
applicant in order to evaluate the applicant's ability and willingness to repay.
The credit report typically contains information relating to such matters as
credit history with local merchants and lenders, installment and revolving debt
payments and any record of delinquencies, defaults, bankruptcy, collateral
repossessions, suits or judgments.
The seller may originate or acquire mortgage loans in accordance with
alternative sets of underwriting criteria under an Alternative Documentation
Loan Program, a Reduced Documentation Loan Program or a Streamlined
Documentation Loan Program. Generally, Alternative Documentation Programs permit
a borrower to provide pay stubs and W-2 forms covering the most recent two
years, in lieu of obtaining a Verification of Employment. Reduced Documentation
Programs place more emphasis on property underwriting than on credit
underwriting. Thus, certain credit underwriting documentation concerning income
and employment verification is waived. Reduced Documentation Programs require
applicants to list their assets and also permit applicants to submit bank
statements in lieu of verifications of deposits. Only self-employed borrowers
with credit histories that demonstrate an established ability to repay
indebtedness in a timely fashion are eligible for Reduced Documentation
Programs. Streamlined Documentation programs may be available for first-lien
borrowers in good standing with the seller. A Streamlined Documentation Loan
Program may be available for borrowers who have recently purchased or refinanced
(rate/term) with the seller if they have not been 30 days delinquent in payment
during the previous twelve month period. Under a Streamlined Documentation
Program, the value of the mortgaged property that was used in conjunction with
obtaining the first lien from the seller is used in lieu of a new appraisal and
later used to determine the combined loan-to-value ratios for the new home
equity line of credit. In most instances, the maximum loan amount is limited to
$30,000. In addition, a credit review is conducted, however no debt ratio
calculation, income documentation or asset verification is required. A
telephonic verification of employment is required before loan closing.
Full appraisals are generally performed on all home equity loans which at
origination had a credit limit greater than $100,000. Such appraisals are
determined on the basis of a seller-approved, independent third-party, fee-based
appraisal completed on forms approved by Fannie Mae or Freddie Mac. For certain
home equity loans which had at origination a credit limit equal to or less than
$100,000, a drive-by evaluation is generally completed by a state licensed,
independent third-party, professional appraiser on forms approved by either
Fannie Mae or
S-21
<PAGE>
Freddie Mac. The drive-by evaluation is an exterior examination of the premises
by the appraiser to determine that the property is in good condition. The
appraisal is based on various factors, including the market value of comparable
homes and the cost of replacing the improvements and generally is required to
have been made not earlier than 180 days prior to the date of origination of the
mortgage loan. For certain home equity loans with credit limits equal to or less
than $100,000, the seller may have the related mortgaged property appraised
electronically. Electronic appraisals utilize commercially-available home price
indices and will only be completed on mortgaged properties where the seller also
services the first mortgage. The minimum and maximum loan amounts for home
equity loans are generally $5,000 and $250,000, respectively. Borrowers may draw
under the home equity loans in minimum amounts of $250 and maximum amounts up to
the remaining available credit thereunder, in each case after giving effect to
all prior draws and payments thereon.
After obtaining all applicable employment, credit and property information,
the seller generally uses a debt-to-income ratio to assist in determining
whether the prospective borrower has sufficient monthly income available to
support the payments on the home equity loan in addition to any senior mortgage
loan payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations. The "debt-to-income ratio" is
the ratio of the borrower's total monthly credit obligations (assuming the
mortgage loan interest rate is based on the applicable fully indexed interest
rate) to the borrower's gross monthly income. Based on the foregoing, the
maximum monthly debt-to-income ratio is 45%. Variations in the monthly debt-to-
income ratios limits are permitted based on compensating factors. The seller
currently offers home equity loan products that allow maximum Combined Loan-to-
Value Ratios up to 125%.
It is generally the seller's policy to require a title search or limited
coverage policy before it makes a home equity loan for amounts less than or
equal to $100,000. In addition, if the home equity loan has a maximum draw
amount of more than $100,000, the seller requires that the borrower obtain an
ALTA policy, or other assurance of title customary in the relevant jurisdiction.
In addition, ALTA title policies are generally obtained in situations where the
property is on leased land or there has been a change in title or such home
equity loan is in first lien position.]
Servicing of the Mortgage Loans
[The master servicer has established standard policies for the servicing
and collection of the home equity loans. Servicing includes, but is not limited
to, the collection and aggregation of payments relating to the mortgage loans;
the supervision of delinquent mortgage loans, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of the mortgaged
properties; and the preparation of tax related information in connection with
the mortgage loans.
Billing statements are mailed monthly by the master servicer. The
statements detail all debits and credits and specify the minimum payment due and
the available credit line. Notice of changes in the applicable loan rate are
provided by the master servicer to the mortgagor with such statements. All
payments are due by the fifteenth day of the month.
With respect to mortgage loans, the general policy of the master servicer
is to initiate foreclosure in the underlying property after such loan is 60 days
or more delinquent and satisfactory arrangements cannot be made with the
mortgagor; or if a notice of default on a senior lien is received by the master
servicer. Foreclosure proceedings may be terminated if the delinquency is cured.
Mortgage loans to borrowers in bankruptcy proceedings may be restructured in
accordance with law and with a view to maximizing recovery of such loans,
including any deficiencies.
Once foreclosure is initiated by the master servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to
S-22
<PAGE>
monitor whether proceedings are progressing within the time frame typical for
the state in which the property is located. During the foreclosure proceeding,
the master servicer determines the amount of the foreclosure bid and whether to
liquidate the loan.
After foreclosure, if the home equity loan is secured by a first mortgage
lien, the master servicer may liquidate the mortgaged property and charge off
the home equity loan balance which was not recovered through liquidation
proceeds. If the mortgaged property was subject to a senior lien, the master
servicer will either directly manage the foreclosure sale of the property and
satisfy such lien at the time of sale or take other action as deemed necessary
to protect the interest in the mortgaged property. If in the judgment of the
master servicer, the cost of maintaining or purchasing the senior lien position
exceeds the economic benefit of such action, the master servicer will generally
charge off the entire home equity loan and may seek a money judgment against the
borrower.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the master servicer's business
judgment, changes in the portfolio and applicable laws and regulations.]
Foreclosure and Delinquency Experience
The tables on the following page summarize the delinquency and foreclosure
experience, respectively, on the dates indicated, of home equity revolving
credit line loans serviced by the master servicer. The delinquency and
foreclosure percentages may be affected by the size and relative lack of
seasoning of the servicing portfolio because many of such loans were not
outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount or severity of
delinquency or losses on the mortgage loans and no assurances can be given that
the foreclosure and delinquency experience presented in the table below will be
indicative of such experience on the mortgage loans.
For the purposes of the following table, the period of delinquency is based
on the number of days payments are contractually past due.
Certain total percentages and dollar amounts may not equal the sum of the
percentages and dollar amounts indicated in the columns due to differences in
rounding.
[remainder of page intentionally left blank]
S-23
<PAGE>
Delinquency and Foreclosure Experience
of First Tennessee's Home Equity Revolving Credit Line Loan Portfolio
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998
--- ----
No. of % of Principal % of No. of % of Principal % of No. of
Loans Loans Balance($) Balance Loans Loans Balance($) Balance Loans
----- ----- --------- ------- ------ ----- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 29,374 100% 611,00 100% 33,170 100% 681,000 100% 35,527
Period of Delinquency
30-59 Days 452 1.54% 8,572 1.40% 279 0.84% 4,686 0.69% 391
60-89 Days 94 0.32% 1,658 0.27% 75 0.23% 1,580 0.23% 103
90 Days or more 89 0.30% 1,820 0.30% 116 0.35% 2,229 0.33% 82
Foreclosures Pending
Total Delinquencies 635 2.16% 12,049 1.97% 470 1.42% 8,495 1.25% 576
<CAPTION>
1999
----
% of Principal % of
Loans Balance($) Balance
----- --------- -------
<S> <C> <C> <C>
Total Portfolio 100% 782,000 100%
Period of Delinquency
30-59 Days 1.10% 7,575 0.97%
60-89 Days 0.29% 1,868 0.24%
90 Days or more 0.23% 1,790 0.23%
Foreclosures Pending
Total Delinquencies 1.62% 11,234 1.44%
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------
No. of % of Principal % of
Loans Loans Balance($) Balance
--------- ----- ---------- ---------
<S> <C> <C> <C> <C>
Total Portfolio 38,436 100% 896,000 100%
Period of Delinquency
30-59 Days 373 0.97% 7,202 0.80%
60-89 Days 119 0.31% 2,140 0.24%
90 Days or more 105 0.27% 2,394 0.27%
Foreclosures Pending
Total Delinquencies 597 1.55% 11,736 1.31%
</TABLE>
S-24
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
General
[Certain statistical information concerning the pool of mortgage loans
(such pool is referred to as the "Statistic Calculation Pool" and each such
mortgage loan is referred to as a "Statistic Calculation Pool Mortgage Loan") is
set forth below. The mortgage pool will be divided into [two] groups of mortgage
loans (each is referred to as a loan group) -- loan group [ ] and loan group [
]. The Class [ ] Certificates will represent an interest in loan group [ ] only.
Loan group [ ] information is included chiefly to provide a better understanding
about the trust fund. A detailed description of the mortgage loans actually
delivered (the "Detailed Description") will be available to purchasers of the
Certificates at or before, and will be filed on Form 8-K with the Securities and
Exchange Commission after delivery of the Certificates. The Detailed Description
will specify the aggregate of the principal balances of the mortgage loans
included in the trust fund as of the cut-off date (the "cut-off date pool
balance") and will also include, among other things, the following information
regarding such mortgage loans:
. the outstanding principal balances of such mortgage loans as of [ ],
200[ ] (referred to as the "cut-off date") [or the related transfer
date], the lien priorities of such mortgage loans, the loan rates borne
by such mortgage loans as of the cut-off date, the combined loan-to-
value ratios of such mortgage loans, the remaining term to scheduled
maturity of such mortgage loans, the type of properties securing such
mortgage loans, the geographical distribution of such mortgage loans by
state and the credit limits and Credit Limit Utilization Rates of such
mortgage loans as of the cut-off date.
. [The Detailed Description speaks as of the cut-off date and consequently
does not include any Additional Home Equity Loans purchased with the
funds in the prefunding accounts.] The mortgage loans will have been
originated pursuant to credit line agreements and will be secured by
mortgages or deeds of trust, which are either first or second mortgages
or deeds of trust, on mortgaged properties expected to be located in [49
states and the District of Columbia] as of the cut-off date. The
mortgaged properties securing the mortgage loans will consist of
residential properties that are one- to four-family properties. See " --
Mortgage Loan Terms" below.
. Information regarding the Statistical Calculation Pool Mortgage Loans as
of [ ], 200[ ] (the "Statistic Calculation Date") can be found on the
tables on pages S-___ through S-___.]
Mortgage Loan Terms
[General. A borrower may access a mortgage loan by writing a check in a
minimum amount of $[ ]. The mortgage loans bear interest at a variable rate
which changes monthly on the first business day of the related month with
changes in the applicable Index Rate. The Statistic Calculation Pool Mortgage
Loans are subject to a maximum per annum interest rate ranging from [ ]% to
[ ]% per annum, subject to applicable usury limitations. See "Legal Aspects of
the Loans -- Applicability of Usury Laws" in the Prospectus. The daily periodic
rate on the mortgage loans (i.e., the loan rate) is the sum of the Index Rate
plus the applicable margin, divided by 365 days. The margin generally ranges
between [ ]% and [ ]%. The "Index Rate" is based on the highest "prime rate"
(the "Index") published in the "Money Rates" table of The Wall Street Journal as
of the first business day of each calendar month.
S-25
<PAGE>
The second mortgage ratio for a mortgage loan is the credit limit for the
related mortgage loan, provided such mortgage loan was in the second lien
position, divided by the sum of such credit limit and the outstanding principal
balance of any mortgage loan senior to the related mortgage loan as of the date
of related loan application. The weighted average second mortgage loan ratio for
the Loan Group [ ] Statistic Calculation Pool Mortgage Loans was approximately
[ ]%. The weighted average second mortgage ratio for the Loan Group [ ]
Statistic Calculation Pool Mortgage Loans was approximately [ ]%.
The seller generally offers introductory loan rates on its home equity
lines of credit. The introductory rate applies to payments made during the
[first three months or first six months] after origination. After such
introductory period, the loan rate will adjust to the Index Rate plus the
applicable margin.
In general, the home equity loans may be drawn upon during a draw period of
[five] years. Home equity loans with a draw period of [five] years (which
generally may be extendible for an additional [five] years, upon the seller's
approval) constitute approximately [ ]% of the Loan Group [ ] Statistic
Calculation Pool Mortgage Loans and approximately [ ]% of the Loan Group [ ]
Statistic Calculation Pool Mortgage Loans, each by Statistic Calculation Date
Principal Balance. These loans are generally subject to a [fifteen] year
repayment period following the end of the draw period. During this repayment
period, the outstanding principal balance of the loan will be paid in monthly
installments equal to [1/180] of the outstanding principal balance as of the end
of the draw period.
The minimum payment due during the draw period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period, any such amounts past due and any other
charges owed. The minimum payment due during the repayment period will be equal
to the sum of the finance charges accrued on the outstanding principal balance
of the mortgage loan during the related billing period, any amounts past due,
any other charges owed and the principal payment described above.
The "principal balance" of a mortgage loan (other than a Liquidated
Mortgage Loan) on any day is equal to its principal balance as of the cut-off
date for the mortgage loans purchased on the Closing Date [and as of the
relevant date for the additional home equity loan] plus any Additional Balances
in respect of such mortgage loan, minus all collections credited against the
principal balance of such mortgage loan in accordance with the related credit
line agreement prior to such day.
The principal balance of a Liquidated Mortgage Loan after final recovery of
related liquidation proceeds shall be zero.
Difference between Statistic Calculation Pool and Cut-off Date Pool. The
statistical information presented in this Prospectus Supplement for each loan
group reflects the mortgage loans originated by the seller through the Statistic
Calculation Date, and is based on the number and the principal balances of such
mortgage loans in each loan group as of the Statistic Calculation Date. The
depositor expects that the actual pool as of the Closing Date will represent
approximately $[ ] aggregate principal balance of mortgage loans. Loan group
[ ], which has a Statistic Calculation Date Principal Balance of approximately
$[ ], is expected to have a cut-off date principal balance of approximately
$[ ]. Loan group [ ], which has a Statistic Calculation Date Principal
Balance of approximately $[ ], is expected to have a cut-off date principal
balance of $[ ]. [The trust also will include approximately $[ ] for loan
group [ ] and $[ ] for loan group [ ] in the relevant prefunding accounts
that may be applied to the purchase of additional mortgage loans as described
below.] The [initial] mortgage loans to be included in the cut-off date pool
will represent mortgage loans originated or to be originated by the seller on or
prior to the cut-off date and sold by the seller to the depositor, and by the
depositor to the trust fund, on the Closing Date. In addition, with respect to
the Statistic Calculation Pool Mortgage Loans, as to which statistical
information is presented herein, some
S-26
<PAGE>
amortization will occur and some Additional Balances may be created prior to the
cut-off date. Moreover, certain Statistic Calculation Pool Mortgage Loans may
prepay in full or may be determined not to meet the eligibility requirements for
the final cut-off date pool and as a result may not be included in the cut-off
date pool. As a result of the foregoing, the statistical distribution of
characteristics as of the cut-off date for the cut-off date mortgage loan pool
will vary from the statistical distribution of such characteristics of each
Statistic Calculation Loan Group as presented in this Prospectus Supplement,
although such variance will not be material. In the event that the seller does
not, as of the cut-off date, have the full amount of mortgage loans which the
depositor expects to purchase from the seller and sell to the trust fund on
such date (i.e. approximately $[ ] aggregate principal balance of mortgage
loans), the depositor may reduce the size of the offering. Likewise, if the
seller has more mortgage loans than anticipated, the depositor may increase the
size of the offering. The original principal amount of either class of
Certificates may not decrease or increase by more than [10]%. [For each loan
group, the excess of the original principal balance of the related certificates
over the cut-off date principal balance of that loan group will be deposited
into an account (the account for loan group [ ], the "Prefunding Account").
These funds are expected to be used to acquire additional home equity loans not
in the cut-off date pool (these loans for loan group [ ], the "Additional Home
Equity Loans"). Consequently, the statistical distribution characteristics of
loan group [ ] after the addition of Additional Home Equity Loans will vary from
that of both the loan group [ ] cut-off date mortgage loan pool and the Loan
Group [ ] Statistical Calculation Pool Mortgage Loans. Any funds remaining in
the Prefunding Account on [ ] will be used to prepay the Class [ ]
Certificates on the first Distribution Date].
The sum of the columns below may not equal the total indicated for each
loan group due to rounding. The following tables describe the Statistic
Calculation Pool Mortgage Loans in each loan group and the related mortgaged
properties based upon the Loan Group [ ] Statistic Calculation Pool or the Loan
Group [ ] Statistic Calculation Pool, as applicable, as of the close of business
on the Statistic Calculation Date:]
S-27
<PAGE>
LOAN GROUP [ ]
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Number of Aggregate Unpaid
Principal Balances Mortgage Loans Principal Balance
-------------------- -------------- -----------------
<S> <C> <C>
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
$ - $ ....................
TOTAL:...........
</TABLE>
S-28
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
Range of Combined Number of Aggregate Unpaid
Loan-to-Value Ratios Mortgage Loans Principal Balance
-------------------- -------------- -----------------
<S> <C> <C>
Less than %..........
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
- ...................
TOTAL: .......
</TABLE>
(1) [The ratio (expressed as a percentage) of (A) the sum of (i) the credit
limited of the mortgage loans and (ii) any outstanding principal balances
of mortgage loans senior or of equal priority to the mortgage loans
(calculated generally at the date of origination of the mortgage loans) to
(B) the lesser of (i) the appraised value of the related mortgaged property
as set forth in loan files at such date of origination or (ii) in the case
of a mortgaged property purchased within one year of the origination of the
related mortgage loan, the purchase price of such mortgaged property.]
S-29
<PAGE>
LOAN RATES (1)
<TABLE>
<CAPTION>
Range of Number of Aggregate Unpaid
Loan Rates Mortgage Loans Principal Balance
---------- -------------- -----------------
<S> <C> <C>
- %.................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
TOTAL:.........
</TABLE>
(1) Approximately [ ]% of the Loan Group [ ] Statistic Calculation Pool
Mortgage Loans by Statistic Calculation Date Principal Balance are
currently subject to an introductory rate of [ ]% per annum and [ ]% of the
Loan Group [ ] Statistic Calculation Pool Mortgage Loans by Statistic
Calculation Date Principal Balance are currently subject to an introductory
rate of [ ]% per annum.
S-30
<PAGE>
GEOGRAPHIC DISTRIBUTION (1)
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
State Mortgage Loans Principal Balance
----- -------------- -----------------
<S> <C> <C>
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
TOTAL:.........
</TABLE>
(1) [Geographic location is determined by the address of the mortgaged property
securing the related mortgage loan.]
S-31
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance
Property Type Mortgage Loans Outstanding
------------- -------------- -----------
<S> <C> <C>
Single Family.............
PUD.......................
Lo Condo..................
2-4 Units.................
TOTALS:..........
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance
Property Type Mortgage Loans Outstanding
------------- -------------- -----------
<S> <C> <C>
1/st/ Lien................
2/nd/ Lien................
TOTALS:..........
</TABLE>
S-32
<PAGE>
MARGINS
<TABLE>
<CAPTION>
Range of Number of Aggregate Unpaid
Margins Mortgage Loans Principal Balance
------- -------------- -----------------
<S> <C> <C>
- %.................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
- ..................
TOTAL:.........
</TABLE>
S-33
<PAGE>
CREDIT LIMIT UTILIZATION RATES (1)
<TABLE>
<CAPTION>
Range of Credit Number of Aggregate Unpaid
Limit Utilization Rates Mortgage Loans Principal Balance
----------------------- -------------- -----------------
<S> <C> <C>
- %.......................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
TOTAL:...............
</TABLE>
(1) [The "Credit Limit Utilization Rate" is determined by dividing the Loan
Group [ ] Statistic calculation Date Balance by the aggregate of the
credit limits of the related credit line agreements.]
S-34
<PAGE>
MAXIMUM RATES
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Maximum Rates Mortgage Loans Principal Balance
------------- -------------- -----------------
<S> <C> <C>
%......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
TOTAL:..............
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY (1)
<TABLE>
<CAPTION>
Range of Months
Remaining to Number of Aggregate Unpaid
Scheduled Maturity Mortgage Loans Principal Balance
------------------ -------------- -----------------
<S> <C> <C>
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
- ........................
TOTAL:............
</TABLE>
(1) [Assumes that the Draw Period for Loan Group [ ] Statistic Calculation Pool
Mortgage Loans with (a) five year draw periods and fifteen year repayment
periods will be extended for an additional five years and (b) five year
draw periods and ten year repayment periods will not be extended.]
S-35
<PAGE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Origination Year Mortgage Loans Principal Balance
---------------- -------------- -----------------
<S> <C> <C>
.....................
.....................
.....................
.....................
.....................
.....................
TOTAL:............
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
Number of Number of Aggregate Unpaid
Days Delinquent Mortgage Loans Principal Balance
----------------- -------------- -----------------
<S> <C> <C>
Current................
TOTAL:........
</TABLE>
S-36
<PAGE>
CREDIT LIMITS
<TABLE>
<CAPTION>
Range of Number of Aggregate Unpaid
Credit Limits Mortgage Loans Principal Balance
--------------- -------------- -----------------
<S> <C> <C>
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
$ - $ ..................
TOTAL:.........
</TABLE>
CONVEYANCE OF MORTGAGE LOANS
The obligation of the trust fund to purchase mortgage loans for loan group
[ ] on the Closing Date is subject to the following requirements, any of which
requirements may be waived or modified in any respect by the Certificate
Insurer:
. such mortgage loan may not be 60 or more days delinquent as of the
Closing Date; the remaining term to stated maturity of such mortgage
loan will not exceed [ ] months;
. such mortgage loan will be secured by a mortgage in a first or second
lien position;
. such mortgage loan will not have a loan rate less than [ ]%;
. such mortgage loan will be otherwise acceptable to the Certificate
Insurer;
. following the purchase of such mortgage loan by the trust fund, the
mortgage loans as of the Closing Date:
(a) will have a weighted average loan rate of at least [ ]%;
(b) will have a weighted average remaining term to stated
maturity of not more than [ ] months;
(c) will have a weighted average Combined Loan-to-Value Ratio of
not more than [ ]%;
S-37
<PAGE>
(d) will have no mortgage loan with a principal balance in
excess of $[ ];
(e) will have a concentration in any one state not in excess of
[ ]%; and will have a concentration in any one zip code not in
excess of [ ]%;
(f) will have not more than [ ]% in aggregate principal balance
of mortgage loans relating to non-owner occupied properties; and
(g) will not have more than [ ]% in aggregate principal balance
of mortgage loans that were appraised electronically;
. such mortgage loan shall have a Combined Loan-to-Value Ratio not in
excess of [ ];
. such mortgage loan will have a credit limit between $[ ] and $[ ];
. such mortgage loan will have a margin between [ ]% and [ ]%; and
. such mortgage loan will comply with the representations and warranties
in the pooling and servicing agreement.
[The trust fund may acquire Additional Home Equity Loans through [ ]
that will be included in loan group [ ] so long as they conform to the criteria
listed above. Each Additional Home Equity Loan will have been underwritten
substantially in accordance with the criteria described under "The Home Equity
Loan Program -- Underwriting Procedures Relating to Home Equity Loans."
Additional Home Equity Loans will be purchased using amounts on deposit in the
Prefunding Account at a cash purchase price of [100]% of their principal balance
on a designated cut-off date before [ ]. The amount paid from the Prefunding
Account for Additional Home Equity Loans will not include accrued interest.
Following each purchase of Additional Home Equity Loans, the aggregate principal
balance of loan group [ ] will increase by an amount equal to the aggregate
principal balance of the Additional Home Equity Loans so acquired and the amount
in the Prefunding Account will decrease accordingly.
Any conveyance of Additional Home Equity Loans is subject to various
conditions including:
. that they satisfy substantially the same loan representations and
warranties as the initial home equity loans;
. that they were identified by means of a selection process reasonably
believed not to be adverse to the interests of the holders of the
certificates and the Certificate Insurer;
. that the trust fund receive opinions of counsel acceptable to the
Certificate Insurer and the trustee with respect to the validity of
the conveyance of the Additional Home Equity Loans; and
. that as of their cut-off date, each Additional Home Equity Loan
satisfied the eligibility requirements that the mortgage loans had to
satisfy on the closing date.
No discretion will be exercised in the selection of the Additional Home
Equity Loans to be acquired by the trust fund. They will all be mortgage loans
that had been applied for by the related borrowers before the cut-off date, but
that were not included in the cut-off date pool. The exact mortgage loans to be
acquired will be determined on a first-in, first-out basis. Mortgage
S-38
<PAGE>
loans otherwise meeting the eligibility requirements will be aggregated by the
date on which they were funded, and all of these Additional Home Equity Loans
will be purchased in date order up through the day substantially all of the
funds in the Prefunding Account are expended. On that last day, the Additional
Home Equity Loans will be ordered and acquired alphabetically by the last name
of the primary obligor. These acquisitions may occur in one or more closings
after the intitial closing date.]
[The Prefunding Account
The assets of the trust fund will include the Prefunding Account that will
contain approximately $[ ] on the closing date representing the excess of
the original principal balance of the Class [ ] Certificates over the cut-
off date principal balance of the mortgage loans in loan group [ ] initially
transferred to the trust fund on the closing date. Monies in the Prefunding
Account are expected to be used to purchase Additional Home Equity Loans through
[ ]. The Prefunding Account will be part of the trust fund, but will not be
available to cover losses on the mortgage loans. Any funds remaining on deposit
in the Prefunding Account on [ ] will be used to prepay the Class [ ]
Certificates on the first Distribution Date. Net income on investment of funds
in the Prefunding Account will be paid to the master servicer, and will not be
available for payment on the Certificates.]
MATURITY AND PREPAYMENT CONSIDERATIONS
The pooling and servicing agreement, except as otherwise described herein,
provides that the Certificateholders will be entitled to receive on each
distribution date distributions of principal, in the amounts described under
"Description of the Certificates -- Distributions on the Certificates" herein,
until the certificate principal balance is reduced to zero. During the Managed
Amortization Period, Certificateholders will receive amounts from principal
collections based upon the applicable Investor Fixed Allocation Percentage for
the related loan group, subject to reduction as described below. [In addition,
the funds remaining in the Prefunding Account on [ ] after the purchase of
any Additional Home Equity Loans on that date will be used to prepay the Class
[ ] Certificates on the first Distribution Date.] With respect to any date
of calculation on or prior to the first distribution date on which the balance
of the Transferor Interest with respect to such loan group is equal to the
applicable Required Transferor Subordinated Amount, the "Investor Fixed
Allocation Percentage" will equal the greater of (i) [ ]% and (ii) 100% minus
the percentage obtained by dividing the amount of the Transferor Interest
allocable to a loan group at the beginning of such Collection Period by the loan
group balance at the beginning of such Collection Period. Thereafter, the
Investor Fixed Allocation Percentage will equal [ ]%. During the related Rapid
Amortization Period, Certificateholders will receive amounts from principal
collections based solely upon the Investor Fixed Allocation Percentage for the
related loan group. Because prior distributions of principal collections to
Certificateholders serve to reduce the related Investor Floating Allocation
Percentage but may not change the related Investor Fixed Allocation Percentage
in all instances, allocations of principal collections from the mortgage loans
in a loan group based on the related Investor Fixed Allocation Percentage may
result in distributions of principal to the Certificateholders in amounts that
are, in most cases, greater relative to the declining balance of the mortgage
loans in that loan group than would be the case if the related Investor Floating
Allocation Percentage were used to determine the percentage of principal
collections from the mortgage loans in that loan group distributed to
Certificateholders. This is especially true during the Rapid Amortization Period
when the Certificateholders are entitled to receive their respective Investor
Principal Collections and not a lesser amount. In addition, respective Investor
Interest Collections may be distributed as principal to Certificateholders of
Certificates in a particular loan group in connection with the applicable
Accelerated Principal Distribution Amount, if any. Moreover, to the extent of
losses allocable to the Certificateholders of Certificates related to a
particular loan group, those Certificateholders may also receive as payment of
principal the amount of such losses from the related Investor Interest
Collections, Investor Interest Collections from the other loan group, the
Subordinated Transferor Collections, [the Reserve Fund,] or, in some instances,
draws under the
S-39
<PAGE>
Policy [or payments under any third party enhancement]. The level of losses may
therefore affect the rate of payment of principal on the Certificates.
[As of the closing date, the Transferor Interest with respect to each loan
group will be $0. The Transferor Interest is expected to grow in the early
months of the transaction due to the payment of the applicable Accelerated
Principal Distribution Amount.] [In addition,] to the extent obligors make more
draws than principal payments on the mortgage loans in a loan group, the
Transferor Interest may grow. An increase in the Transferor Interest due to
additional draws may also result in Certificateholders receiving principal at a
greater rate during the Rapid Amortization Period because the Certificateholders
share of principal collections on the mortgage loans in a loan group is based
upon the applicable Investor Fixed Allocation Percentage (without reduction).
The pooling and servicing agreement permits the Transferor, at its option, but
subject to the satisfaction of certain conditions specified in the pooling and
servicing agreement, including the conditions described below, to remove certain
mortgage loans from a loan group at any time during the life of the trust fund,
so long as the portion of the Transferor Interest related to the applicable loan
group (after giving effect to such removal) is not less than the related Minimum
Transferor Interest. Such removals may affect the rate at which principal is
distributed to Certificateholders by reducing the overall loan group balance and
thus the related amount of principal collections. See "Description of the
Certificates -- Optional Transfers of Mortgage Loans to the Transferor" herein.
All of the mortgage loans may be prepaid in full or in part at any time.
However, mortgage loans secured by mortgaged properties in California are
subject to an account termination fee equal to the lesser of $[ ] or [ ] months
interest on the amount prepaid, to the extent the prepaid amount exceeds [ ]% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, mortgage loans secured by mortgaged
properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $[ ] and do not apply to accounts terminated subsequent to a date
designated in the related mortgage note which, depending on the jurisdiction,
ranges between [ ] months and [ ] years following origination. The prepayment
experience with respect to the mortgage loans in a loan group will affect the
weighted average life of the related Certificates.
The rate of prepayment on the mortgage loans cannot be predicted.
Generally, it is assumed that home equity revolving credit lines are not viewed
by borrowers as permanent financing. Accordingly, the mortgage loans may
experience a higher rate of prepayment than traditional first mortgage loans. On
the other hand, because the mortgage loans amortize as described under
"Description of the Mortgage Loans -- Mortgage Loan Terms" herein, rates of
principal payments on the mortgage loans will generally be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
such mortgage loans. The prepayment experience of the mortgage loans in a loan
group may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the credit line agreements and changes affecting the deductibility for federal
income tax purposes of interest payments on home equity credit lines.
Substantially all of the mortgage loans contain "due-on-sale" provisions, and
the master servicer intends to enforce such provisions, unless such enforcement
is not permitted by applicable law or the master servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related mortgaged property to assume the mortgage loan.
The enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related mortgage loan. See "Legal Aspects of the Loans -- Due-
on-Sale Clauses" in the Prospectus.
The seller is not required to deliver certain documents relating to the
mortgage loans to the trustee until [30] days after the Closing Date [(or in the
case of the Additional Home Equity
S-40
<PAGE>
Loans, until 21 days after they are acquired by the trust fund)]. See
"Description of the Certificates -- Assignment of Mortgage Loans" herein. Should
the seller fail to deliver all or a portion of such documents with respect to
any such mortgage loan to the depositor, or, at the depositor's direction, to
the trustee within such period, the seller will be obligated to accept the
transfer of such mortgage loan from the trust fund. Upon such transfer, the
principal balance of such mortgage loan will be deducted from the related loan
group balance, thus reducing the amount of the Transferor Interest related to
such loan group. If the deduction would cause such portion of the Transferor
Interest to become less than the related Minimum Transferor Interest at such
time, the seller will be obligated to either substitute an Eligible Substitute
Mortgage Loan or make a deposit into the Collection Account in an amount equal
to the amount by which such portion of the Transferor Interest would be reduced
to less than the related Minimum Transferor Interest at such time. Any such
deduction, substitution or deposit, will be treated under the pooling and
servicing agreement as a payment in full of such mortgage loan.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the mortgage loans in the related loan group is actually
different than the rate anticipated by such investor at the time such
Certificates were purchased.
Collections on the mortgage loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the mortgage loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the trust fund and it can be expected that a portion of borrowers
will not prepay their mortgage loans to any significant degree. See "Yield and
Prepayment Considerations" in the Prospectus.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the trustee will compute
monthly expressing the Certificate Principal Balance of each class of
certificates as of each distribution date (after giving effect to any
distribution of principal to that class of certificates on such distribution
date) as a proportion of the Original Certificate Principal Balance. On the
Closing Date, the Pool Factor for each class of certificates will be 1.0000000.
See "Description of the Certificates -- Distributions on the Certificates"
herein. Thereafter, the Pool Factor for each class of certificates will decline
to reflect reductions in the related certificate principal balance resulting
from distributions of principal to that class of certificates and the related
Invested Amount of any unreimbursed Liquidation Loss Amounts from mortgage loans
in the related loan group.
Pursuant to the pooling and servicing agreement, monthly reports concerning
the Invested Amount, the Pool Factor and various other items of information for
each class of certificates will be made available to the Certificateholders. In
addition, within [60] days after the end of each calendar year, beginning with
the 200[ ]calendar year, information for tax reporting purposes will be made
available to each person who has been a Certificateholder of record at any time
during the preceding calendar year. See "Description of the Certificates --
Book-Entry Certificates" and " -- Reports to Certificateholders" herein.
DESCRIPTION OF THE CERTIFICATES
The Revolving Home Equity Loan Asset Backed Certificates Class [ ] and
Class [ ] (each is sometimes referred to as a "Class"), Series 200[ ]-[ ] (the
"Certificates") will be issued pursuant to the pooling and servicing agreement.
The form of the pooling and servicing agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus
S-41
<PAGE>
Supplement and the Prospectus is a part. The following is a description of the
material provisions of the pooling and servicing agreement. Wherever particular
sections or defined terms of the pooling and servicing agreement are referred
to, such sections or defined terms are hereby incorporated herein by reference.
General
The Class [ ] Certificates will be issued in denominations of $[25,000] and
multiples of $[1,000] in excess thereof and will evidence specified undivided
interests in loan group [ ]. Together with the Transferor's Interest and the
Class [ ] Certificates (which are not offered by this prospectus supplement),
they comprise First Horizon Home Equity Loan Trust 200[ ]-[ ] (referred to as
the trust fund). The property of the trust fund will consist of, to the extent
provided in the pooling and servicing agreement:
. the principal balance of each mortgage loan as of the cut-off date
(referred to as the cut-off date principal balance), plus any new
advances made in respect thereof under the applicable credit line
agreement during the life of the trust fund ("Additional Balances");
. collections on the mortgage loans received after the cut-off date
(exclusive of payments in respect of accrued interest due on or prior to
the cut-off date);
. mortgaged properties relating to the mortgage loans that are acquired by
foreclosure or deed in lieu of foreclosure;
. the Collection Account for the Certificates (excluding net earnings
thereon);
. [the Prefunding Account and the similar account for loan group 1 and any
additional loans purchased with their proceeds;]
. [the Reserve Fund (excluding net earnings thereon);]
. the Policy and any further credit enhancement for the Class [ ]
Certificates only; and
. an assignment of the depositor's rights under the Purchase Agreement.
Definitive Certificates (as defined below), if issued, will be transferable
and exchangeable at the corporate trust office of the trustee, which will
initially maintain the Security Register for the Certificates. See " -- Book-
Entry Certificates" below. No service charge will be made for any registration
of exchange or transfer of Certificates, but the trustee may require payment of
a sum sufficient to cover any tax or other governmental charge.
The aggregate undivided interest in the trust fund represented by the
Certificates as of the Closing Date is expected to equal approximately $[ ]
(the "Original Invested Amount"), which represents approximately 100% of the sum
of the cut-off date pool balance [and the prefunding accounts]. As of the
Closing Date, the Class [ ] Certificates are expected to equal approximately
$[ ] (the "Class [ ] Original Invested Amount"), which represents
approximately 100% of the sum of the cut-off date loan group [ ] principal
balance [and approximately $[ ] deposited in the related prefunding
account]. The "Class [ ] Original Certificate Principal Balance" is expected to
equal approximately $[ ]. As of the Closing Date, the Class [ ]
Certificates are expected to equal approximately $[ ] (the "Class [ ]
Original Invested Amount"), which represents approximately 100% of the sum of
the cut-off date loan group [ ] principal balance [and the amount deposited in
the Prefunding Account]. The "Class [ ]Original Certificate Principal Balance"
is expected to equal approximately $[ ]. [Of the Class [ ] Original Invested
Amount approximately $[ ] represents the proceeds deposited into the
Prefunding Account which may be used through [ ] to purchase
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additional home equity loans for addition to loan group [ ]. Following the
Closing Date, the "Invested Amount" for each class of certificates with respect
to any distribution date will be an amount equal to the Original Invested Amount
for such class of certificates minus the amount of the related Investor
Principal Collections previously distributed on such class of certificates [and
any return of the related prefunding account funds], minus an amount equal to
the product of the related Investor Floating Allocation Percentage and the
Liquidation Loss Amounts on the mortgage loans in the related loan group (each
as defined herein) for such distribution date.
For each class of certificates, the principal amount of the outstanding
Certificates in that class (the "Certificate Principal Balance") on any
distribution date is equal to the applicable Original Certificate Principal
Balance minus the aggregate of amounts actually distributed as principal to the
certificates in that class. See "-- Distributions on the Certificates" below.
Each Certificate represents the right to receive payments of interest at the
related Certificate Rate and payments of principal as described below.
The remaining interest in the mortgage loans in the trust fund will be
represented by a single transferor interest (the "Transferor Interest") that
will be owned by the transferor. In each loan group, the portion of the
Transferor Interest in that loan group, as of any date of determination, will
equal the related loan group balance as of the close of business on the day
preceding such date of determination, less the Invested Amount for such loan
group as of the close of business on the preceding distribution date. The
Required Transferor Subordinated Amount initially is approximately $[ ],
which, in the aggregate, will represent approximately [ ]% of the cut-off date
loan group [ ] balance [and the amount originally deposited in the related
prefunding account plus approximately [ ]% of the cut-off date loan group [ ]
balance and the amount originally deposited in the Prefunding Account], but the
pooling and servicing agreement requires the Transferor Interest (once it is
fully funded) to be at least equal to the Minimum Transferor Interest (as
defined in this prospectus supplement). The owner of the Transferor Interest
(the "Transferor") will initially be the seller (or one of its affiliates). In
general, the loan group balance of each loan group will vary each day as
principal is paid on the mortgage loans in that loan group, liquidation losses
are incurred and Additional Balances are drawn down by borrowers on mortgage
loans in that loan group and transferred to the related loan group.
[The Certificate Insurer will require, based upon the terms and conditions
of the Insurance Agreement, that the portion of the Transferor's Interest with
respect to each class of certificates be maintained at the related Required
Transferor Subordinated Amount with respect to such class.
The portion of the Transferor's Interest related to each class of
certificates as of the closing date will be zero, which is less than the initial
Required Transferor Subordinated Amount, thus requiring an increase in the
Transferor's Interest on future Distribution Dates until it equals the Required
Transferor Subordinated Amount.
With respect to each class of certificates, certain excess cashflow will be
applied as a payment of principal of that class of certificates on each
Distribution Date to increase or maintain the portion of the Transferor's
Interest related to that class to or at the Required Transferor Subordinated
Amount for such class for such Distribution Date. The amount of such excess
cashflow with respect to a class of certificates so applied as a payment of
principal on a Distribution Date is an "Accelerated Principal Distribution
Amount" for the related class of certificates. The requirement to maintain the
Transferor's Interest at the Required Transferor Subordinated Amount, or to
increase it to the Required Transferor Subordinated Amount, is not an obligation
of the seller, the master servicer, the trustee, the Certificate Insurer or any
other person.
The pooling and servicing agreement requires excess cashflow not required
to maintain or achieve the Required Transferor Subordinated Amount of the
related class of certificates to be applied to the funding of a reserve fund,
which has been required by the Certificate Insurer to be
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established and maintained with respect to the certificates (the "Reserve
Fund"). The amount on deposit in the Reserve Fund will not exceed the excess of
(x) the sum of the Required Transferor Subordinated Amounts with respect to each
class of certificates over (y) the sum of the portion of the Transferor's
Interest with respect to each class of certificates. Amounts in the Reserve Fund
may only be withdrawn therefrom and applied in accordance with the terms of the
pooling and servicing agreement.
The Certificate Insurer may permit the Required Transferor Subordinated
Amount for a class of certificates to decrease or "step down" over time, subject
to certain floors and triggers. The dollar amount of any decrease in a Required
Transferor Subordinated Amount is an "Overcollateralization Reduction Amount,"
which, with respect to each class of certificates, may result in a release of
cash from the trust fund in an amount up to such Overcollateralization Reduction
Amounts (net of any Reimbursement Amounts due to the Certificate Insurer),
and/or result in the removal of cash or mortgage loans from the trust fund on
Distribution Dates occurring after such step-downs take effect. The dollar
amount of any Overcollateralization Reduction Amount with respect to a class
will first be released from the Reserve Fund, to the extent of the amount on
deposit therein. If the amount on deposit in the Reserve Fund with respect to a
class is not sufficient to fund the full amount of such Overcollateralization
Reduction Amount with respect to such class, then an amount equal to the
remaining portion of such Overcollateralization Reduction Amount will be
released from the monthly cashflow with respect to such class, thus reducing the
portion of the Transferor's Interest for such class.]
The Transferor has the right to sell or pledge the Transferor Interest at
any time, provided the Rating Agencies have notified the Transferor and the
Trustee in writing that such action will not result in the reduction or
withdrawal of the ratings assigned to the Certificates without regard to the
Policy [or any other third party credit enhancements], and certain other
conditions specified in the pooling and servicing agreement are satisfied.
Book-entry Certificates
Each class of book-entry certificates will be issued in one or more
certificates which equal the aggregate original principal balance of the class
of certificates and which will be held by a depository, initially a nominee of
The Depository Trust Company. Beneficial interests in the book-entry
certificates will be held indirectly by investors through the book-entry
facilities of the depository, as described in this prospectus supplement.
Investors may hold beneficial interests in the book-entry certificates in the
minimum denominations set forth on page S-[ ] and integral multiples of $[ ]
in excess thereof. One investor of each class of book-entry certificates may
hold a beneficial interest in a book entry certificate that is not an integral
multiple of $[ ]. The depositor has been informed by the depository
that its nominee will be CEDE & Co. Accordingly, CEDE & Co. is expected to be
the holder of record of the book-entry certificates. Except as described in the
prospectus under "Description of the Securities -- Book-Entry Securities," no
beneficial owner of a book-entry certificate will be entitled to receive a
physical certificate.
Unless and until definitive certificates are issued, it is anticipated that
the only certificateholder of the book-entry certificates will be CEDE & Co., as
nominee of the depository. Beneficial owners of the book-entry certificates
will not be certificateholders, as that term is used in the pooling and
servicing agreement. Beneficial owners are only permitted to exercise the
rights of certificateholders indirectly through financial intermediaries and the
depository. Monthly and annual reports on the trust fund provided to CEDE &
Co., as nominee of the depository, may be made available to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose
depository accounts the book-entry certificates of the beneficial owners are
credited.
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For a description of the procedures generally applicable to the book-entry
certificates, see "Description of the Securities -- Book-Entry Securities" in
the prospectus.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, the depositor will transfer to
the trust fund [the amounts to be deposited into the prefunding accounts and]
all of its interest in each mortgage loan acquired on the closing date
(including any Additional Balances arising in the future), related credit line
agreements, mortgages and certain other related documents (collectively, the
"Related Documents"), including all collections received on each such mortgage
loan after the cut-off date (exclusive of payments in respect of accrued
interest due on or before the cut-off date). The trustee, concurrently with such
transfer, will deliver the Certificates to the depositor and the Transferor
Certificate (as defined in the pooling and servicing agreement) to the
transferor. [Additional closings may occur for the purchase of Additional Home
Equity Loans on dates specified by the depositor through [ ], 200[ ]. On
those closing dates the depositor will transfer to the trust fund all of its
interest in the Additional Home Equity Loans being acquired by the trust fund
that day, the Related Documents and all collections received on the Additional
Home Equity Loans after a date designated in connection with the transfer.] Each
mortgage loan transferred to the trust fund will be identified on a mortgage
loan schedule delivered to the trustee pursuant to the pooling and servicing
agreement. Such schedule will include information as to the cut-off date
principal balance of each mortgage loan as well as information with respect to
the loan rate.
The pooling and servicing agreement will require that on the [initial]
Closing Date, with respect to not less than [50]% of the mortgage loans
transferred to the trust fund on that date; not later than [30] days after the
initial Closing Date, with respect to the [remaining] mortgage loans; [and] [not
later than [21] days after the relevant closing date, with respect to the
Additional Home Equity Loans,] [the seller] deliver to the depositor for
delivery to the trustee or, at the depositor's direction, directly to the
trustee, the mortgage notes related to the mortgage loans endorsed in blank and
the Related Documents.
In lieu of delivery of original documentation, [the seller] may deliver
documents which have been imaged optically upon delivery of an opinion of
counsel that such documents are enforceable to the same extent as the originals
and do not impair the enforceability of the transfer to the trust fund of the
mortgage loans, provided the retention of such documents in such format will not
result in a reduction in the then current rating of the Certificates, without
regard to the Policy [or any other third party credit enhancements].
[In addition, with respect to any of the mortgage loans, in lieu of
transferring the related mortgage to the trustee as one of the Related
Documents, the Depositor may at its discretion provide evidence that the related
mortgage is held through the MERS "r" System. In addition, the mortgage for some
or all of the mortgage loans in the trust fund that are not already held in the
MERS "r" System may, at the discretion of the master servicer, in the future be
held through the MERS "r" System. For any mortgage held through the MERS "r"
System, the mortgage is recorded in the name of the Mortgage Electronic
Registration System, Inc. or MERS, as nominee for the owner of the mortgage
loan, and subsequent assignments of the mortgage were, or in the future may be,
at the discretion of the master servicer, registered electronically through the
MERS "r" System. For each of these mortgage loans, MERS serves as a mortgagee of
record on the mortgage solely as a nominee in an administrative capacity on
behalf of the trustee, and does not have any interest in that mortgage loan.]
The pooling and servicing agreement will require the seller to record
assignments of the mortgage loans to the trustee only in those states specified
by the rating agencies where recordation of such assignments is required to
protect the interest of the seller and the trustee in the mortgage loans.
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Within [180] days of the Closing Date with respect to the mortgage loans
acquired on the Closing Date [and within [180] days of the relevant closing date
with respect to Additional Home Equity Loans], the trustee will review the
mortgage loans and the Related Documents and if any mortgage loan or Related
Document is found to be defective in any material respect and such defect is not
cured within 90 days following notification thereof to the seller and the
depositor by the trustee, or within such longer period not to exceed 720 days
after the closing date as provided in the pooling and servicing agreement in the
case of missing documents not returned from the public recording office, the
seller will be obligated to accept the transfer of such mortgage loan from the
trust fund. Upon such transfer, the principal balance of such mortgage loan will
be deducted from the applicable loan group balance, thus reducing the amount of
the Transferor Interest. If the deduction would cause the portion of the
Transferor Interest related to that loan group to become less than the related
Minimum Transferor Interest at such time (a "Transfer Deficiency"), the seller
will be obligated to either substitute an Eligible Substitute mortgage loan
and/or make a deposit into the Collection Account in the amount (the "Transfer
Deposit Amount") equal to the amount by which the portion of the Transferor
Interest related to that loan group would be reduced to less than the related
Minimum Transferor Interest at such time. Any such deduction, substitution or
deposit, will be treated under the pooling and servicing agreement as a payment
in full of such mortgage loan. Any Transfer Deposit Amount will be treated as a
principal collection on the related loan group. Notwithstanding the foregoing,
however, no such transfer shall be considered to have occurred unless and until
all required deposits to the Collection Account are actually made. The
obligation of the seller to accept a transfer of a Defective Mortgage Loan and
to make any required deposits are the sole remedies regarding any defects in the
mortgage loans and Related Documents available to the trustee or the
Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the seller for a defective mortgage loan which must, on the date of such
substitution, have an outstanding principal balance (or in the case of a
substitution of more than one mortgage loan for a Defective Mortgage Loan, an
aggregate principal balance) that is not 10% more or less than the Transfer
Deficiency relating to such Defective Mortgage Loan; have a loan rate not less
than the loan rate of the Defective Mortgage Loan and not more than 1% in excess
of the loan rate of such Defective Mortgage Loan; have a loan rate based on the
same Index with adjustments to such loan rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; have a margin that is
not less than the margin of the Defective Mortgage Loan and not more than 100
basis points higher than the margin for the Defective Mortgage Loan;have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; have a remaining term to maturity not more than six
months earlier and not more than 60 months later than the remaining term to
maturity of the Defective Mortgage Loan; comply with each representation and
warranty as to the mortgage loans set forth in the pooling and servicing
agreement (deemed to be made as of the date of substitution); have an original
combined loan-to-value ratio not greater than that of the Defective Mortgage
Loan; and satisfy certain other conditions specified in the pooling and
servicing agreement.
The seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
trustee with respect to each mortgage loan (e.g., cut-off date principal balance
and loan rate). In addition, the seller will represent and warrant on the
Closing Date that at the time of transfer to the depositor, the seller has
transferred or assigned all of its interest in each mortgage loan and the
Related Documents, free of any lien[, and likewise represent and warrant on each
relevant closing date with respect to each Additional Home Equity Loan]. Upon
discovery of a breach of any such representation and warranty which materially
and adversely affects the interests of the Certificateholders, the Certificate
Insurer [or any other third party credit enhancer] in the related mortgage loan
and Related Documents, the seller will have a period of 90 days after discovery
or notice of the breach to effect a cure. If the breach cannot be cured within
the 90-day period, the seller will be obligated to accept a transfer of the
Defective Mortgage Loan from the trust fund. The same procedure and limitations
that are set forth in the second preceding paragraph for the transfer of
Defective Mortgage Loans will
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apply to the transfer of a mortgage loan that is required to be transferred
because of such breach of a representation or warranty in the pooling and
servicing agreement that materially and adversely affects the interests of the
Certificateholders.
Mortgage loans required to be transferred to the seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the pooling and servicing agreement, the master servicer will
service and administer the mortgage loans as more fully set forth above.
Amendments to Credit Line Agreements
Subject to applicable law and to certain limitations described in the
pooling and servicing agreement, the master servicer may change the terms of the
credit line agreements at any time provided that such changes do not materially
and adversely affect the interest of the Certificateholders, the Certificate
Insurer [or any other third party credit enhancer], and are consistent with
prudent business practice.
In addition, the pooling and servicing agreement permits the master
servicer, within certain limitations described therein, to increase the credit
limit of the related mortgage loan or reduce the margin for such mortgage loan.
Optional Transfers of Mortgage Loans to the Transferor
In order to permit the transferor to remove mortgage loans from [either]
loan group at such times, if any, as the portion of the Transferor Interest
related to that loan group exceeds the level required by the Certificate
Insurer[, any other third party credit enhancer] and the Rating Agencies, on any
Distribution Date the transferor may, but shall not be obligated to, remove on
such distribution date (the "Transfer Date") from the loan group, certain
mortgage loans without notice to the Certificateholders. The transferor is
permitted to designate the mortgage loans to be removed. Mortgage loans so
designated will only be removed upon satisfaction of the following conditions:
. no Rapid Amortization Event (as defined herein) has occurred;
. the portion of the Transferor Interest (allocable to that loan group) as
of such Transfer Date (after giving effect to such removal) exceeds the
Minimum Transferor Interest;
. the transfer of any mortgage loans from [either] loan group on any
Transfer Date during the Managed Amortization Period (as defined herein)
shall not, in the reasonable belief of the transferor, cause a Rapid
Amortization Event or an event which with notice or lapse of time or
both would constitute a Rapid Amortization Event to occur;
. the transferor shall have delivered to the trustee a "Mortgage Loan
Schedule" containing a list of all mortgage loans remaining in the
related loan group after such removal;
. the transferor shall represent and warrant that no selection procedures
which the transferor reasonably believes are adverse to the interests of
the Certificateholders, the Certificate Insurer [or any other third
party credit enhancer] were used by the transferor in selecting such
mortgage loans;
. in connection with each such retransfer of mortgage loans, the Rating
Agencies and the Certificate Insurer shall have been notified of the
proposed transfer and prior to the Transfer Date no Rating Agency has
notified the transferor or the Certificate
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Insurer in writing that such transfer would result in a reduction or
withdrawal of the ratings assigned to either class of Certificates
without regard to the Policy [or any other third party credit
enhancement]; and
. the Transferor shall have delivered to the Trustee and the Certificate
Insurer an officer's certificate confirming the six conditions preceding
this one.
As of any date of determination within any Collection Period, the "Minimum
Transferor Interest" for either loan group is an amount equal to [the lesser of
(a) 5% of the related loan group balance at the end of the immediately preceding
Collection Period and (b) 1.5% of the cut-off date balance of the related loan
group].
Payments on Mortgage Loans; Deposits to Collection Account
The master servicer shall establish and maintain an account (the
"Collection Account") in trust for the Certificateholders, the transferor, the
Certificate Insurer [and any other third party credit enhancer], as their
interests may appear. The Collection Account will be an Eligible Account (as
defined herein). Subject to the investment provision described in the following
paragraphs and except under the circumstances described below, within two
business days of receipt by the master servicer of amounts in respect of the
mortgage loans (excluding amounts representing administrative charges, annual
fees, taxes, assessments, credit insurance charges, insurance proceeds to be
applied to the restoration or repair of a mortgaged property or similar items),
the master servicer will deposit such amounts in the Collection Account.
Notwithstanding the foregoing, such amounts in respect of the mortgage loans may
be remitted to the Collection Account by the master servicer on a monthly basis
not later than the business day immediately preceding the related distribution
date [so long as First Tennessee is the master servicer and the Certificate
Insurer's claims-paying ability is rated "Aaa" by Moody's and "AAA" by Standard
& Poor's.]
Amounts so deposited may be invested in Eligible Investments (as described
in the pooling and servicing agreement) maturing no later than one business day
prior to the next distribution date or on such Distribution Date if approved by
the Rating Agencies, the Certificate Insurer [and any other third party credit
enhancer]. Not later than the [fifth] business day prior to each distribution
date (the "Determination Date"), the master servicer will notify the trustee of
the amount of such deposit to be included in funds available for the related
distribution date.
An "Eligible Account" is an account that is maintained with a depository
institution whose debt obligations throughout the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, one or more
accounts with a depository institution having a minimum long-term unsecured debt
rating of ["BBB" by Standard & Poor's and "Baa3" by Moody's], which accounts are
fully insured by either the Savings Association Insurance Fund ("SAIF") or the
Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
established by such fund, a segregated trust account maintained with the trustee
or an affiliate of the trustee in its fiduciary capacity or otherwise acceptable
to each Rating Agency and the Certificate Insurer as evidenced by a letter from
each Rating Agency and the Certificate Insurer to the trustee, without reduction
or withdrawal of each Rating Agency's then current ratings of the Certificates
without regard to the Policy [or any other third party credit enhancement].
Eligible Investments are specified in the pooling and servicing agreement
and are limited to obligations of the United States or any agency thereof,
provided the timely payment of such obligations are backed by the full faith and
credit of the United States; general obligations of or obligations guaranteed by
any state of the United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates by each Rating Agency without regard to the Policy [or any other
third party credit enhancement]; commercial or finance company paper which is
then receiving the highest commercial or finance company
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paper rating of each Rating Agency, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the Certificates
by any Rating Agency without regard to the Policy [or any other third party
credit enhancement]; certificates of deposit, demand or time deposits, or
bankers" acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term unsecured debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding company, but only
if Moody's is not a Rating Agency) are then rated one of the two highest long-
term and the highest short-term ratings of each Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by any Rating Agency
without regard to the Policy [or any other third party credit enhancement];
demand or time deposits or certificates of deposit issued by any bank or trust
company or savings institution to the extent that such deposits are fully
insured by the FDIC; guaranteed reinvestment agreements issued by any bank,
insurance company or other corporation containing, at the time of the issuance
of such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to the Certificates by any
Rating Agency without regard to the Policy [or any other third party credit
enhancement]; repurchase obligations with respect to any security described in
the first and second bullet points, in either case entered into with a
depository institution or trust company (acting as principal) described in the
fifth bullet point; securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall be the highest
commercial paper rating of Moody's for any such securities), or such lower
rating as will not result in the downgrading or withdrawal of the rating then
assigned to the Certificates by any Rating Agency without regard to the Policy
[or any other third party credit enhancement], as evidenced by a signed writing
delivered by each Rating Agency; interests in any money market fund which at the
date of acquisition of the interests in such fund and throughout the time such
interests are held in such fund has the highest applicable rating by each Rating
Agency or such lower rating as will not result in the downgrading or withdrawal
of the ratings then assigned to the Certificates by each Rating Agency without
regard to the Policy [or any other third party credit enhancement]; short term
investment funds sponsored by any trust company or national banking association
incorporated under the laws of the United States or any state thereof which on
the date of acquisition has been rated by each Rating Agency in their respective
highest applicable rating category or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the Certificates
by each Rating Agency without regard to the Policy [or any other third party
credit enhancement]; and such other investments having a specified stated
maturity and bearing interest or sold at a discount acceptable to each Rating
Agency as will not result in the downgrading or withdrawal of the rating then
assigned to the Certificates by any Rating Agency without regard to the Policy
[or any other third party credit enhancement], as evidenced by a signed writing
delivered by each Rating Agency; provided that no such instrument shall be an
Eligible Investment if such instrument evidences the right to receive interest
only payments with respect to the obligations underlying such instrument or both
principal and interest payments derived from obligations underlying such
instrument and the interest and principal payments with respect to such
instrument provide a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations; and provided, further, that no
instrument described hereunder may be purchased at a price greater than par if
such instrument may be prepaid or called at a price less than its purchase price
prior to its stated maturity.
Allocations and Collections
All collections on the mortgage loans will generally be allocated in
accordance with the credit line agreements between amounts collected in respect
of interest and amounts collected in
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respect of principal. As to any distribution date, "Interest Collections" will
be determined on a loan group basis and will be equal to the amounts collected
during the related Collection Period (as defined herein), including without
limitation such portion of Net Liquidation Proceeds, allocated to interest
pursuant to the terms of the credit line agreements less Servicing Fees for the
related Collection Period and amounts payable to the master servicer pursuant to
the pooling and servicing agreement as reimbursement of optional advances of the
interest component of any delinquent monthly payments on the mortgage loans.
As to any distribution date, "Principal Collections" will be determined on
a loan group basis and will be equal to the sum of the amounts collected during
the related Collection Period, including without limitation such portion of Net
Liquidation Proceeds, allocated to principal pursuant to the terms of the credit
line agreements and any Transfer Deposit Amounts.
"Net Liquidation Proceeds" with respect to a mortgage loan are equal to the
liquidation proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the principal balance of the
mortgage loan plus accrued and unpaid interest thereon to the end of the
Collection Period during which such mortgage loan became a Liquidated Mortgage
Loan. "Liquidation Proceeds" are the proceeds (excluding any amounts drawn on
the Policy) received in connection with the liquidation of any mortgage loan,
whether through trustee's sale, foreclosure sale or otherwise.
With respect to any distribution date and loan group, the portion of
interest collections allocable to the related class of Certificates ("Investor
Interest Collections") will equal the product of (a) Interest Collections for
such Distribution Date and loan group and (b) the Investor Floating Allocation
Percentage for such loan group. With respect to any distribution date and loan
group, the "Investor Floating Allocation Percentage" is the percentage
equivalent of a fraction determined by dividing the Invested Amount at the close
of business on the preceding distribution date (or the Closing Date in the case
of the first distribution date) by the loan group balance for such loan group at
the beginning of the related Collection Period. The remaining amount of interest
collections will be allocated to the portion of the Transferor Interest related
to that loan group.
With respect to the mortgage loans in each loan group, principal
collections will be allocated between the Certificateholders and the transferor
("Investor Principal Collections" and "Transferor Principal Collections,"
respectively) as described herein.
The trustee will apply any amounts drawn under the Policy as provided in
the pooling and servicing agreement.
With respect to any date and loan group, the "loan group balance" will be
equal to the aggregate of the principal balances of all mortgage loans in that
loan group as of such date. The principal balance of a mortgage loan (other than
a Liquidated Mortgage Loan) on any day is equal to its cut-off date principal
balance, plus (1) any Additional Balances in respect of such mortgage loan minus
(2) all collections credited against the principal balance of such mortgage loan
in accordance with the related credit line agreement prior to such day. The
principal balance of a Liquidated Mortgage Loan after final recovery of related
liquidation proceeds shall be zero.
Distributions on the Certificates
Beginning with the first distribution date (which will occur on [ ]),
distributions on the Certificates will be made by the trustee or the Paying
Agent on each distribution date to the persons in whose names such Certificates
are registered at the close of business on the day prior to each distribution
date or, if the Certificates are no longer book-entry certificates, at the close
of business on the record date (which is the [last] day of the month preceding
such distribution date). The term "distribution date" means the [fifteenth] day
of each month or, if such day is not a business day, then the first business day
thereafter. Distributions on the Class [ ] Certificates
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will be made by check or money order mailed (or upon the request of a
Certificateholder owning Certificates having denominations aggregating at least
$[1,000,000], by wire transfer or as otherwise agreed by such Certificateholder
and the trustee) to the address of the person entitled thereto (which, in the
case of book-entry certificates, will be DTC or its nominee) as it appears on
the certificate register in amounts calculated as described herein on the
determination date. However, the final distribution in respect of the
Certificates will be made only upon presentation and surrender thereof at the
office or the agency of the trustee specified in the notice to
Certificateholders of such final distribution. For purposes of the pooling and
servicing agreement, a "business day" is any day other than (1) a Saturday or
Sunday or (2) a day on which banking institutions in the states of New York,
California or Illinois are required or authorized by law to be closed.
Application of Interest Collections. On each distribution date, the trustee
or the Paying Agent will apply the Investor Interest Collections for loan group
[ ] in the following manner and order of priority:
(1) as payment to the trustee for the related fee for services rendered
pursuant to the pooling and servicing agreement;
(2) as payment to the Certificate Insurer for the portion of the premium
for the Policy related to loan group [ ];
(3) as payment to Certificateholders for the interest accrued at the
related certificate rate and any overdue accrued interest (with
interest thereon to the extent permitted by applicable law) on the
Certificate Principal Balance of the Certificates;
(4) to pay to Certificateholders the related Investor Loss Amount for such
Distribution Date;
(5) as payment to Certificateholders for any related Investor Loss Amount
for a previous distribution date that was not previously (a) funded by
related Investor Interest Collections, (b) absorbed by a reduction in
the related portion of the Transferor Interest, (c) funded by related
Subordinated Transferor Collections as described below[, (d)
previously funded by the Reserve Fund, (e) previously funded pursuant
to clause (9) below] or (f) funded by draws on the Policy;
(6) to reimburse the Certificate Insurer for prior draws made from the
Policy (with interest thereon);
(7) to pay to Certificateholders principal on the Certificates until the
related portion of the Transferor Interest equals the related Required
Transferor Subordinated Amount (such amount so paid, the "Accelerated
Principal Distribution Amount");
(8) in respect of any other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement;
(9) [to pay to the other class of certificates any deficiency in items
(3), (4) and (5) above, after taking into account the allocation of
100% of such other Class Investor Interest Collections relating to
such other Class on such distribution date (the amount of one Class
remaining Investor Interest Collections which is allocated with
respect to the other Class on such distribution date is a "Crossover
Amount");]
(10) [to the Reserve Fund for application in accordance with the pooling
and servicing agreement, to the extent that the sum of the portion of
the Transferor's Interest for [both] loan groups as of such
distribution date is less than the sum of the Required
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Transferor Subordinated Amounts for [both] loan groups as of such
distribution date;]
(11) as payment to the master servicer for certain amounts that may be
required to be paid to the master servicer pursuant to the pooling and
servicing agreement;
(12) to pay to the Certificateholders any Basis Risk Carryforward with
respect to such Certificates; and
(13) to pay to the transferor to the extent permitted as described herein.
Payments to Certificateholders pursuant to clause (3) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(4), (5) and (7) will be principal payments on the Certificates and will
therefore reduce the related Certificate Principal Balance; however, payments
pursuant to clause (7) will not reduce the related Invested Amount. The
Accelerated Principal Distribution Amount for a Class is not guaranteed by the
Policy.
[On each distribution date, if Investor Interest Collections with respect
to a Class of Certificates, plus any Crossover Amount available from the other
Class of Certificates, are insufficient to pay the amounts specified in items
(3), (4) and (5) above with respect to a Class of Certificates, the amount of
such insufficiency shall be withdrawn from the Reserve Fund to the extent of
funds on deposit therein.]
[The amount on deposit in the Reserve Fund will not exceed the excess of
(x) the sum of the Required Transferor Subordinated Amounts with respect to
[both] loan groups over (y) the sum of the portion of the Transferor's Interest
with respect to each loan group. Amounts in the Reserve Fund may only be
withdrawn therefrom and applied in accordance with the terms of the pooling and
servicing agreement.]
To the extent that Investor Interest Collections from a loan group are
applied to pay the interest on the related class of Certificates, Investor
Interest Collections for that loan group may be insufficient to cover related
Investor Loss Amounts. If such insufficiency exists after the related Available
Transferor Subordinated Amount[, the Crossover Amount and the Reserve Fund]
[have each been] [has] reduced to zero and results in the related Certificate
Principal Balance exceeding the related Invested Amount, a draw will be made on
the Policy in accordance with the terms of the Policy.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered principal balance thereof at the end of the Collection
Period in which such mortgage loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection therewith. The
"Investor Loss Amount" for a loan group shall be the product of the Investor
Floating Allocation Percentage for that loan group and the Liquidation Loss
Amount for that loan group for such distribution date.
A "Liquidated Mortgage Loan" means, as to any distribution date, any
mortgage loan in respect of which the master servicer has determined, based on
the servicing procedures specified in the pooling and servicing agreement, as of
the end of the preceding Collection Period, that all Liquidation Proceeds which
it expects to recover with respect to the disposition of the mortgage loan or
the related mortgaged property have been recovered. The Investor Loss Amount for
a loan group will be allocated to the Certificates related to that loan group.
As to any distribution date, the "Collection Period" is the calendar month
preceding each distribution date (or, in the case of the first Collection
Period, the period beginning on the cut-off date and ending on the last day of
[ ], 200[ ]).
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Interest will be distributed on each distribution date at the applicable
certificate rate for the related Interest Period (as defined below). The
"certificate rate" for the Class [ ] Certificates for a Distribution Date will
generally equal a per annum rate equal to the least of:
(a) the sum of the London Interbank offered rate for one-month United
States dollar deposits ("LIBOR"), calculated as specified below, as of
the second LIBOR Business Day prior to the first day of such Interest
Period (or as of two LIBOR Business Days prior to the Closing Date, in
the case of the first distribution date) plus [ ]%;
(b) a per annum rate equal to the weighted average of the loan rates of
the mortgage loans in loan group [ ] net of the Servicing Fee Rate,
the rate at which the fee payable to the trustee is calculated, the
rate at which the premium payable to the Certificate Insurer is
calculated and, commencing with the distribution date in [ ], [ ]%
per annum, weighted on the basis of the daily average balance of each
mortgage loan included in loan group [ ], during the related billing
cycle prior to the Collection Period relating to such distribution
date, and
(c) [ ]%.
However, on any distribution date for which the certificate rate for a class of
certificates has been determined pursuant to clause (b) of the preceding
sentence, the excess of the amount of interest that would have accrued on those
certificates during the related Interest Period had such amount been determined
pursuant to clause (a) of the definition of the preceding sentence (but not at a
rate in excess of [ ]% per annum) over the interest actually accrued on those
certificates during such Interest Period (such excess is referred to as "Basis
Risk Carryforward") will accrue interest at the certificate rate calculated
pursuant to clause (a), but not to exceed clause (c) (as adjusted from time to
time) and will be paid on subsequent distribution dates to the extent funds are
available therefor.
Interest on the Certificates in respect of any distribution date will
accrue on the Certificate Principal Balance from the preceding distribution date
(or in the case of the first distribution date, from the Closing Date) through
the day preceding such distribution date (each such period, an "Interest
Period") on the basis of the actual number of days in the Interest Period and a
360-day year.
Interest payments on the Certificates will be funded from Investor Interest
Collections, Subordinated Transferor Collections, [the Reserve Fund,] and, if
necessary, from draws on the Policy.
Calculation of the LIBOR Rate. On the second LIBOR business day immediately
preceding each distribution date, the trustee shall determine LIBOR for the
Interest Period commencing on such distribution date. LIBOR for the first
Interest Period will be determined on the second LIBOR business day preceding
the Closing Date. LIBOR will equal the rate for United States dollar deposits
for one month which appears on the Telerate Screen Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR business day prior to the first day of such
Interest Period. "Telerate Screen Page 3750" means the display designated as
page 3750 on the Bridge Telerate Service (or such other page as may replace page
3750 on that service for the purpose of displaying London interbank offered
rates of major banks). If such rate does not appear on such page (or such other
page as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
selected by the depositor after consultation with the trustee), the rate will be
the Reference Bank Rate. The "Reference Bank Rate" will be determined on the
basis of the rates at which deposits in United States dollars are offered by the
reference banks (which shall be three major banks that are engaged in
transactions in the London interbank market, selected by the depositor after
consultation with the trustee) as of 11:00 A.M., London time, on the day that is
two LIBOR
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business days prior to the first day of such Interest Period to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the principal amount of the Certificates then outstanding. The trustee
will request the principal London office of each of the reference banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate will be the arithmetic mean of the quotations. If on such date fewer
than two quotations are provided as requested, the rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the depositor after consultation with the trustee, as of 11:00 A.M., New York
City time, on such date for loans in United States dollars to leading European
banks for a period of one month in amounts approximately equal to the principal
amount of the Certificates then outstanding. If no such quotations can be
obtained, the rate will be LIBOR for the preceding Interest Period. "LIBOR
business day" means any day other than (a) a Saturday or a Sunday or (b) a day
on which banking institutions in the State of New York or in the city of London,
England are required or authorized by law to be closed.
Transferor Collections. Collections allocable to the Transferor Interest in
respect of a loan group will be distributed to the transferor only to the extent
that such distribution will not reduce the amount of the portion of the
Transferor Interest relating to that loan group as of the related distribution
date below the applicable Minimum Transferor Interest. Amounts not distributed
to the transferor because of such limitations will be retained in the Collection
Account until the portion of the Transferor Interest relating to each loan group
exceeds the applicable Minimum Transferor Interest, at which time such excess
shall be released to the transferor. If any such amounts are still retained in
the Collection Account upon the commencement of the Rapid Amortization Period,
such amounts will be paid to the Certificateholders of the related class of
certificates as a reduction of the related Certificate Principal Balance.
Distributions of Principal Collections. For each loan group, the period
beginning on the Closing Date and, unless a Rapid Amortization Event shall have
earlier occurred, through and including the Distribution Date in [ ] (the
"Managed Amortization Period"), the amount of principal collections payable to
Certificateholders as of each distribution date during the Managed Amortization
Period will equal, to the extent funds are available therefor, the Scheduled
Principal Collections Distribution Amount for such loan group and distribution
date. On any distribution date during the Managed Amortization Period, the
"Scheduled Principal Collections Distribution Amount" for a loan group shall
equal the lesser of the applicable Maximum Principal Payment and the applicable
Alternative Principal Payment. With respect to any loan group and distribution
date, the "Maximum Principal Payment" will equal the product of the Investor
Fixed Allocation Percentage for that loan group and principal collections for
such loan group and distribution date. With respect to any loan group and
distribution date, the "Alternative Principal Payment" for that loan group will
equal the amount, but not less than zero, of Principal Collections for such loan
group and distribution date less the aggregate of Additional Balances created on
the mortgage loans in that loan group during the related Collection Period.
Beginning with the first distribution date following the end of the Managed
Amortization Period (such period, the "Rapid Amortization Period"), the amount
of principal collections payable to Certificateholders on each distribution date
will be equal to the Maximum Principal Payment for that loan group.
If on any distribution date the Required Transferor Subordinated Amount for
a loan group is reduced below the then existing Available Transferor
Subordinated Amount for that loan group, the amount of principal collections
from the mortgage loans in that loan group payable to Certificateholders on such
distribution date will be correspondingly reduced by the amount of such
reduction.
The amount of Principal Collections for a loan group to be distributed to
Certificateholders on the first Distribution Date will reflect Principal
Collections and Additional Balances from the mortgage loans in that loan group
during the first Collection Period which is the period beginning on the cut-off
date and ending on the last day of [ ].
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Distributions of Principal Collections from the mortgage loans in a loan
group based upon the related Investor Fixed Allocation Percentage may result in
distributions of principal to the related Certificateholders in amounts that are
greater relative to the declining balance of that loan group than would be the
case if the related Investor Floating Allocation Percentage were used to
determine the percentage of principal collections distributed in respect of such
Invested Amount. Principal Collections from the mortgage loans in a loan group
not allocated to the Certificateholders will be allocated to the portion of the
Transferor Interest related to that loan group. The aggregate distributions of
principal to the Certificateholders will not exceed the Original Certificate
Principal Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the distribution date in [ ],
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the trustee, together
with any successor thereto in such capacity (the "Paying Agent"). The Paying
Agent shall have the revocable power to withdraw funds from the Collection
Account for the purpose of making distributions to the Certificateholders.
Limited Subordination of Transferor Interest
If Investor Interest Collections[, Crossover Amounts and amounts on deposit
in the Reserve Fund] on any distribution date are insufficient to pay (i)
accrued interest due and any overdue accrued interest (with interest thereon to
the extent permitted by applicable law) on the related Certificates and (ii) the
applicable Investor Loss Amount on such distribution date (such insufficiency
being the "Required Amount"), a portion of the Interest Collections from the
mortgage loans in that loan group and principal collections allocable to the
portion of the Transferor Interest related to that loan group (but not in excess
of the applicable Available Transferor Subordinated Amount) (the "Subordinated
Transferor Collections") will be applied to cover the Required Amount for that
loan group. The portion of the Required Amount for a loan group in respect of
clause (ii) above not covered by such Subordinated Transferor Collections will
be reallocated to the portion of the Transferor Interest related to that loan
group, thereby reducing the Transferor Interest (up to the applicable remaining
Available Transferor Subordinated Amount and not in excess of the Investor Loss
Amounts for that loan group). The portion of the Required Amount not covered by
the application of funds pursuant to the provisions of the preceeding sentence
may then be satisfied by amounts available from the remaining Available
Transferor Subordinated Amount from the other loan group. If such Investor
Interest Collections for a loan group[, Crossover Amounts, amounts on deposit in
the Reserve Fund] and the amount of Subordinated Transferor Collections which
have been so applied to cover the applicable Required Amount are together
insufficient to pay the amounts set forth in item (i) of the definition of
Required Amount, then a draw will be made on the Policy to cover the amount of
such shortfall. In addition, if on any distribution date on which the Available
Transferor Subordinated Amount for a loan group is reduced to zero the
Certificate Principal Balance for that loan group exceeds the applicable
Invested Amount (after giving effect to all allocations and distributions with
respect to principal to be made on the Certificates on such distribution date),
a draw will be made on the Policy in the amount of such excess for such
distribution date. See " -- The Policy."
With respect to any distribution date and loan group, the "Available
Transferor Subordinated Amount" shall equal the lesser of the portion of the
Transferor Interest for that loan group and the related Required Transferor
Subordinated Amount for such distribution date.
Rapid Amortization Events
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As described above, the Managed Amortization Period will continue through
and including the distribution date in [ ], unless a Rapid Amortization Event
occurs prior to such date. "Rapid Amortization Event" refers to any of the
following events:
(a) the failure on the part of the seller to make a payment or deposit
required under the pooling and servicing agreement within three
business days after the date such payment or deposit is required to be
made, to record assignments of mortgage loans when required pursuant
to the pooling and servicing agreement or to observe or perform in any
material respect any other covenants or agreements of the seller set
forth in the pooling and servicing agreement, which failure materially
and adversely affects the interests of the Certificateholders, the
Certificate Insurer [or any other third party credit enhancer] and,
with certain exceptions, continues unremedied for a period of 60 days
after written notice;
(b) any representation or warranty made by the seller or the depositor in
the pooling and servicing agreement proves to have been incorrect in
any material respect when made and continues to be incorrect in any
material respect for a period of 60 days after written notice and as a
result of which the interests of the Certificateholders, the
Certificate Insurer [or any other third party credit enhancer] are
materially and adversely affected; provided, however, that a Rapid
Amortization Event shall not be deemed to occur if the seller has
purchased or made a substitution for the related mortgage loan or
mortgage loans if applicable during such period (or within an
additional 60 days with the consent of the trustee) in accordance with
the provisions of the pooling and servicing agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the transferor;
(d) the trust fund becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended; or
(e) the aggregate of all draws under the Policy [or amounts paid pursuant
to third party credit enhancement for loan group [ ]] incurred during
the Managed Amortization Period exceeds [1]% of the Original Invested
Amount.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace period, if any, described in such clauses, either the trustee or
Certificateholders holding Certificates evidencing more than 51% of the
aggregate principal amount of the Certificates, the Certificate Insurer (so long
as there is no default by the Certificate Insurer in the performance of its
obligations under the Policy) [or any other third party credit enhancer], by
written notice to the transferor, the depositor and the master servicer (and to
the trustee, if given by the Certificate Insurer, [any other third party credit
enhancer] or the Certificateholders) declare that a Rapid Amortization Event has
occurred as of the date of such notice. In the case of any event described in
clause (c), (d) or (e), a Rapid Amortization Event will be deemed to have
occurred without any notice or other action on the part of the trustee, the
Certificate Insurer or the Certificateholders immediately upon the occurrence of
such event.
Notwithstanding the foregoing, if a conservator, receiver or trustee-in-
bankruptcy is appointed for the transferor and no Rapid Amortization Event
exists other than such conservatorship, receivership or insolvency of the
transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period.
The Policy
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[On or before the Closing Date, the Policy will be issued by the
Certificate Insurer pursuant to the provisions of the pooling and servicing
agreement and the Insurance and Indemnity Agreement (the "Insurance Agreement")
to be dated as of the Closing Date, among the seller, the depositor, the master
servicer, the trustee and the Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment on each
distribution date to the trustee for the benefit of the Certificateholders of
each class of Certificates the full and complete payment of Insured Amounts with
respect to the related Certificates for such distribution date. An "Insured
Amount" shall equal with respect to each class of Certificates as of any
distribution date any shortfall in amounts available in the Collection Account
to pay (a) (i) the Guaranteed Principal Distribution Amount (as defined herein)
with respect to the related Certificates for such distribution date and (ii)
accrued and unpaid interest due on the related Certificates (together, the
"Guaranteed Distributions"), with such Guaranteed Distributions having been
calculated in accordance with the original terms of the Certificates or the
pooling and servicing agreement after giving effect to amendments or
modifications to which the Certificate Insurer has given its prior written
consent and (b) any Preference Amount (as defined herein) which occurs prior to
the related determination date. The effect of the Policy is to guarantee the
timely payment of interest on, and the ultimate payment of the principal amount
of, all of the Certificates. The Policy does not cover any Basis Risk Carry
forward.
The "Guaranteed Principal Distribution Amount" for any Class of
Certificates and distribution date (other than the distribution date in [ ] on
which the sum of the Available Transferor Subordinated Amounts for [both] loan
groups and the Reserve Fund has been reduced to or equals zero, shall be the
amount, if any, by which the Certificate Principal Balance of such Class of
Certificates (after giving effect to all other amounts distributable and
allocable to principal on the Certificates) exceeds the related Invested Amount
as of such distribution date (after giving effect to all other amounts
distributable and allocable to principal on the Certificates for such
distribution date) and on the distribution date in [ ] (after giving effect to
all other amounts distributable and allocable to principal on such distribution
date) any amount necessary to pay the outstanding Certificate Principal Balance.
A "Preference Amount" means any amount previously distributed to a
Certificateholder that is recoverable and recovered as a voidable preference by
a trustee in bankruptcy pursuant to the United States Bankruptcy Code, as
amended from time to time, in accordance with a final nonappealable order of a
court having competent jurisdiction.
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment (and any other required documentation) on the later to occur of (i)
12:00 noon, New York City time, on the second Business Day following Receipt of
such notice for payment and (ii) 12:00 noon, New York City time, on the relevant
Distribution Date.
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Certificate Insurer prior to 12:00 noon, New York City time, on
a business day; delivery either on a day that is not a business day or after
12:00 noon, New York City time, shall be deemed to be Received on the next
succeeding business day. If any notice or certificate given under the Policy by
the trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer shall promptly so advise the trustee and the trustee may submit an
amended notice.
Under the Policy, "business day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the states of New York,
California or Illinois or the city in which the corporate trust office of the
trustee or the Certificate Insurer is located, are authorized or obligated by
law or executive order to be closed.
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The Certificate Insurer's obligations under the Policy in respect of
Insured Amounts shall be discharged to the extent funds are transferred to the
trustee as provided in the Policy, whether or not such funds are properly
applied by the trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer pays Insured Amounts, either directly or indirectly (as by paying
through the Trustee), to the Certificateholders, the Certificate Insurer will be
subrogated to the rights of the Certificateholders, as applicable, with respect
to such Insured Amounts and shall be deemed to the extent of the payments so
made to be a registered Certificateholder for purposes of payment.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the seller. The Policy by its terms may not be cancelled or revoked. The Policy
is governed by the laws of the State of New York.
Insured Amounts shall be paid only at the time set forth in the Policy and
no accelerated Insured Amounts shall be paid regardless of any acceleration of
the Certificates, unless such acceleration is at the sole option of the
Certificate Insurer. The Policy does not cover shortfalls, if any, attributable
to the liability of the trust fund or the trustee for withholding taxes, if any
(including interest and penalties in respect of any such liability).
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the pooling and servicing
agreement as of the date of execution of the Policy, without giving effect to
any subsequent amendment or modification to the pooling and servicing agreement
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
Pursuant to the terms of the pooling and servicing agreement, unless a
Certificate Insurer default exists, the Certificate Insurer shall be deemed to
be the Holder of the Certificates for certain purposes (other than with respect
to payment on the Certificates), will be entitled to exercise all rights of the
Certificateholders thereunder without the consent of such Holders, and the
Holders of the Certificates may exercise such rights only with the prior written
consent of the Certificate Insurer. In addition, the Certificate Insurer will
have certain additional rights as a third party beneficiary to the pooling and
servicing agreement.]
The Certificate Insurer
The following information set forth in this section has been provided by
[Certificate Insurer] (the "Certificate Insurer"). Accordingly, none of the
depositor, the seller and master servicer[, any third party credit enhancer] or
the underwriter makes any representation as to the accuracy and completeness of
such information.
[Description of Certificate Insurer, including Financial Information]
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the master
servicer will forward to the trustee for mailing to such Certificateholder a
statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for each loan group for
the preceding Collection Period;
(ii) the amount being distributed to each class of certificates;
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(iii) the amount of interest included in such distribution and the related
certificate rate for each class of certificates;
(iv) the amount, if any, of overdue accrued interest for a class of
certificates included in such distribution (and the amount of
interest thereon to the extent permitted by applicable law);
(v) the amount, if any, of the remaining overdue accrued interest for a
class of certificates after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Investor Loss
Amounts for a class of certificates included in such distribution,
(viii) the amount, if any, of Basis Risk Carryforward for a class of
certificates paid and the amount, if any, of Basis Risk Carryforward
accrued;
(ix) the amount, if any, of the aggregate unreimbursed Investor Loss
Amounts for a class of certificates after giving effect to such
distribution;
(x) the Servicing Fee for such distribution date;
(xi) [for each class of certificates:] the Invested Amount, the
Certificate Principal Balance and the Pool Factor, each after giving
effect to such distribution;
(xii) the loan group balance of each loan group as of the end of the
preceding Collection Period;
(xiii) the number and aggregate principal balances of the mortgage loans in
each loan group as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Collection Period;
(xiv) the book value of any real estate in each loan group which is
acquired by the trust fund through foreclosure or grant of deed in
lieu of foreclosure;
(xv) the amount of any draws on the Policy [or payments under third party
credit enhancement for loan group [ ]];
(xvi) [the amount on deposit in the Reserve Fund on the preceding
distribution date, after giving effect to all distributions made on
that date, the amount withdrawn from the Reserve Fund with respect
to this distribution date, and the amount remaining on deposit in
the Reserve Fund;] and
(xvii) with respect to the first and second distribution dates, the number
and aggregate balance of any mortgage loans in [either] loan group
not delivered to the trustee within 30 days after the Closing Date.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per $[1,000] increment of Certificates.
Within 60 days after the end of each calendar year commencing in 200[_],
the master servicer will be required to forward to the Trustee a statement
containing the information set forth in clauses (iii) and (vi) above aggregated
for such calendar year.
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Collection and Other Servicing Procedures on Mortgage Loans
The master servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with the pooling and
servicing agreement, follow such collection procedures as it follows from time
to time with respect to the home equity loans in its servicing portfolio
comparable to the mortgage loans. Consistent with the above, the master servicer
may in its discretion waive any late payment charge or any assumption or other
fee or charge that may be collected in the ordinary course of servicing the
mortgage loans.
With respect to the mortgage loans, the master servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the master servicer's
policies with respect to the mortgage loans it owns or services. In accordance
with the terms of the pooling and servicing agreement, the master servicer may
consent under certain circumstances to the placing of a subsequent senior lien
in respect of a mortgage loan.
Hazard Insurance
The pooling and servicing agreement provides that the master servicer
maintain certain hazard insurance on the mortgaged properties relating to the
mortgage loans. While the terms of the related credit line agreements generally
require borrowers to maintain certain hazard insurance, the master servicer will
not monitor the maintenance of such insurance.
The pooling and servicing agreement requires the master servicer to
maintain for any mortgaged property relating to a mortgage loan acquired upon
foreclosure of a mortgage loan, or by deed in lieu of such foreclosure, hazard
insurance with extended coverage in an amount equal to the lesser of the maximum
insurable value of such mortgaged property or the outstanding balance of such
mortgage loan plus the outstanding balance on any mortgage loan senior to such
mortgage loan at the time of foreclosure or deed in lieu of foreclosure, plus
accrued interest and the master servicer's good faith estimate of the related
liquidation expenses to be incurred in connection therewith.
The pooling and servicing agreement provides that the master servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on such mortgaged properties. If such
blanket policy contains a deductible clause, the master servicer will be
obligated to deposit in the Collection Account the sums which would have been
deposited therein but for such clause. The master servicer will satisfy these
requirements by maintaining a blanket policy. As set forth above, all amounts
collected by the master servicer (net of any reimbursements to the master
servicer) under any hazard policy (except for amounts to be applied to the
restoration or repair of the mortgaged property) will ultimately be deposited in
the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, 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 or an
exact description of the insurance policies relating to the mortgaged
properties.
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Realization upon Defaulted Mortgage Loans
The master servicer will foreclose upon or otherwise comparably convert to
ownership mortgaged properties securing such of the mortgage loans as come into
default when, in accordance with applicable servicing procedures under the
pooling and servicing agreement, no satisfactory arrangements can be made for
the collection of delinquent payments. In connection with such foreclosure or
other conversion, the master servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general mortgage servicing
activities, provided the master servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase net
liquidation proceeds. The master servicer will be reimbursed out of liquidation
proceeds and, if necessary, from other collections on or in respect of the
mortgage loans, for advances of its own funds as liquidation expenses before any
net liquidation proceeds are distributed to Certificateholders or the
transferor.
Optional Purchase of Defaulted Loan
The master servicer may, at its option, purchase from the trust fund any
mortgage loan which is delinquent in payment for 91 days or more. Any such
purchase shall be at a price equal to 100% of the principal balance of such
mortgage loan plus accrued interest thereon at the applicable loan rate from the
date through which interest was last paid by the related mortgagor to the first
day of the month in which such amount is to be distributed to
Certificateholders.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, the master servicer will receive
from interest received on the mortgage loans a portion of such interest
collections as a monthly Servicing Fee in the amount equal to [ ]% per annum
("Servicing Fee Rate") on the aggregate principal balances of the mortgage loans
as of the first day of the related Collection Period. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the master servicer as additional servicing
compensation.
The master servicer will pay certain ongoing expenses associated with the
trust fund and incurred by it in connection with its responsibilities under the
pooling and servicing agreement. In addition, the master servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
defaulted mortgage loans and in connection with the restoration of mortgaged
properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related net liquidation proceeds and, if
necessary, other collections on or in respect of the mortgage loans.
Evidence as to Compliance
The pooling and servicing agreement provides for delivery on or before [May
31] in each year, beginning [May 31, [200[_]], to the trustee of an annual
statement signed by an officer of the master servicer to the effect that the
master servicer has fulfilled its material obligations under the pooling and
servicing agreement throughout the preceding fiscal year, except as specified in
such statement.
On or before [May 31] of each year, beginning [May 31, [200[_]], the master
servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the master
servicer or the transferor) to the trustee, the Certificate Insurer[, any other
third party credit enhancer] and the Rating Agencies to the effect that such
firm has examined certain documents and the records relating to servicing of the
mortgage loans under the pooling and servicing agreement and that, on the basis
of such examination, such firm believes that such servicing was conducted in
compliance with the
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pooling and servicing agreement except for (a) such exceptions as such firm
believes to be immaterial and (b) such other exceptions as shall be set forth in
such report.
Certain Matters Regarding the Master Servicer and the Transferor
The pooling and servicing agreement provides that the master servicer may
not resign from its obligations and duties thereunder, except in connection with
a permitted transfer of servicing, unless
(a) such duties and obligations are no longer permissible under applicable
law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it or
its affiliate or
(b) upon the satisfaction of the following conditions:
. the master servicer has proposed a successor servicer to the
trustee in writing and such proposed successor servicer is
reasonably acceptable to the trustee;
. the Rating Agencies have confirmed to the trustee that the
appointment of such proposed successor servicer as the master
servicer will not result in the reduction or withdrawal of the then
current rating of the certificates without regard to the Policy [or
any other third party credit enhancement]; and
. such proposed successor servicer is reasonably acceptable to the
Certificate Insurer.
No such resignation will become effective until the trustee or a successor
servicer has assumed the master servicer's obligations and duties under the
pooling and servicing agreement.
The master servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the master servicer. Notwithstanding any such
arrangement, the master servicer will remain liable and obligated to the trustee
and the Certificateholders for the master servicer's duties and obligations
under the pooling and servicing agreement, without any diminution of such duties
and obligations and as if the master servicer itself were performing such duties
and obligations.
The pooling and servicing agreement provides that the master servicer will
indemnify the trust fund and the trustee from and against any loss, liability,
expense, damage or injury suffered or sustained as a result of the master
servicer's actions or omissions in connection with the servicing and
administration of the mortgage loans which are not in accordance with the
provisions of the pooling and servicing agreement. Under the pooling and
servicing agreement, the transferor will indemnify an injured party for the
entire amount of any losses, claims, damages or liabilities arising out of or
based on the pooling and servicing agreement to the extent described therein
(other than losses resulting from defaults under the mortgage loans). In the
event of an Event of Servicing Termination (as defined below) resulting in the
assumption of servicing obligations by a successor master servicer, the
successor master servicer will indemnify the transferor for any losses, claims,
damages and liabilities of the transferor as described in this paragraph arising
from the successor master servicer's actions or omissions. The pooling and
servicing agreement provides that neither the depositor, the transferor nor the
master servicer nor their directors, officers, employees or agents will be under
any other liability to the trust fund, the trustee, the Certificateholders or
any other person for any action taken or for refraining from taking any action
pursuant to the pooling and servicing agreement. However, neither the depositor,
the transferor nor the master servicer will be protected against any liability
which would otherwise be imposed by reason of willful misconduct, bad faith or
gross negligence of the
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depositor, the transferor or the master servicer in the performance of its
duties under the pooling and servicing agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the pooling and servicing
agreement provides that the master servicer will not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the pooling and servicing agreement and which
in its opinion may expose it to any expense or liability. The master servicer
may, in its sole discretion, undertake any such legal action which it may deem
necessary or desirable with respect to the pooling and servicing agreement and
the rights and duties of the parties thereto and the interest of the
Certificateholders thereunder.
Any corporation into which the master servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the master servicer shall be a party, or any corporation
succeeding to the business of the master servicer shall be the successor of the
master servicer under the pooling and servicing agreement, without the execution
or filing of any paper or any further act on the part of any of the parties
thereto, anything in the pooling and servicing agreement to the contrary
notwithstanding.
Events of Servicing Termination
"Events of Servicing Termination" will consist of:
(i) any failure by the master servicer to deposit in the Collection
Account any deposit required to be made under the pooling and
servicing agreement, which failure continues unremedied for five
business days (or, if the master servicer is permitted to remit
collections in respect of the mortgage loans to the Collection
Account on a monthly basis as described under " -- Payments on
Mortgage Loans; Deposits to Collection Account," three business days)
after the giving of written notice of such failure to the master
servicer by the trustee, or to the master servicer and the trustee by
the Certificate Insurer or Certificateholders evidencing an aggregate
undivided interest in the Trust Fund of at least 25% of the aggregate
Certificate Principal Balance;
(ii) any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Certificates or the pooling and servicing agreement which, in each
case, materially and adversely affects the interests of the
Certificateholders[, any other third party credit enhancer] or the
Certificate Insurer and continues unremedied for 60 days after the
giving of written notice of such failure to the master servicer by
the trustee, or to the master servicer and the trustee by the
Certificate Insurer[, any other third party credit enhancer] or
Certificateholders evidencing an aggregate, undivided interest in the
trust fund of at least 25% of the aggregate Certificate Principal
Balance; or
(iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the master
servicer and certain actions by the master servicer indicating
insolvency, reorganization or inability to pay its obligations. Under
certain other circumstances, the Certificate Insurer or the holders
of Certificates evidencing an aggregate, undivided interest in the
trust fund of at least 51% of the aggregate Certificate Principal
Balance may deliver written notice to the master servicer terminating
all the rights and obligations of the master servicer under the
pooling and servicing agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of five or more business days or
referred to under clause (ii) above for a period of 60 or more days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the master servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon
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the occurrence of any such event the master servicer shall not be relieved from
using its best efforts to perform its obligations in a timely manner in
accordance with the terms of the pooling and servicing agreement and the master
servicer shall provide the trustee, the depositor, the transferor, the
Certificate Insurer[, any other third party credit enhancer] and the
Certificateholders prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
Rights upon an Event of Servicing Termination
So long as an Event of Servicing Termination remains unremedied, either the
trustee, or Certificateholders evidencing an aggregate undivided interest in the
trust fund of at least 51% of the aggregate Certificate Principal Balance (with
the consent of the Certificate Insurer) or the Certificate Insurer, may
terminate all of the rights and obligations of the master servicer under the
pooling and servicing agreement, whereupon the trustee will succeed to all the
responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement and will be entitled to similar compensation
arrangements. In the event that the trustee would be obligated to succeed the
master servicer but is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a housing and
home finance institution or other mortgage loan or home equity loan servicer
with all licenses and permits required to perform its obligations under the
pooling and servicing agreement and having a net worth of at least $[ ] and
acceptable to the Certificate Insurer to act as successor to the master servicer
under the pooling and servicing agreement. Pending such appointment, the trustee
will be obligated to act in such capacity unless prohibited by law. Such
successor will be entitled to receive the same compensation that the master
servicer would otherwise have received (or such lesser compensation as the
trustee and such successor may agree upon). A receiver or conservator for the
master servicer may be empowered to prevent the termination and replacement of
the master servicer where the Event of Servicing Termination that has occurred
is an Insolvency Event.
Amendment
The pooling and servicing agreement may be amended from time to time by the
seller, the master servicer, the depositor and the trustee and with the consent
of the Certificate Insurer, but without the consent of the Certificateholders,
to cure any ambiguity, to correct any defective provision or to correct or
supplement any provisions therein which may be inconsistent with any other
provisions of the pooling and servicing agreement, to add to the duties of the
depositor, the seller, the transferor or the master servicer, to add or amend
any provisions of the pooling and servicing agreement as required by the Rating
Agencies in order to maintain or improve any rating of the Certificates (it
being understood that, after obtaining the ratings in effect on the Closing
Date, neither the transferor, the seller, the depositor, the trustee nor the
master servicer is obligated to obtain, maintain, or improve any such rating),
to add any other provisions with respect to matters or questions arising under
the pooling and servicing agreement or the Policy which shall not be
inconsistent with the provisions of the pooling and servicing agreement [or any
other third party credit enhancement], to comply with any requirement imposed by
the Code (as defined herein) or to increase the limits set forth in the pooling
and servicing agreement as to the amount of senior liens which the master
servicer may consent to, provided that such action will not, as evidenced by an
opinion of counsel, materially and adversely affect the interests of any
Certificateholder, the Certificate Insurer [or any other third party credit
enhancer]; provided, that any such amendment will not be deemed to materially
and adversely affect the Certificateholders and no such opinion will be required
to be delivered if the person requesting such amendment obtains a letter from
the Rating Agencies stating that such amendment would not result in a
downgrading of the then current rating of the Certificates without regard to the
Policy [or any other third party credit enhancement].
The pooling and servicing agreement may also be amended from time to time
by the seller, the master servicer, the depositor, and the trustee, and the
master servicer and the
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Certificate Insurer may from time to time consent to the amendment of the
Policy, with the consent of Certificateholders with certificates evidencing at
least 51% of the Certificate Principal Balance of the affected class and the
Certificate Insurer for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the pooling and servicing
agreement or of modifying in any manner the rights of the Certificateholders,
provided that no such amendment will
. reduce in any manner the amount of, or delay the timing of, payments
on the Certificates or distributions or payments under the Policy
which are required to be made on any Certificate without the consent
of the Holder of such Certificate,
. reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the Holders of all Certificates then
outstanding or
. adversely affect in any material respect the interests of the
Certificate Insurer [or any other third party credit enhancer].
Termination; Retirement of the Certificates
The trust fund will terminate on the distribution date following the later
of
(A) payment in full of all amounts owing to the Certificate Insurer [and
any other third party credit enhancer] and
(B) the earliest of
. the distribution date on which the Certificate Principal Balance
of each class of certificates has been reduced to zero;
. the final payment or other liquidation of the last mortgage loan
in the trust fund;
. the optional transfer to the transferor of the mortgage loans, as
described below; and
. the distribution date in [ ].
The mortgage loans will be subject to optional transfer to the transferor
on any distribution date on or after which the aggregate Certificate Principal
Balance [of both classes of certificates] is reduced to an amount less than or
equal to [10]% of the aggregate Original Certificate Principal Balance [for both
classes of certificates] and all amounts due and owing to the Certificate
Insurer [and any other third party credit enhancer] including any unreimbursed
draws on the Policy [and unreimbursed payments under other third party credit
enhancement], together with interest thereon, as provided under the Insurance
Agreement, have been paid. The transfer price will be equal to the sum of the
outstanding Certificate Principal Balance of each class of certificates plus
accrued and unpaid interest thereon at the applicable Certificate Rate through
the day preceding the final distribution date and an amount equal to any Basis
Risk Carryforward for each class of certificates plus accrued and unpaid
interest thereon.
In no event, however, will the trust fund created by the pooling and
servicing agreement continue for more than 21 years after the death of certain
individuals named in the pooling and servicing agreement. Written notice of
termination of the pooling and servicing agreement will be given to each
certificateholder, and the final distribution will be made only upon surrender
and cancellation of the certificates at an office or agency appointed by the
trustee which will be specified in the notice of termination.
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[In addition, Certificates must be prepaid and redeemed in part with any
funds remaining in the relevant prefunding account on [ ] after the
purchase of any Additional Home Equity Loans on that day.]
The Trustee
[Name of trustee], a [national] banking association with its principal
place of business in [State], has been named trustee pursuant to the pooling and
servicing agreement.
The commercial bank or trust company serving as trustee may own
Certificates and have normal banking relationships with the depositor, the
master servicer, the seller and the Certificate Insurer and/or their affiliates.
The trustee may resign at any time, in which event the depositor will be
obligated to appoint a successor trustee, as approved by the Certificate
Insurer. The depositor may also remove the trustee if the trustee ceases to be
eligible to continue as such under the pooling and servicing agreement or if the
trustee becomes insolvent. Upon becoming aware of such circumstances, the
depositor will be obligated to appoint a successor trustee, as approved by the
Certificate Insurer. Any resignation or removal of the trustee and appointment
of a successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
No holder of a Certificate will have any right under the pooling and
servicing agreement to institute any proceeding with respect to the pooling and
servicing agreement unless such holder previously has given to the trustee
written notice of default and unless Certificateholders evidencing an aggregate,
undivided interest in the trust fund of at least 51% of the aggregate
Certificate Principal Balance have made written requests upon the trustee to
institute such proceeding in its own name as trustee thereunder and have offered
to the trustee reasonable indemnity and the trustee for 60 days has neglected or
refused to institute any such proceeding. The trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the pooling
and servicing agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
Certain Activities
The Trust Fund will not borrow money, make loans, invest in securities for
the purpose of exercising control, underwrite securities, except as provided in
the pooling and servicing agreement, engage in the purchase and sale (or
turnover) of investments, offer securities in exchange for property (except the
Certificates for the mortgage loans), or repurchase or otherwise reacquire its
securities. See " -- Evidence as to Compliance" above for information regarding
reports as to the compliance by the master servicer with the terms of the
pooling and servicing agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The mortgage loans to be transferred to the trust fund by the depositor
will be purchased by the depositor from the seller pursuant to a purchase
agreement (the "Purchase Agreement") to be entered into between the depositor,
as purchaser of the mortgage loans, and the seller, as transferor of the
mortgage loans. Under the Purchase Agreement, the seller will agree to transfer
the mortgage loans and related Additional Balances to the depositor. Pursuant to
the pooling and servicing agreement, the mortgage loans will be immediately
transferred by the depositor to the trust fund, and the depositor will assign
its rights in, to and under the Purchase Agreement to the trust fund. The
following is a description of the material provisions of the Purchase Agreement.
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Transfers of Mortgage Loans
Pursuant to the Purchase Agreement, the seller will transfer and assign to
the depositor, all of its interest in the mortgage loans [(including any
Additional Home Equity Loans)] and all of the Additional Balances thereafter
created. The purchase price of the mortgage loans is a specified percentage of
the face amount thereof as of the time of transfer and is payable by the
depositor in cash. The purchase price of each Additional Balance comprising the
principal balance of a mortgage loan is the amount of such Additional Balance.
Representations and Warranties
The seller will represent and warrant to the depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement. The seller will also represent and warrant to the depositor
that, among other things, immediately prior to the sale of the mortgage loans to
the depositor, the seller was the sole owner and holder of the mortgage loans
free and clear of any and all liens and security interests. The seller will make
similar representations and warranties in the pooling and servicing agreement.
The seller will also represent and warrant to the depositor that, among other
things, as of the Closing Date, (a) the Purchase Agreement constitutes a legal,
valid and binding obligation of the seller and (b) the Purchase Agreement
constitutes a valid sale to the depositor of all right, title and interest of
the seller in and to the mortgage loans and the proceeds thereof.
Assignment to Trust Fund
The seller will expressly acknowledge and consent to the depositor's
transfer of its rights relating to the mortgage loans under the pooling and
servicing agreement to the trust fund. The seller also will agree to perform its
obligations under the Purchase Agreement for the benefit of the trust fund.
Termination
The Purchase Agreement will terminate upon the termination of the trust
fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Class [ ] Certificates
will be applied by the depositor towards the purchase of the initial loan group
[ ] mortgage loans [and the deposit to the Prefunding Account].
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion, which summarizes the material U.S. federal income
tax aspects of the purchase, ownership and disposition of the Certificates, is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations thereunder, and published rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to Certificate Owners in
light of their personal investment circumstances or to certain types of
Certificate Owners subject to special treatment under the U.S. federal income
tax laws (for example, banks and life insurance companies). Accordingly,
investors should consult their tax advisors regarding U.S. federal, state,
local, foreign and any other tax consequences to them of investing in the
Certificates.
Characterization of the Certificates as Indebtedness
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Based on the application of existing law to the facts as set forth in the
pooling and servicing agreement and other relevant documents and assuming
compliance with the terms of the pooling and servicing agreement as in effect on
the date of issuance of the Certificates, Andrews & Kurth L.L.P., special tax
counsel to the depositor ("Tax Counsel"), is of the opinion that the
Certificates will be treated as debt instruments for federal income tax purposes
as of such date. Accordingly, upon issuance, the Certificates will be treated as
"Debt Securities" as described in the Prospectus. Furthermore, special tax
counsel to the depositor is of the opinion that neither the trust fund nor any
portion of the trust fund will be treated as either an association or a publicly
traded partnership taxable as a corporation or as a taxable mortgage pool. See
"Material Federal Income Tax Consequences" in the Prospectus.
The transferor and the Certificateholders express in the pooling and
servicing agreement their intent that, for applicable tax purposes, the
Certificates will be indebtedness secured by the mortgage loans. The transferor,
the depositor and the Certificateholders, by accepting the Certificates, and
each Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Transferor intends to treat this transaction as a sale of an interest in the
principal balances of the mortgage loans for financial accounting purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service and the courts have set
forth several factors to be taken into account in determining whether the
substance of a transaction is a sale of property or a secured loan, the primary
factor in making this determination is whether the transferee has assumed the
risk of loss or other economic burdens relating to the property and has obtained
the benefits of ownership thereof. Tax Counsel has analyzed and relied on
several factors in reaching its opinion that the weight of the benefits and
burdens of ownership of the mortgage loans has been retained by the transferor
and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
Taxation of Interest Income of Certificate Owners
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable as
Debt Securities. See "Material Federal Income Tax Consequences" in the
Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the "OID
Regulations") it is possible that the Certificates could nevertheless be deemed
to have been issued with original issue discount ("OID") if the interest were
not treated as "unconditionally payable" under the OID Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate Owners
as OID, but would not be includible again when the interest is actually
received. See "Material Federal Income Tax Consequences -- Taxation of Debt
Securities; Interest and Acquisition Discount" in the Prospectus for a
discussion of the application of the OID rules if the Certificates are in fact
issued at a greater than de minimis discount or are treated as having been
issued with OID under
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the OID Regulations. For purposes of calculating OID, it is likely that the
Certificates will be treated as Pay-Through Securities.
Possible Classification of the Certificates as a Partnership or Association
Taxable as a Corporation
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement and the accompanying
Prospectus with respect to the Certificates constitutes a sale of the mortgage
loans (or an interest therein) to the Certificate Owners and that the proper
classification of the legal relationship between the transferor and the
Certificate Owners resulting from this transaction is that of a partnership, a
publicly traded partnership treated as a corporation, or an association taxable
as a corporation. Since Tax Counsel has advised that the Certificates will be
treated as indebtedness in the hands of the Certificateholders for U.S. federal
income tax purposes, the transferor will not attempt to comply with U.S. federal
income tax reporting requirements applicable to partnerships or corporations.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the trust fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the mortgage loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the transferor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness. Assuming that all of the
provisions of the pooling and servicing agreement, as in effect on the date of
the issuance, are complied with, it is the opinion of Tax Counsel that the trust
fund will not be treated as either an association or a partnership taxable as a
corporation or as a taxable mortgage pool.
Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the pooling and servicing agreement,
as in effect on the date of issuance, are complied with, Tax Counsel is of the
opinion that neither the trust fund nor any portion of the trust fund will be a
taxable mortgage pool under Section 7701(i) of the Code because payments on each
loan group support only one class of indebtedness.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the pooling and servicing agreement is a taxable
mortgage pool, such arrangement would be subject to U.S. federal corporate
income tax on its taxable income generated by ownership of the mortgage loans.
Such a tax might reduce amounts available for distributions to Certificate
S-69
<PAGE>
Owners. The amount of such a tax would depend upon whether distributions to
Certificate Owners would be deductible as interest expense in computing the
taxable income of such an arrangement as a taxable mortgage pool.
Foreign Investors
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See "Material Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors" in the Prospectus.
Interest paid (or accrued) to a Certificateholder who is a non-U.S. Person
will be considered "portfolio interest," and generally will not be subject to
United States federal income tax and withholding tax, provided, that (i) the
interest is not effectively connected with the conduct of a trade or business
within the United States by the non-U.S. Person, (ii) the non-U.S. Person
provides the trust fund or other person who is otherwise required to withhold
U.S. tax with respect to the Certificate with an appropriate statement (on Form
W-8 or other similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Certificate is a foreign person and providing that
non-U.S. person's name and address. If a Certificate is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the non-U.S. Person
that owns that interest in the mortgage loan. If such interest does not
constitute portfolio interest, then it will be subject to U.S. federal income
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable tax treaty and the non-U.S. Person provides the Trust Fund, or an
organization or financial institution described above, with an appropriate
statement (e.g., a Form 1001), signed under penalties of perjury, to that
effect.
Final regulations dealing with backup withholding and information reporting
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
non-U.S. Persons who own interests in mortgage loans are strongly urged to
consult their own tax advisor with respect to the New Withholding Regulations.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, a corporate foreign partner would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each foreign
partner would be credited against such foreign partner's U.S. income tax
liability.
In addition, the interest paid on Certificates could be subject to a 30%
withholding tax (or lower treaty rate) either because the interest on the
mortgage loans does not appear to satisfy the requirements to be treated as
"portfolio interest" under the Code, or because, even if such mortgage loan
interest were to be treated as portfolio interest, interest payments on the
Certificates could be treated as "guaranteed payments" within the meaning of the
partnership provisions of the Code.
S-70
<PAGE>
If the trust fund were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
Backup Withholding
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owner, upon issuance, fails to supply the trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to provide
the Trustee or his broker with a certified statement, under penalty of perjury,
that he is not subject to backup withholding.
The trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede & Co.,
as nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the trustee. (The
trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a nonexempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. The
discussion set forth above does not take the New Withholding Regulations into
account. Prospective non-U.S. Persons who own Regular Certificates are strongly
urged to consult their own tax advisor with respect to the New Withholding
Regulations.
STATE TAXES
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the certificates.
ERISA CONSIDERATIONS
[The fiduciary of any pension or other employee benefit plan (a "Plan")
which proposes to cause such Plan to acquire any of the Certificates should
consult with its counsel with respect to the potential consequences under the
Employee Retirement Income Security Act of 1974, as
S-71
<PAGE>
amended ("ERISA"), and the Code, of the Plan's acquisition and ownership of such
Certificates. See "ERISA Considerations" in the Prospectus.
Section 406 of ERISA prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA from engaging in certain transactions
involving such plan and its assets unless a statutory, regulatory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving "disqualified
persons" and employee benefit plans or other arrangements (including, but not
limited to, individual retirement accounts) described under that Section
(together with employee benefit plans subject to ERISA, "Plans"); ERISA
authorizes the imposition of civil penalties for prohibited transactions
involving Plans not subject to the requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Certificates without regard to the ERISA
considerations described herein and in the prospectus, subject to the provisions
of other applicable federal and state law. Any such plan that is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code may
nonetheless be subject to the prohibited transaction rules set forth in Section
503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
A fiduciary that decides to invest the assets of a Plan in the Certificates
should consider, among other factors, the extreme sensitivity of the investment
to the rate of principal payments (including prepayments) on the mortgage loans.
In Prohibited Transaction Exemption 83-1 (the "Exemption"), the Department
of Labor ("DOL") exempted from ERISA's prohibited transaction rules certain
transactions relating to the operation of residential mortgage pool investment
trusts and the purchase, sale and holding of "mortgage pool pass-through
certificates" in the initial issuance of such certificates.
The Exemption permits, subject to certain conditions, transactions that
might otherwise be prohibited between Plans and "parties in interest" with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans.
If the general conditions of the Exemption are satisfied, investments by a
Plan in certificates that represent interests in a mortgage pool consisting of
mortgage loans representing loans for single family homes ("Single Family
Certificates") will be exempt from the prohibitions of ERISA Sections 406(a) and
407 (relating generally to transactions with "parties in interest" who are not
fiduciaries) if the Plan purchases the Single Family Certificates at no more
than fair market value and the Certificates are not subordinated to the other
Certificates issued by the same pool, and will be exempt from the prohibitions
of ERISA Sections 406(b)(1) and (2) (relating generally to transactions with
fiduciaries) if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, a Plan does not
purchase more than twenty-five percent (25%) of all Single Family Certificates
and at least fifty percent (50%) of all Single Family Certificates are purchased
by persons independent of the pool sponsor or pool trustee.
S-72
<PAGE>
It is believed that the Exemption will apply to the acquisition and holding
of the Class [ ] Certificates by Plans and that all conditions of the Exemption
other than those within the control of the investors will be met.
Any Plan fiduciary considering whether to purchase any Class [ ]
Certificates on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things, before
purchasing any Class [ ] Certificates, a fiduciary of a Plan subject to the
fiduciary responsibility provisions of ERISA or an employee benefit plan subject
to the prohibited transaction provisions of the Code should make its own
determination as to the availability of the exemptive relief provided in the
Exemption, and also consider the availability of any other prohibited
transaction exemptions.]
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibit "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
such Plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction, Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that Section (collectively with
employee benefit plans subject to ERISA, "Plans"); ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire the Offered Certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Class [ ] Certificates should consider,
among other factors, the extreme sensitivity of the investments to the rate of
principal rate of principal payments (including prepayments) on the Mortgage
Loans.
The U.S. Department of Labor has granted to [Underwriter] an administrative
exemption (Prohibited Transaction Exemption[ ]; Exemption Application No.[
], Fed. Reg. [ ] ([ ]) (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations and the servicing, operation and
management of such asset-backed pass-through trusts; provided that the
conditions and requirements of the Exemption are met. The Exemption will apply
to the acquisition, holding and resale of the Certificates by a Plan provided
that certain conditions are met. For a general description of the Exemption and
the conditions that must be satisfied for the exemption to apply, see "ERISA
Considerations" in the Prospectus.
It is believed that the Exemption will apply to the acquisition and holding
of the Certificates by Plans and that all conditions of the Exemption other than
those within the control of the investors will be met.
S-73
<PAGE>
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Class [ ] Certificates
will be rated in the highest rating category of each of the Rating Agencies, the
Class [ ] Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because not all of the mortgages securing the mortgage loans are first
mortgages. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans may not be legally
authorized to invest in the Class [ ] Certificates, which because they
evidence interests in a pool that includes junior mortgage loans are not
"mortgage related securities" under SMMEA. See "Legal Investment" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated [ ], 200[ ], between the depositor and [
] ("[ ]"), which is an affiliate of the depositor, the seller and the master
servicer), the depositor has agreed to sell to [ ], and [ ] has agreed to
purchase from the depositor, the Class [ ] Certificates.
In the underwriting agreement, [ ] has agreed, subject to the terms and
conditions set forth therein, to purchase all the Certificates offered hereby if
any of the Certificates are purchased.
The depositor has been advised by [ ] that it proposes initially to offer
the Class [ ] Certificates to the public in Europe and the United States at
the offering price set forth on the cover page hereof and to certain dealers at
such price less a discount not in excess of [ ]% of the Certificate
denominations. [ ] may allow and such dealers may reallow a discount not in
excess of [ ]% of the Certificate denominations to certain other dealers.
After the initial public offering, the public offering price, such concessions
and such discounts may be changed.
Until the distribution of the Class [ ] Certificates is completed,
rules of the Securities and Exchange Commission may limit the ability of [ ]
and certain selling group members to bid for and purchase the Class [ ]
Certificates. As an exception to these rules, [ ] is permitted to engage in
certain transactions that stabilize the price of the Class [ ] Certificates.
Such transactions consist of bids or purchases for the purposes of pegging,
fixing or maintaining the price of the Class [ ] Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the depositor nor [ ] makes any representation or prediction as
to the direction or magnitude of any effect that the transactions described
above may have on the prices of the Certificates. In addition, neither the
depositor nor [ ] makes any representation that [ ] will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
S-74
<PAGE>
The underwriting agreement provides that the depositor will indemnify [ ]
against certain civil liabilities, including liabilities under the Act.
After the initial distribution of the Certificates offered hereby, this
prospectus and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets], an affiliate of the depositor,
the seller and the master servicer, in connection with market making
transactions in such Certificates. [First Tennessee Securities
Corporation][First Tennessee Capital Markets] may act as principal or agent in
these transactions. These transactions will be at market prices at the time of
sale and not at the prices of the initial offering.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by Andrews & Kurth L.L.P., Dallas, Texas. [ ],
will pass upon certain legal matters on behalf of the underwriters.
EXPERTS
[The consolidated financial statements of the Certificate Insurer,
[Certificate Insurer] and subsidiaries, as of [month] [day], [year] and [year]
and for each of the years in the [number]-year period ended [month] [day],
[year], are incorporated by reference herein and in the registration statement
in reliance upon the report of [ ], independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.]
RATINGS
It is a condition to the issuance of the Class [ ] Certificates that they
be rated [ ] by [Rating Agency] and [ ] by [Rating Agency] (each a "Rating
Agency").
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the mortgage loans. The rating takes into
consideration the characteristics of the mortgage loans and the structural and
legal aspects associated with the Certificates. The ratings on the Certificates
do not, however, constitute statements regarding the likelihood or frequency of
prepayments on the mortgage loans or the possibility that Certificateholders
might realize a lower than anticipated yield. The ratings on the Certificates do
not address the likelihood of the receipt by Certificateholders of Basis Risk
Carryforward.
The ratings assigned to the Class [ ] Certificates will depend primarily
upon the financial strength of the Certificate Insurer. Any reduction in a
rating assigned to the financial strength of the Certificate Insurer below the
ratings initially assigned to the Certificates may result in a reduction of one
or more of the ratings assigned to the Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
The depositor has not requested a rating of the Certificates by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Certificates or, if it does, what
rating would be assigned by such other rating agency. The rating assigned by
such other rating agency to the Certificates could be lower than the respective
ratings assigned by the Rating Agencies.
S-75
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Accelerated Principal Distribution Amount"...........................S-43, S-51
"Additional Balances".......................................................S-42
"Additional Home Equity Loans"..............................................S-27
"Alternative Principal Payment".............................................S-54
"Available Transferor Subordinated Amount"..................................S-55
"Basis Risk Carryforward"...................................................S-53
"BIF".......................................................................S-48
"business day"........................................................S-51, S-57
"Certificate Insurer".......................................................S-58
"Certificate Principal Balance".............................................S-43
"Certificates"..............................................................S-41
"Class".....................................................................S-41
"Code"......................................................................S-67
"Collection Account"........................................................S-48
"Collection Period".........................................................S-52
"Crossover Amount"..........................................................S-51
"cut-off date pool balance".................................................S-25
"cut-off date"..............................................................S-25
"Debt Securities"...........................................................S-68
"Detailed Description"......................................................S-25
"Determination Date"........................................................S-48
"Eligible Account"..........................................................S-48
"Eligible Substitute Mortgage Loan".........................................S-46
"ERISA"...............................................................S-72, S-73
"Events of Servicing Termination"...........................................S-63
"Exemption"...........................................................S-72, S-73
"First Tennessee"...........................................................S-20
"Guaranteed Distributions"..................................................S-57
"Guaranteed Principal Distribution Amount"..................................S-57
"Index".....................................................................S-25
"Insurance Agreement".......................................................S-57
"Insured Amount"............................................................S-57
"Interest Period"...........................................................S-53
"Investor Fixed Allocation Percentage"......................................S-39
"Investor Floating Allocation Percentage"...................................S-50
"Investor Interest Collections".............................................S-50
"Investor Loss Amount"......................................................S-52
"Investor Principal Collections"............................................S-50
"LIBOR".....................................................................S-53
"Liquidated Mortgage Loan"..................................................S-52
"Liquidation Loss Amount"...................................................S-52
"Managed Amortization Period"...............................................S-54
"Maximum Principal Payment".................................................S-54
"Minimum Transferor Interest"...............................................S-48
"Mortgaged Properties"......................................................S-20
"New Withholding Regulations"...............................................S-70
"OID Regulations"...........................................................S-68
"OID".......................................................................S-68
"Original Invested Amount"..................................................S-42
"Paying Agent"..............................................................S-55
"Plan"......................................................................S-71
"Preference Amount".........................................................S-57
"Prefunding Account"........................................................S-27
</TABLE>
S-76
<PAGE>
<TABLE>
<S> <C>
"Purchase Agreement"........................................................S-66
"Rapid Amortization Event"..................................................S-56
"Rapid Amortization Period".................................................S-54
"Rating Agency".............................................................S-75
"Related Documents".........................................................S-45
"Required Amount"...........................................................S-55
"Reserve Fund"..............................................................S-44
"SAIF"......................................................................S-48
"Scheduled Principal Collections Distribution Amount".......................S-54
"Servicing Fee Rate"........................................................S-61
"Single Family Certificates"................................................S-72
"Statistic Calculation Date"................................................S-25
"Statistic Calculation Pool Mortgage Loan"..................................S-25
"Statistic Calculation Pool"................................................S-25
"Subordinated Transferor Collections".......................................S-55
"Tax Counsel"...............................................................S-68
"Transfer Date".............................................................S-47
"Transfer Deficiency".......................................................S-46
"Transfer Deposit Amount"...................................................S-46
"Transferor Interest".......................................................S-43
"Transferor"................................................................S-43
</TABLE>
S-77
<PAGE>
[LOGO] FIRST
HORIZON
Home Loan Corporation
(Seller and Master Servicer)
First Horizon Home Equity Loan Trust 200[_]-[_]
(Issuer)
$[__________]
(Approximate)
Revolving Home Equity Loan Asset-Backed Certificates, Series 200[_]-[_]
______________________________
PROSPECTUS SUPPLEMENT
_____________________________
[UNDERWRITER]
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus until [__________].
[______], 200[_]
<PAGE>
SUBJECT TO COMPLETION; DATED JANUARY 5, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________)
$[___________________]
(Approximate)
First Tennessee Bank National Association
Seller and Master Servicer
First Horizon Home Equity Loan Trust 200[_]-[_]
Issuer
Revolving Home Equity Loan Asset-Backed Notes, Series 200[_]-[_]
Distributions payable monthly commencing in ________
Class [__] Notes
You should carefully consider the risk factors beginning on page S-[__] of this
prospectus supplement and on page [__] of the accompanying prospectus.
The Notes
The Class [__] [and Class [___]] Notes have [an] original principal
balance[s] of $[______][ and $[______], respectively, each] subject to a
permitted variance of plus or minus [10]%.
The Trust Fund
The trust fund will own a pool consisting of [two] loan groups of home
equity revolving credit line loans made or to be made in the future under
certain home equity revolving credit line loan agreements. The loans will be
secured by first or second deeds of trust or mortgages on one- to four-family
residential properties and will bear interest at rates that adjust based on the
prime rate. [The trust fund will also initially include funds from the sale of
the notes in excess of the cut-off date principal balances. These excess funds
are expected to be used to acquire additional home equity revolving credit line
loans after the cut-off date. The Class [ ] Notes will represent an interest in
loan group [ ] only.]
[The Policy
Note Insurer will issue an irrevocable and unconditional note guaranty
insurance policy which will guarantee certain payments to noteholders.]
[NOTE INSURER LOGO]
The SEC and state securities regulators have not approved or
disapproved of these securities or determined if this prospectus supplement or
the prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
[Underwriter] will offer the notes subject to prior sale and subject to
its right to reject orders in whole or in part. The notes will be issued in
book-entry form on or about [ ], 200[ ] and will be offered in the United
States [and Europe].
[UNDERWRITER]
[ ], 200[ ]
<PAGE>
Important notice about information presented in this prospectus
supplement and the accompanying prospectus:
We provide information to you about the notes offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your notes, and (2) this prospectus supplement, which describes
the specific terms of your notes.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
After the initial distribution of the notes offered hereby, this prospectus
and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets], an affiliate of the depositor,
the seller and the master servicer, in connection with market making
transactions in the notes. [First Tennessee Securities Corporation][First
Tennessee Capital Markets] may act as principal or agent in these transactions.
These transactions will be at market prices at the time of sale and not at the
prices of the initial offering. Certain information in this prospectus
supplement will be updated from time to time.
S-2
<PAGE>
<TABLE>
<S> <C>
SUMMARY..................................................................................................... S-6
RISK FACTORS................................................................................................ S-15
FORWARD LOOKING STATEMENTS.................................................................................. S-20
THE TRUST................................................................................................... S-21
General................................................................................................ S-21
Trust Assets........................................................................................... S-21
Duties of the Owner Trustee............................................................................ S-22
Certain Activities..................................................................................... S-22
Termination............................................................................................ S-22
The Owner Trustee...................................................................................... S-22
[THE NOTE INSURER........................................................................................... S-23
THE MASTER SERVICER......................................................................................... S-23
General................................................................................................ S-23
The Master Servicer.................................................................................... S-23
[THE HOME EQUITY LOAN PROGRAM .............................................................................. S-24
Underwriting Procedures Relating to Home Equity Loans.................................................. S-24
SERVICING OF THE MORTGAGE LOANS............................................................................. S-25
Foreclosure and Delinquency Experience................................................................. S-26
DESCRIPTION OF THE MORTGAGE LOANS........................................................................... S-28
General................................................................................................ S-28
Mortgage Loan Terms.................................................................................... S-28
Conveyance of Mortgage Loans........................................................................... S-46
[The Prefunding Account ............................................................................... S-47
MATURITY AND PREPAYMENT CONSIDERATIONS ..................................................................... S-47
POOL FACTOR ................................................................................................ S-49
DESCRIPTION OF THE NOTES ................................................................................... S-50
General................................................................................................ S-50
Book-entry Notes....................................................................................... S-51
Distributions on the Notes............................................................................. S-51
Limited Subordination of Transferor Interest........................................................... S-55
DESCRIPTION OF THE INDENTURE................................................................................ S-56
Payments on Mortgage Loans; Deposits to Collection Account............................................. S-56
Allocations and Collections............................................................................ S-58
[The Policy............................................................................................ S-59
Rapid Amortization Events.............................................................................. S-61
Reports to Noteholders................................................................................. S-62
EVENTS OF DEFAULT UNDER THE INDENTURE
....................................................................................................... S-63
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
....................................................................................................... S-63
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE............................................................. S-64
Duties of the Indenture Trustee........................................................................ S-64
Amendment.............................................................................................. S-65
TERMINATION; RETIREMENT OF THE NOTES........................................................................ S-66
The Indenture Trustee.................................................................................. S-67
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT ............................................................ S-67
Assignment of Mortgage Loans........................................................................... S-67
Amendments to Credit Line Agreements................................................................... S-69
[Optional Transfers of Mortgage Loans to the Transferor................................................ S-69
Collection and Other Servicing Procedures on Mortgage Loans
................................................................................................. S-70
Hazard Insurance....................................................................................... S-71
Realization on Defaulted Mortgage Loans................................................................ S-71
Optional Purchase of Defaulted Loan.................................................................... S-72
Servicing Compensation and Payment of Expenses......................................................... S-72
Evidence as to Compliance.............................................................................. S-72
Certain Matters Regarding the Master Servicer and the Transferor
.................................................................................................. S-72
EVENTS OF SERVICING TERMINATION
.................................................................................................. S-73
Rights after an Event of Servicing Termination......................................................... S-74
Amendment.............................................................................................. S-75
DESCRIPTION OF THE PURCHASE AGREEMENT....................................................................... S-76
REPRESENTATIONS AND WARRANTIES.............................................................................. S-76
ASSIGNMENT TO TRUST FUND.................................................................................... S-76
USE OF PROCEEDS............................................................................................. S-76
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................................................... S-77
General................................................................................................ S-77
Characterization of the Notes as Indebtedness.......................................................... S-77
Possible Classification of the Notes as a Partnership or Association Taxable as a Corporation
.................................................................................................. S-78
Possible Classification as a Taxable Mortgage Pool..................................................... S-79
Foreign Investors...................................................................................... S-79
Backup Withholding..................................................................................... S-80
State Taxes............................................................................................ S-81
ERISA CONSIDERATIONS........................................................................................ S-81
Prohibited Transactions................................................................................ S-81
LEGAL INVESTMENT CONSIDERATIONS............................................................................. S-83
UNDERWRITING................................................................................................ S-83
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
LEGAL MATTERS............................................................................................... S-84
</TABLE>
S-5
<PAGE>
SUMMARY
This Summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the notes,
read carefully this entire document and the accompanying prospectus.
Trust Fund
First Horizon Home Equity Loan Trust 200[ ]-[ ]. The trust fund will own a
pool of home equity revolving credit line loans made or to be made in the future
under certain home equity revolving credit line loan agreements. The loans will
be secured by first or second deeds of trust or mortgages on one- to four-family
residential properties and will bear interest at rates that adjust based on the
prime rate. We sometimes refer to these loans as home equity loans or mortgage
loans. [The original principal balance of the notes will exceed the aggregate
cut-off date principal balances of the home equity loans initially transferred
to the trust fund. Funds in an amount equal to this excess are expected to be
used to acquire future home equity loans that are not included in the cut-off
date pool. Until they are so used, they will be held in the trust fund.]
We will be dividing the mortgage loans in the trust fund into [two] groups.
Each will be referred to as a loan group. The repayment of the Class [ ] Notes
will be secured by a security interest in loan group [ ] and the repayment of
the Class [ ] Notes will be secured by a security interest in loan group [ ].
Likewise, holders of Class [ ] Notes will receive payments from collections on
mortgage loans in loan group [ ] and holders of Class [ ] Notes will receive
payments from collections on mortgage loans in loan group [ ].
The Offered Notes
First Horizon Home Equity Loan Trust 200[ ]-[ ] will issue [ ] classes
of Revolving Home Equity Loan Asset Backed Notes and a transferor's interest.
Only the Class [ ] Notes are offered by this prospectus supplement.]
Other Notes
First Horizon Home Equity Loan Trust 200[ ]-[ ] is also issuing the
Class [ ] Notes and the transferor's interest. As described in this prospectus
supplement, except for limited cross-collateralization, the Class [ ] Notes are
not supported by the mortgage loans in loan group [ ], the group that supports
the offered notes. A portion of the transferor's interest is subordinated in
right of payment to the payment of the notes. Information regarding the Class
[ ] Notes and the transferor's interest is included in this prospectus
supplement chiefly to provide you with a better understanding of the Class [ ]
Notes.]
Depositor
First Horizon Asset Securities Inc. Its address is 4000 Horizon Way,
Irving, Texas 75063 and its telephone number is (214) 441-4000.
See "The Depositor" in the prospectus.
Seller and Master Servicer
[First Tennessee Bank National Association.]
See "The Master Servicer" in this prospectus supplement.
S-6
<PAGE>
Indenture Trustee
[Name of Indenture Trustee].
Owner Trustee
[Name of Owner Trustee].
[Note Insurer
Note Insurer, will insure the [Class [ ]] Notes as described in this
prospectus supplement.
See "The Note Insurer" in this prospectus supplement.]
Indenture
The notes will be issued under an indenture between the owner trustee and
the indenture trustee.
Cut-off Date
[ ], 200[ ].
Closing Date
On or about [ ], 200[ ].
Distribution Dates
The indenture trustee will make distributions on the [ ]th day of each
calendar month beginning in [ ] 200[ ]. If the [ ]th day of a month is not a
business day, then payments will be made on the next business day after the [ ]
th day of the month.
Record Date
The [last] day preceding a distribution date or, if the notes are no longer
book-entry notes, the last day of the month preceding a distribution date.
Denominations
[The Class [ ] Notes will be issued in minimum denominations of]
$[25,000] and multiples of $[1,000] in excess of that.
Registration of Notes
The [Class [ ]] Notes will initially be issued in book-entry form.
[Persons acquiring beneficial ownership interests in the [Class [ ]] Notes may
elect to hold their beneficial interests through The Depository Trust Company,
in the United States, or Clearstream, Luxembourg or the Euroclear System, in
Europe.]
See "Description of Notes -- Book-Entry Notes" in this prospectus supplement.
S-7
<PAGE>
The Mortgage Loans
General
The mortgage loans are revolving lines of credit. During the applicable
draw period, each borrower may borrow additional amounts from time to time up to
the maximum amount of that borrower's line of credit. If borrowed amounts are
repaid, they can again be borrowed.
The pool balance equals the aggregate of the principal balances of all
mortgage loans in [both] loan groups. The loan group balance of a loan group
equals the aggregate of the principal balances of all mortgage loans in that
loan group. The principal balance of a mortgage loan (other than a liquidated
mortgage loan) on any day is equal to its cut-off date principal balance, plus
any additional borrowings on that mortgage loan, minus all collections credited
against the principal balance of that mortgage loan before that day. Once a
mortgage loan is finally liquidated, its principal balance will be zero.
Loan Rate
Interest on each mortgage loan is payable monthly and computed on the
related daily outstanding principal balance for each day in the billing cycle.
The loan rate is a variable rate per annum equal to the sum of the highest prime
rate published in the Money Rates table of The Wall Street Journal as of the
first business day of each calendar month and a margin. The loan rate is subject
to applicable usury limits and certain maximum rates. Loan rates are adjusted
monthly on the first business day of the calendar month preceding the due date.
The due date for each mortgage loan is the fifteenth day of each month.
Principal Payments
Each home equity loan features a draw period during which the loan may be
drawn on, immediately followed by a repayment period during which the loan must
be repaid. In general, home equity loans with [ ]-year draw periods have [ ]-
year repayment periods. These [ ]-year draw periods are generally extendible for
an additional [ ] years with the approval of the master servicer.
Statistics
The statistical information presented in this prospectus supplement
concerning the pool of mortgage loans does not reflect all of the mortgage loans
that will be included in the pool on the closing date. Instead, this statistical
information relates to statistical calculation loan groups that include the
number and principal balances only of mortgage loans originated by the seller
through the statistic calculation date and included in the applicable loan
group. The aggregate principal balance of each statistic calculation loan group
as of the statistic calculation date is the statistic calculation loan group
balance. The statistic calculation date is [ ], 200[ ].
Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by the aggregate principal balance of the applicable
statistic calculation loan group on the statistic calculation date.
See "Description of the Mortgage Loans" in this prospectus supplement for
additional information concerning the statistic calculation pool and the
mortgage loans in general.
S-8
<PAGE>
Summary of Loans in Statistic Calculation Loan Group [ ] (As of Statistic
Calculation Date)
Loan Group [ ] Statistic Calculation Date Balance: $ [ ]
Weighted Average Combined Loan-to-Value Ratio: [ ]%
Weighted Average Margin: [ ]%
Range of Principal Balances: $[ ] to $[ ]
Average Principal Balance: $[ ]
Range of Credit Limits: $[ ] to $[ ]
Average Credit Limit: $[ ]
Origination Period: [ ] through [ ]
Range of Loan Rates: [ ]% to [ ]%
Weighted Average Loan Rate: [ ]%
Weighted Average Maximum Loan Rate: [ ]%
Weighted Average Minimum Loan Rate: [ ]%
Maximum Credit Utilization Rate: [ ]%
Average Credit Utilization Rate: [ ]%
Weighted Average Credit Utilization Rate: [ ]%
Percentage of Pool Secured by 1st liens: [ ]%
Percentage of Pool Secured by 2nd liens: [ ]%
Weighted Average Second Mortgage Ratio: [ ]%
Percentage with Mortgaged Properties in: [ ]%
[ ]: [ ]%
[ ]: [ ]%
[ ]: [ ]%
[ ]: [ ]%
[ ]: [ ]%
Range of Remaining Term to Scheduled Maturity: [ ] months to [ ] months
Weighted Average Remaining Term to Scheduled Maturity: [ ] months
Percentage Single Family Residences: [ ]%
Percent Owner Occupied: [ ]%
[Summary of Loans in Statistic Calculation Loan Group [ ] (As of Statistic
Calculation Date)]
Loan Group [ ] Statistic Calculation Date Balance: $ [ ]
Weighted Average Combined Loan-to-Value Ratio: [ ]%
Weighted Average Margin: [ ]%
Range of Principal Balances: $ [ ] to $[ ]
Average Principal Balance: $ [ ]
Range of Credit Limits: $ [ ] to $[ ]
Average Credit Limit: $ [ ]
Origination Period: [ ] through [ ]
Range of Loan Rates: [ ]% to [ ]%
Weighted Average Loan Rate: [ ]%
Weighted Average Maximum Loan Rate: [ ]%
Weighted Average Minimum Loan Rate: [ ]%
Maximum Credit Utilization Rate: [ ]%
Average Credit Utilization Rate: [ ]%
Weighted Average Credit Utilization Rate: [ ]%
Percentage of Pool Secured by 1st liens: [ ]%
Percentage of Pool Secured by 2nd liens: [ ]%
Weighted Average Second Mortgage Ratio: [ ]%
Percentage with Mortgaged Properties in: [ ]%
S-9
<PAGE>
[ ]: [ ]%
[ ]: [ ]%
[ ]: [ ]%
[ ]: [ ]%
[ ]: [ ]%
Range of Remaining Term to Scheduled Maturity: [ ] months to [ ] months
Weighted Average Remaining Term to Scheduled Maturity: [ ] months
Percentage Single Family Residences: [ ]%
Percent Owner Occupied: [ ]%
The [Class [ ]] Notes
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Per $1,000 of
Notes Total
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Price to Public........................................... $[ ] $[ ]
--------------------------------------------------------------------------------------------------
Underwriting Discount..................................... $[ ] $[ ]
--------------------------------------------------------------------------------------------------
Proceeds, before expenses, to the Depositor............... $[ ] $[ ]
--------------------------------------------------------------------------------------------------
</TABLE>
Note Rate
[Class [ ] Notes]
The note rate on the Class [ ] Notes may change from distribution date
to distribution date. On any distribution date the note rate for the [Class [ ]]
Notes will equal the least of: LIBOR plus [ ]% per annum, the weighted average
of the loan rates on the mortgage loans in loan group [ ] minus certain fees,
expenses and minimum spread requirements, and [ ]% per annum. However, on any
distribution date for which the note rate for the Class [ ] Notes has been
determined in accordance with the weighted average of the net loan rates on the
mortgage loans in loan group [ ], the excess of the lesser of A. [ ]% per annum
and B. LIBOR + [ ]% per annum over the note rate will be paid (with interest at
the rate of LIBOR + [ ]% per annum, but not at a rate in excess of [ ]% per
annum) on the Class [ ] Notes on future distribution dates to the extent that
funds are available in the priority described in this prospectus supplement.
[Class [ ] Notes
The note rate on the Class [ ] Notes may change from distribution date
to distribution date. On any distribution date the note rate for the Class [ ]
Notes will equal the least of: LIBOR plus [ ]% per annum, the weighted average
of the loan rates on the mortgage loans in loan group [ ] minus certain fees,
expenses and minimum spread requirements, and [ ]% per annum.
However, on any distribution date for which the note rate for the Class
[ ] Notes has been determined in accordance with the weighted average of the net
loan rates on the mortgage loans in loan group [ ], the excess of the lesser of
A. [ ]% per annum and B. LIBOR + [ ]% per annum over the note rate will be paid
(with interest at the rate of LIBOR + [ ]% per annum, but not at a rate in
excess of [ ]% per annum) on the Class [ ] Notes on future distribution dates to
the extent that funds are available in the priority described in this prospectus
supplement.]
See "Description of the Notes -- Distributions on the Notes -- Application
of Interest Collections" in this prospectus supplement.
S-10
<PAGE>
Interest Period
For each distribution date and class of notes, the period beginning on
the prior distribution date (or in the case of the first distribution date,
beginning on the closing date) and ending on the day before the applicable
distribution date. The indenture trustee will calculate interest based on the
actual number of days in the interest period and a year assumed to consist of
360 days.
Note Principal Balance
The original principal balance of either class of notes may be reduced
or increased by not more than [10]% depending on the aggregate principal balance
of the mortgage loans in the related loan group actually delivered on the
closing date.
Principal
The amount of principal distributed on a class of notes on a
distribution date will depend on whether the distribution date occurs during the
managed amortization period or the rapid amortization period. The managed
amortization period begins on the closing date and ends on the earlier of the
distribution date in [ ] and the existence of a rapid amortization event. The
rapid amortization period begins on the first distribution date after the end of
the managed amortization period.
See "Description of Notes-- Distributions on the Notes -- Distributions
of Principal Collections" in this prospectus supplement.
[Prefunding Account]
On the closing date approximately $[ ] will be deposited into a
prefunding account [for loan group [ ] and approximately $[ ] will be
deposited into a prefunding account for loan group [ ], each] held as a part of
the trust fund. These funds represent the excess of the original principal
balance of the Class [ ] [and Class [ ]] Notes [,as applicable,] over the cut-
off date principal balance of the mortgage loans in [their related] loan group [
] initially transferred to the trust fund. These funds are expected to be used
through [ ] to acquire future home equity loans that are not included in the
cut-off date pool. Any future home equity loans acquired by the trust fund after
the cut-off date will have been underwritten using generally the same guidelines
as were used to select the initial mortgage loans in the trust fund, and the
trust fund will have the benefit of substantially the same representations and
warranties covering the initial mortgage loans in the trust fund. The seller and
master servicer will not exercise any discretion in the selection of the future
home equity loans to be acquired by the trust fund. The selection will be made
by a mechanical procedure on a first-in, first-out basis. The purchase of these
future home equity loans is in addition to the ongoing purchase of additional
balances during the managed amortization period with the proceeds of principal
repayments received on the trust fund's mortgage loan portfolio. Any funds
remaining in the prefunding account[s] on [ ] will be used to prepay the [Class
[ ]] [related class of] Notes on the first distribution date.]
Termination
The trust fund will terminate on the distribution date following the
later of (a) payment in full of all amounts owing to [the note insurer and][any
third party credit enhancer] and (b) the earliest of the distribution date on
which the principal balance of [both] classes of notes have been reduced to
zero, the final payment or other liquidation of the last mortgage loan in the
trust
S-11
<PAGE>
fund, the optional transfer of the mortgage loans to the owner of the transferor
interest, as described below, and the distribution date in [ ].
The mortgage loans in the trust fund will be subject to optional
transfer to the owner of the transferor interest on any distribution date on or
after which the combined principal balance of both classes of notes is reduced
to any amount less than or equal to 10% of the original combined principal
balance of the notes and all amounts due and owing to the note insurer and] [any
third party credit enhancer][, including any unreimbursed draws on the policy
][and any third party enhancement], together with interest on those amounts,
have been paid as provided [either] [in the insurance agreement under which the
policy is issued] [or in accordance with any third party credit enhancement].
See "Description of the Indenture -- Termination; Retirement of the
Notes" in this prospectus supplement and "The Agreements -- Termination;
Optional Termination" in the prospectus.
Credit Enhancement
General
The trust fund includes various mechanisms that are intended to protect
noteholders against losses on the mortgage loans.
Excess Interest
The indenture trustee will distribute certain interest collections on
the mortgage loans in each loan group to cover losses that would otherwise be
allocated to the notes related to that loan group, and to the extent described
in this prospectus supplement, to the notes related to the other loan group.
Limited Subordination of Transferor Interest
The sum of the amounts by which the loan group balance of each loan
group in the trust fund exceeds the principal balance of its related notes is
the transferor interest. Initially, the transferor interest will be $0. The
transferor interest is expected to grow as interest collections in excess of
trustee fees, [amounts due the note insurer,] interest accrued on the notes and
certain loss amounts due on the notes are applied as principal distributions on
the notes, thereby creating overcollateralization of the notes. For each loan
group, once the required level of overcollateralization is reached, the
acceleration feature for the related class of notes will cease, unless it is
necessary to maintain the required level of overcollateralization. The
transferor interest is also the mechanism that absorbs changes in the principal
amount of mortgage loans in a loan group due to new borrowings and repayments.
In certain circumstances, amounts that would be distributed on the transferor
interest will instead be distributed on the notes. First Tennessee Bank National
Association (or one of its affiliates) will be the owner of the transferor
interest on the closing date.
See "Description of the Notes -- Limited Subordination of Transferor
Interest" in this prospectus supplement.
[Policy
The policy will irrevocably and unconditionally guarantee on each
distribution date to the indenture trustee for the benefit of the noteholders
the full and complete payment of the
S-12
<PAGE>
guaranteed distributions consisting of the guaranteed principal distribution
amount with respect to the notes for the distribution date, and accrued and
unpaid interest due on the notes.
The effect of the policy is to guarantee the timely payment of interest
on, and the ultimate payment of the principal amount of, the notes. The policy
does not cover payment of basis risk carryforward.
In addition, the policy will guarantee the payment of the outstanding
note principal balance on the distribution date in [ ] (after giving effect to
all other amounts distributable and allocable to principal on that distribution
date).
IN THE ABSENCE OF PAYMENTS UNDER THE POLICY, NOTEHOLDERS WILL DIRECTLY
BEAR THE CREDIT AND OTHER RISKS ASSOCIATED WITH THEIR PERCENTAGE INTEREST IN THE
TRUST FUND.
See "Description of the Indenture -- The Policy" in this prospectus
supplement.
The indenture will allow for limited cross-collateralization, in that
certain excess cashflows from either loan group on any distribution date will be
applied to the funding of certain deficiencies in interest and principal on the
notes related to the other loan group.]
[Reserve Fund
On the closing date, an account will be set up in the name of the
indenture trustee on behalf of the noteholders, but will not be funded. Once the
required level of overcollateralization for a loan group has been reached,
excess cashflow from that loan group may be deposited in the reserve fund on
future distribution dates until the amount reaches a specified level. Amounts in
the reserve fund may be used to cover shortfalls in amounts required to be
distributed as interest to either Class of Class [ ] Notes or to cover losses on
the mortgage loans in either loan group.]
Material Federal Income Tax Consequences
Subject to the qualifications described under "Material Federal Income
Tax Consequences" in this prospectus supplement, Andrews & Kurth L.L.P., special
tax counsel to the depositor, is of the opinion that, under existing law, a note
will be treated as a debt instrument for federal income tax purposes as of the
closing date. Furthermore, special tax counsel to the depositor is of the
opinion that neither the trust fund nor any portion of the trust fund will be
treated as either an association or a publicly traded partnership taxable as a
corporation or as a taxable mortgage pool.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for additional information concerning the
application of federal income tax laws.
ERISA Considerations
Generally, the notes may be purchased by a pension or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974 or
Section 4975 of the Internal Revenue Code of 1986, or by an entity investing the
assets of an employee benefit plan, so long as certain conditions are met. A
fiduciary of an employee benefit plan or an individual retirement account must
determine that the purchase of a note is consistent with its fiduciary duties
under applicable law and does not result in a nonexempt prohibited transaction
under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
S-13
<PAGE>
Legal Investment Considerations
The [Class [ ]] Notes will not constitute mortgage related securities
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, because
not all of the mortgages securing the loans are first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based solely on first mortgages may not be legally authorized to invest in the
[Class [ ]] Notes.
See "Legal Investment" in the prospectus.
Note Rating
The notes will not be offered unless they are each rated [ ] by
[Rating Agency] and [ ] by [Rating Agency] A rating is not a recommendation to
buy, sell or hold securities. These ratings may be lowered or withdrawn at any
time by either of the rating agencies.
See "Ratings" in this prospectus supplement and "Risk Factors -- Rating
of Securities" in the prospectus.
[remainder of page intentionally left blank]
S-14
<PAGE>
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the notes.
You should also carefully consider the information under "Risk Factors" in the
prospectus.
<TABLE>
<S> <C>
You may have difficulty
selling your notes............................. The underwriter intends to make a secondary market in the
notes purchased by it, but has no obligation to do so. We
cannot assure you that a secondary market will develop or,
if it develops, that it will continue. Consequently, you
may not be able to sell your notes readily or at prices
that will enable you to realize your desired yield. The
market values of the notes are likely to fluctuate; these
fluctuations may be significant and could result in
significant losses to you.
The secondary markets for asset backed securities have
experienced periods of illiquidity and can be expected to
do so in the future. Illiquidity can have a severely
adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest
rate risk, or that have been structured to meet the
investment requirements of limited categories of investors.
Cash flow disruptions could
cause payment delays and losses............... Substantial delays could result while liquidating
delinquent mortgage loans. [Resulting shortfalls in
distributions to noteholders could occur if the note
insurer were unable to perform its obligations under the
policy.] Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation
expenses) will reduce the security for the related
mortgage loans and in turn reduce the proceeds payable to
noteholders. [If any of the mortgaged properties fail to
provide adequate security for the related mortgage loans,
you could experience a loss if the note insurer were
unable to perform its obligations under the policy.]
Yield and reinvestment may be adversely
affected by unpredictability of
prepayments................................... During the period that a borrower may borrow money under
the borrower's line of credit, the borrower may make
monthly payments only for the accrued interest or may also
repay some or all of the amount previously borrowed. In
addition, borrowers may borrow additional amounts up to
the maximum amounts of their lines of credit. As a result,
the amount each loan group receives in any month (and in
turn the amount distributed to the holders of the
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
related class of notes) may change significantly. Even
during the repayment period, borrowers generally may prepay
their mortgage loans at any time without penalty. However,
prepayments on loans secured by property in California and
certain other jurisdictions may be subject to account
termination fees during the first five years after
origination of the loan. Generally, revolving home equity
loans are not viewed by borrowers as permanent financing.
The mortgage loans may be repaid at faster rates than
traditional mortgage loans. The trust fund's prepayment
experience may be affected by a wide variety of factors,
including: general economic conditions, interest rates,
the availability of alternative financing and homeowner
mobility.
In addition, substantially all of the mortgage loans
contain due-on-sale provisions and the master servicer
intends to enforce those provisions unless doing so is not
permitted by applicable law or the master servicer permits
the purchaser of the mortgaged property in question to
assume the mortgage loan in a manner consistent with
reasonable commercial practice. See "Description of the
Notes" in this prospectus supplement and "Legal Aspects of
the Loans-Due-on-Sale Clauses" in the prospectus for a
description of certain provisions of the credit line
agreements that may affect the prepayment experience on
the mortgage loans.
The yield to maturity and weighted average life of your
notes will be affected primarily by the rate and timing of
repayments and prepayments on the mortgage loans in your
loan group as compared with the creation and amount of
additional balances and the realization of liquidation
loss amounts.
You bear the reinvestment risks resulting from a faster or
slower rate of principal payments than you expected. [You
also bear the reinvestment risk if by [ ] all of
the funds in the prefunding account[s] have not been used
to acquire future home equity loans, which would result in
a prepayment of [each class of] [the Class [ ]] Notes in
an amount equal to the amount remaining in [its related]
[the] prefunding account on that date.] See "Maturity and
Prepayment Considerations" in this prospectus supplement
and "Yield and Prepayment Considerations" in the
prospectus.
Withdrawal or downgrading of
initial ratings will affect the
</TABLE>
S-16
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<TABLE>
<S> <C>
value of the notes............................ The rating of the notes will depend primarily on an
assessment by the rating agencies of the mortgage loans
[and upon the financial strength of the note insurer. Any
reduction in a rating assigned to the financial strength
of the note insurer may result in a reduction in the
rating of the notes]. A reduction in the rating assigned
to the notes probably would reduce the market value of the
notes and may affect your ability to sell them.
The rating by each of the rating agencies of the notes is
not a recommendation to purchase, hold or sell the notes
since that rating does not address the market price or
suitability for a particular investor. The rating agencies
may reduce or withdraw the ratings on the notes at any
time they deem appropriate. In general, the ratings
address credit risk and do not address the likelihood of
prepayments.
Junior lien priority could result in
payment delay or loss......................... The mortgage loans are secured by mortgages that generally
are second mortgages. The master servicer has the power under
certain circumstances to consent to a new mortgage lien on the
mortgaged property having priorty over the mortgage loan in
the trust fund. Mortgage loans secured by second mortgages are
entitled to proceeds that remain from the sale of the related
mortgaged property after any related senior mortgage loan and prior
statutory liens have been satisfied. If the remaining proceeds are
insufficient to satisfy the mortgage loans secured by
second mortgages and prior liens in the aggregate [and the
note insurer is unable to perform its obligations under
the policy], you will bear the risk of delay in
distributions while any deficiency judgment against the
borrower is sought and the risk of loss if the deficiency
judgment cannot be obtained or is not realized on.
See "Legal Aspects of the Loans" in the prospectus.
Trust fund may be unsecured
creditor under certain mortgage
loans since mortgage loan
assignments not recorded...................... Although the mortgage notes relating to the mortgage loans
will be delivered to the indenture trustee within [30]
days of the closing date [(or within 30 days after receipt
by the trust fund, with respect to the future home equity
loans)], assignments of mortgage loans to the indenture
trustee will only be recorded in those states specified by
the rating agencies where recording is required in order
to protect the indenture trustee's
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
interest in the related mortgage loan or to perfect a first
priority security interest in favor of the indenture trustee
in the related mortgage loan if a court were to recharacterize
the sale of the mortgage loans as a financing.
In certain states in which the mortgage properties are
located, failure to record the assignments of the related
mortgages to the indenture trustee will have the result of
making the sale of the mortgage loans potentially
ineffective against any creditors of the seller who may
have been fraudulently or inadvertently induced to rely on
the mortgage loans as assets of the seller or any
purchaser of a mortgage loan who had no notice of the
prior conveyance to the trust fund if the purchaser
perfects his interest in the mortgage loan by taking
possession of the related documents or other evidence of
indebtedness or otherwise.
In those events, the trust fund would be an unsecured
creditor of the seller.
Developments in [California] could
have disproportionate effect on the
pool of mortgage loans due to
geographic concentration of
mortgaged properties.......................... Approximately [ ]% of the mortgage loans in statistic
calculation loan group [ ] and approximately [ ]% of
the mortgage loans in statistic calculation loan group [
] are secured by mortgaged properties located in the State
of [California]. After the statistic calculation date, the
geographic concentration could change because of the
addition or removal of mortgage loans, prepayments or the
creation of additional balances. Property in [California]
may be more susceptible than homes located in other parts
of the country to certain types of uninsurable hazards,
such as earthquakes, floods, mudslides and other natural
disasters. In addition: economic conditions in
[California] (which may or may not affect real property
values) may affect the ability of borrowers to repay their
loans on time; declines in the [California] residential
real estate market may reduce the values of properties
located in [California], which would result in an increase
in the loan-to-value ratios; and any increase in the
market value of properties located in [California] would
reduce the loan-to-value ratios and could, therefore, make
alternative sources of financing available to the
borrowers at lower interest rates,
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
which could result in an increased rate of prepayment of the
mortgage loans.
Master servicer has ability to
change the terms of the
mortgage loans............................... The master servicer may agree to changes in the terms of a
credit line agreement if the changes do not materially and
adversely affect the interest of the related noteholders[,
any third party credit enhancer] [or the note insurer,]
and are consistent with prudent business practice.
In addition, the master servicer, within certain
limitations, may increase the credit limit related to a
mortgage loan or reduce the loan rate for a mortgage loan.
Any increase in the credit limit related to a mortgage
loan would increase the combined loan-to-value ratio of
that mortgage loan and, accordingly, would increase the
risk of the related class of notes' investment in the
mortgage loan. In addition, any reduction in the loan rate
of a mortgage loan would reduce the related loan group's
excess cash flow available to absorb losses.
Your return could be adversely
affected by delinquent mortgage
Loans....................................... The trust fund may include mortgage loans that are 59 or
fewer days delinquent as of [ ] (the cut-off date for
the pool of mortgage loans). We expect that the principal
balance of mortgage loans that are between 30 days and 59
days delinquent as of the cut-off date will not exceed
approximately $[ ]. Mortgage loans that are already
delinquent may increase the risk that the trust fund will
experience a loss if the investor interest collections are
not sufficient to cover the investor loss amounts for any
distribution date, amounts intended to provide protection
for the notes that are otherwise payable to the owner of
the transferor interest have been exhausted [and the note
insurer fails to perform its obligations under the policy].
Effect of loan rates on the notes............. The notes accrue interest at a rate based on the one-month
LIBOR index plus a specified margin, but are subject to a
cap [based in part on the interest rates on the mortgage
loans].
The mortgage loans have interest rates that are based on
the prime rate, and have periodic and maximum limitations
on adjustments to the loan rate. As a result, the notes
may accrue less interest than they would accrue if the
note rate were based solely on the LIBOR index plus the
specified margin.
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
A variety of factors could limit the note rate. Some of
these factors are described below: Each note rate
adjusts [monthly] while the loan rates on the mortgage
loans may adjust less frequently. Consequently, the loan
rates may limit increases in one or both note rates for
extended periods in a rising interest rate environment.
The prime rate may respond to different economic and
market factors than LIBOR and thus may increase or
decrease at different times. As a result, the loan rates
could decline while LIBOR is stable or rising. And
although both the loan rates and LIBOR may either decline
or increase during the same period, the loan rates could
decline more rapidly or increase more slowly than LIBOR.
These factors may adversely affect the yield to maturity
on the notes.
For a discussion of additional risks pertaining to the
notes, see "Risk Factors" in the prospectus.
[Certain rights may be affected by the
issuance of [two] classes of notes
secured by a single trust fund.............. The ability to declare an event of master servicing
termination under the sale and servicing agreement or an
event of default under the indenture, or to amend the sale
and servicing agreement or the indenture rests with [the
note insurer and] the holders of specified percentages of
the notes in both groups. [In addition, under certain
circumstances the third party credit enhancer will have
those rights as they relate to the Class [ ] Notes.] As
a result you may have less ability to control certain
actions than you would have had if only a single class of
notes had been issued.]
</TABLE>
FORWARD LOOKING STATEMENTS
Some statements contained in or incorporated by reference in this
prospectus supplement and the accompanying prospectus consist of forward-looking
statements relating to future economic performance or projections and other
financial items. These statements can be identified by the use of
forward-looking words such as "may," "will," "should," "expects," "believes,"
"anticipates," "estimates," or other comparable words. Forward-looking
statements are subject to a variety of risks and uncertainties that could cause
actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences and various other matters, many of which are beyond our control.
Because we cannot predict the future, what actually happens may be very
different from what we predict in our forward-looking statements.
S-20
<PAGE>
THE TRUST
General
First Horizon Home Equity Loan Trust 200[ ]-[ ] is a business trust
formed under the laws of the State of [ ] under the Trust
Agreement, dated [ , 200[ ]], between First Horizon Asset Securities
Inc., as depositor, and [Name of owner trustee], as owner trustee, to do the
transactions described in this prospectus supplement. After its formation, the
trust will not engage in any activity other than acquiring, holding and managing
the mortgage loans and the other assets of the trust and their proceeds, issuing
the Notes and the transferor's interest, making payments on the Notes and the
transferor's interest, and engaging in other activities that are appropriate in
connection these activities.
The trust's principal offices are located in [ ] in care of
[Name of owner trustee], as owner trustee, at its address below.
Trust Assets
The property of the trust will generally consist of: the principal balance
of each mortgage loan as of the cut-off date (referred to as the cut-off date
principal balance), plus any new advances made on it under the applicable credit
line agreement during the life of the trust fund ("Additional Balances");
collections on the mortgage loans received after the cut-off date (exclusive of
payments of accrued interest due on or before the cut-off date); mortgaged
properties relating to the mortgage loans that are acquired by foreclosure or
deed in lieu of foreclosure; the collection account for the Notes (excluding its
net earnings); [the Prefunding Account[s] [and the similar account for loan
group 1] and any additional loans purchased with their proceeds;] [the Reserve
Fund (excluding its net earnings);] [the Policy] and any further credit
enhancement for the Notes; and an assignment of the depositor's rights under the
purchase agreement.
The assets of the trust comprising loan group [ ], the related collection
account, [the related Prefunding Account, the Reserve Fund,] [the Policy,] and
the depositor's rights under the agreement under which it purchased the mortgage
loans will be pledged to the indenture trustee as security for the Class [ ]
Notes under the indenture. [The assets of the trust comprising loan group [ ],
the related collection account, [the related Prefunding Account, the Reserve
Fund,] [the Policy,] and the depositor's rights under the agreement under which
it purchased the mortgage loans will be pledged to the indenture trustee as
security for the Class [ ] Notes under the indenture.]
A substantial portion of the economic interest in the mortgage loans, and
consequently the trust, is related to the repayment of the Notes and subject to
the lien of the indenture. All of the remaining interest in the mortgage loans
in the trust fund will be represented by a single transferor interest that will
be owned by the transferor.
The transferor has the right to sell or pledge the transferor interest at
any time, if the Rating Agencies have notified the transferor and the indenture
trustee in writing that the action will not result in the reduction or
withdrawal of the ratings assigned to the Notes [without regard to the Policy]
[or any other third party credit enhancements], and certain other conditions
specified in the trust agreement are satisfied.
S-21
<PAGE>
The owner trustee and any of its affiliates may hold Notes in their own
names or as pledgees. To meet the legal requirements of certain jurisdictions,
the owner trustee may appoint co-trustees or separate trustees of any part of
the trust fund under the trust agreement. All rights and obligations conferred
or imposed on the owner trustee by the sale and servicing agreement and the
trust agreement will be conferred or imposed on any separate trustee or co-
trustee. In any jurisdiction in which the owner trustee or indenture trustee is
incompetent or unqualified to perform any act, the separate trustee or co-
trustee will perform the act solely at the direction of the owner trustee.
The owner trustee may resign at any time, in which event the master
servicer must appoint a successor [acceptable to the Note Insurer]. The master
servicer may also remove the owner trustee if it ceases to be eligible to
continue as such under the trust agreement or becomes legally unable to act or
becomes insolvent. Any resignation or removal of the owner trustee and
appointment of a successor will not become effective until acceptance of the
appointment by the successor.
Duties of the Owner Trustee
The owner trustee will make no representations as to the validity or
sufficiency of the trust agreement, the Notes, or of any mortgage loans or
related documents, and will not be accountable for the use or application by the
depositor or the master servicer of any funds paid to the depositor or the
master servicer on the Notes, or the mortgage loans, or the investment of any
monies by the master servicer before being deposited into the collection
accounts. The owner trustee will be required to perform only those duties
specifically required of it under the trust agreement. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the owner trustee under the trust
agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the trust agreement.
Certain Activities
The Trust Fund will not borrow money, make loans, invest in securities for
the purpose of exercising control, underwrite securities, except as provided in
the trust agreement, engage in the purchase and sale (or turnover) of
investments, offer securities in exchange for property (except the Notes for the
mortgage loans), or repurchase or otherwise reacquire its securities. See
"Description of the Sale and Servicing Agreement -- Evidence as to Compliance"
above for information regarding reports as to the compliance by the master
servicer with the sale and servicing agreement.
Termination
The trust created by the trust agreement shall terminate upon the final
distribution of all moneys or other property or proceeds of the trust or at the
time the assignor of mortgage loans to the depositor becomes insolvent.
The Owner Trustee
[Name of owner trustee] will act as the owner trustee under the trust
agreement. [Name of owner trustee] is a [ ] banking
corporation and its principal officers are located at [ ],
[ ].
S-22
<PAGE>
[THE NOTE INSURER
The following information in this section has been provided by Note Insurer
(the "Note Insurer"). Accordingly, none of the depositor, the seller and master
servicer[, any third party credit enhancer] or the underwriter makes any
representation as to the accuracy and completeness of the information in this
section.
[Description of Note Insurer, including financial information]]
THE MASTER SERVICER
General
[First Tennessee Bank National Association ("First Tennessee") will service
the mortgage loans consisting of [adjustable] rate home equity revolving credit
line loans made or to be made in the future under the sale and servicing
agreement. The mortgage loans will be secured by either first or second deeds of
trust or mortgages on the residential properties that are one- to four-family
properties, condominiums and planned unit developments.
First Tennessee may perform any of its obligations under the sale and
servicing agreement dated as of [ ], 200[ ] among First Horizon Asset
Securities Inc., as depositor, First Tennessee, as seller and master servicer
[Name of third party enhancer, if any] and [Name of owner trustee], as owner
trustee, through one or more subservicers. Notwithstanding any subservicing
arrangement, the master servicer will remain liable for its servicing
obligations under the sale and servicing agreement as if the master servicer
alone were servicing the mortgage loans. As of the Closing Date, the master
servicer will service the mortgage loans without subservicing arrangements.]
The Master Servicer
[First Tennessee, a national banking association, will act as master
servicer for the mortgage loans under the sale and servicing agreement. First
Tennessee is an indirect wholly owned subsidiary of First Tennessee National
Corporation, a Tennessee corporation. First Tennessee National Corporation,
headquartered in Memphis, Tennessee, is a national, diversified financial
services institution, and one of the fifty largest bank holding companies in the
United States. Through its principal subsidiary, First Tennessee, and other
subsidiaries, it provides banking and other financial services to its customers
through various regional and national lines of business.
First Tennessee's mortgage loan servicing portfolio consists primarily of
first and second lien, fixed or adjustable rate mortgage loans secured by
single-family residences. First Tennessee began servicing home equity lines of
credit in [ ]. At [ ], 200[ ] First Tennessee provided
servicing for approximately $[ ] aggregate principal amount of mortgage
loans, substantially all of which are being serviced for unaffiliated persons.
At [ ], First Tennessee provided servicing for approximately $[ ]
aggregate principal amount of first and second lien mortgage loans originated
under its home equity lines of credit program.
The principal executive offices of First Tennessee are located at 165
Madison Avenue, Memphis, Tennessee 38103. Its telephone number is (800) 364-
7662. First Tennessee conducts operations from its headquarters in Memphis,
Tennessee.]
[THE HOME EQUITY LOAN PROGRAM
Underwriting Procedures Relating to Home Equity Loans
S-23
<PAGE>
[The following is a description of the underwriting procedures customarily
employed by the seller with respect to home equity loans. The underwriting
process is intended to assess the applicant's credit standing and repayment
ability, and the value and adequacy of the real property security as collateral
for the proposed loan. Exceptions to the seller's underwriting guidelines will
be made when compensating factors are present. These factors include the
borrower's employment stability, favorable credit history, equity in the related
property and the nature of the underlying first mortgage loan.
Each applicant for a home equity loan must complete an application that
lists the applicant's assets, liabilities, income, and employment history and
other demographic and personal information. If information in the loan
application demonstrates that the applicant has sufficient income and there is
sufficient equity in the real property to justify making a home equity loan, the
seller will conduct a further credit investigation of the applicant. This
investigation includes obtaining and reviewing an independent credit bureau
report on the credit history of the applicant to evaluate the applicant's
ability and willingness to repay. The credit report typically contains
information relating to matters such as credit history with local merchants and
lenders, installment and revolving debt payments and any record of
delinquencies, defaults, bankruptcy, collateral repossessions, suits or
judgments.
The seller may originate or acquire mortgage loans in accordance with
alternative sets of underwriting criteria under an Alternative Documentation
Loan Program, a Reduced Documentation Loan Program or a Streamlined
Documentation Loan Program. Generally, Alternative Documentation Programs permit
a borrower to provide pay stubs and W-2 forms covering the most recent two
years, in lieu of obtaining a Verification of Employment. Reduced Documentation
Programs place more emphasis on property underwriting than on credit
underwriting. Thus, certain credit underwriting documentation concerning income
and employment verification is waived. Reduced Documentation Programs require
applicants to list their assets and also permit applicants to submit bank
statements in lieu of verifications of deposits. Only self-employed borrowers
with credit histories that demonstrate an established ability to repay
indebtedness in a timely fashion are eligible for Reduced Documentation
Programs. Streamlined Documentation programs may be available for first-lien
borrowers in good standing with the seller. A Streamlined Documentation Loan
Program may be available for borrowers who have recently purchased or refinanced
(rate/term) with the seller if they have not been 30 days delinquent in payment
during the previous twelve month period. Under a Streamlined Documentation
Program, the value of the mortgaged property that was used in conjunction with
obtaining the first lien from the seller is used in lieu of a new appraisal and
later used to determine the combined loan-to-value ratios for the new home
equity line of credit. In most instances, the maximum loan amount is limited to
$30,000. In addition, a credit review is conducted, however no debt ratio
calculation, income documentation or asset verification is required. A
telephonic verification of employment is required before loan closing.
Full appraisals are generally performed on all home equity loans that at
origination had a credit limit greater than $100,000. These appraisals are
determined on the basis of a seller-approved, independent third-party, fee-based
appraisal completed on forms approved by Fannie Mae or Freddie Mac. For certain
home equity loans that had at origination a credit limit less than or equal to
$100,000, a drive-by evaluation is generally completed by a state licensed,
independent third-party, professional appraiser on forms approved by either
Fannie Mae or Freddie Mac. The drive-by evaluation is an exterior examination of
the premises by the appraiser to determine that the property is in good
condition. The appraisal is based on various factors, including the market value
of comparable homes and the cost of replacing the improvements, and generally
must have been made not earlier than 180 days before the date of origination of
the mortgage loan. For certain home equity loans with credit limits less than or
equal to $100,000, First Tennessee may have the related mortgaged property
appraised electronically. Electronic appraisals use commercially-available home
price indices and will only be completed on
S-24
<PAGE>
mortgaged properties where First Tennessee also services the first mortgage. The
minimum and maximum loan amounts for home equity loans are generally $7,500 and
$500,000, respectively. Borrowers may draw under the home equity loans in
minimum amounts of $250 and maximum amounts up to the remaining available
credit, in each case after giving effect to all prior draws and payments on the
credit line.
After obtaining all applicable employment, credit and property information,
the seller generally uses a debt-to-income ratio to assist in determining
whether the prospective borrower has sufficient monthly income available to
support the payments on the home equity loan in addition to any senior mortgage
loan payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations. The "debt-to-income ratio" is
the ratio of the borrower's total monthly credit obligations (assuming the
mortgage loan interest rate is based on the applicable fully indexed interest
rate) to the borrower's gross monthly income. Based on this, the maximum monthly
debt-to-income ratio is 45%. Variations in the monthly debt-to-income ratios
limits are permitted based on compensating factors. The seller currently offers
home equity loan products that allow maximum combined loan-to-value ratios up to
100%.
It is generally the seller's policy to require a title search or limited
coverage policy before it makes a home equity loan for amounts less than or
equal to $100,000. In addition, if the home equity loan has a maximum draw
amount of more than $100,000, the seller requires that the borrower obtain an
ALTA policy, or other assurance of title customary in the relevant jurisdiction.
In addition, ALTA title policies are generally obtained in situations where the
property is on leased land or there has been a change in title or the home
equity loan is in first lien position.]
SERVICING OF THE MORTGAGE LOANS
[The master servicer has established standard policies for the servicing
and collection of the home equity loans. Servicing includes, but is not limited
to, the collection and aggregation of payments relating to the mortgage loans;
the supervision of delinquent mortgage loans, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of the mortgaged
properties; and the preparation of tax related information in connection with
the mortgage loans.
Billing statements are mailed monthly by the master servicer. The
statements detail all debits and credits and specify the minimum payment due and
the available credit line. Notice of changes in the applicable loan rate are
provided by the master servicer to the mortgagor with the monthly statements.
All payments are due by the fifteenth day of the month.
The general policy of the master servicer is to initiate foreclosure in the
underlying property for a mortgage loan after the loan is 60 days or more
delinquent and satisfactory arrangements cannot be made with the mortgagor; or
if a notice of default on a senior lien is received by the master servicer.
Foreclosure proceedings may be terminated if the delinquency is cured.
Mortgage loans to borrowers in bankruptcy proceedings may be restructured in
accordance with law and with a view to maximizing recovery on the loans,
including any deficiencies.
Once foreclosure is initiated by the master servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the property is
located. During the foreclosure proceeding, the master servicer determines the
amount of the foreclosure bid and whether to liquidate the loan.
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<PAGE>
After foreclosure, if the home equity loan is secured by a first mortgage
lien, the master servicer may liquidate the mortgaged property and charge off
the home equity loan balance that was not recovered through liquidation
proceeds. If the mortgaged property was subject to a senior lien, the master
servicer will either directly manage the foreclosure sale of the property and
satisfy the lien at the time of sale or take other action deemed necessary to
protect the interest in the mortgaged property. If in the judgment of the master
servicer, the cost of maintaining or purchasing the senior lien position exceeds
the economic benefit of the action, the master servicer will generally charge
off the entire home equity loan and may seek a money judgment against the
borrower.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the master servicer's business
judgment, changes in the portfolio and applicable laws and regulations.]
Foreclosure and Delinquency Experience
The tables on the following page summarize the delinquency and foreclosure
experience, respectively, on the dates indicated, of home equity revolving
credit line loans serviced by the master servicer. The delinquency and
foreclosure percentages may be affected by the size and relative lack of
seasoning of the servicing portfolio because many of such loans were not
outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount or severity of
delinquency or losses on the mortgage loans and no assurances can be given that
the foreclosure and delinquency experience presented in the table below will be
indicative of such experience on the mortgage loans.
For the purposes of the following table, the period of delinquency is based
on the number of days payments are contractually past due.
Certain total percentages and dollar amounts may not equal the sum of the
percentages and dollar amounts indicated in the columns due to differences in
rounding.
[remainder of page intentionally left blank]
S-26
<PAGE>
Delinquency and Foreclosure Experience
of First Tennessee's Home Equity Revolving Credit Line Loan Portfolio
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998 1999
---- ---- ----
No. of % of Principal % of No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance($) Balance Loans Loans Balance($) Balance Loans Loans Balance($) Balance
------ ----- --------- ------- ----- ----- --------- ------- ----- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 29,374 100% 611,00 100% 33,170 100% 681,000 100% 35,527 100% 782,000 100%
Period of Delinquency
30-59 Days 452 1.54% 8,572 1.40% 279 0.84% 4,686 0.69% 391 1.10% 7,575 0.97%
60-89 Days 94 0.32% 1,658 0.27% 75 0.23% 1,580 0.23% 103 0.29% 1,868 0.24%
90 Days or more 89 0.30% 1,820 0.30% 116 0.35% 2,229 0.33% 82 0.23% 1,790 0.23%
Foreclosures Pending
Total Delinquencies 635 2.16% 12,049 1.97% 470 1.42% 8,495 1.25% 576 1.62% 11,234 1.44%
</TABLE>
As of June 30, 2000
-------------------
No. of % of Principal % of
Loans Loans Balance($) Balance
------ ------ ---------- --------
Total Portfolio 38,436 100% 896,000 100%
Period of Delinquency
30-59 Days 373 0.97% 7,202 0.80%
60-89 Days 119 0.31% 2,140 0.24%
90 Days or more 105 0.27% 2,394 0.27%
Foreclosures Pending
Total Delinquencies 597 1.55% 11,736 1.31%
S-27
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
General
[Certain statistical information concerning the pool of mortgage loans is
illustrated below (the pool is referred to as the "Statistic Calculation Pool"
and each mortgage loan is referred to as a "Statistic Calculation Pool Mortgage
Loan"). The mortgage pool will be divided into [two] groups of mortgage loans
(each is referred to as a loan group) -- loan group [ ] and loan group [ ]. The
repayment of the Class [ ] Notes will be secured by a security interest in loan
group [ ] only [and the repayment of the Class [ ] Notes will be secured by a
security interest in loan group [ ].] [Loan group [ ] information is included
chiefly to provide a better understanding about the trust fund.] A detailed
description of the mortgage loans actually delivered (the "Detailed
Description") will be available to purchasers of the Notes at or before, and
will be filed on Form 8-K with the Securities and Exchange Commission after
delivery of the Notes. The Detailed Description will specify the aggregate of
the principal balances of the mortgage loans included in the trust fund as of
the cut-off date and will also include, among other things, the following
information regarding the mortgage loans: the outstanding principal balances of
the mortgage loans as of [ ], 200[ ] (the cut-off date) [or the related
transfer date], the lien priorities of the mortgage loans, the loan rates borne
by the mortgage loans as of the cut-off date, the combined loan-to-value ratios
of the mortgage loans, the remaining term to scheduled maturity of the mortgage
loans, the type of properties securing the mortgage loans, the geographical
distribution of the mortgage loans by state and the credit limits and credit
limit utilization rates of the mortgage loans as of the cut-off date.
[The Detailed Description speaks as of the cut-off date and consequently
does not include any Subsequent Home Equity Loans purchased with the funds in
the prefunding accounts.] The mortgage loans will have been originated in
accordance with credit line agreements and will be secured by mortgages or deeds
of trust. The mortgages and deeds of trust are either first or second mortgages
or deeds of trust on mortgaged properties expected to be located in [49 states
and the District of Columbia] as of the cut-off date. The mortgaged properties
securing the mortgage loans will consist of residential properties that are one-
to four-family properties. See "-- Mortgage Loan Terms" below.
Information regarding the Statistical Calculation Pool Mortgage Loans as of
[ ], 200[ ] (the "Statistic Calculation Date") can be found on the tables
on pages S-[ ] through S-[ ].]
Mortgage Loan Terms
[General. A borrower may access a mortgage loan by writing a check in a
minimum amount of $[ ]. The mortgage loans bear interest at a variable rate
that changes monthly on the first business day of the related month with changes
in the applicable index rate. The Statistic Calculation Pool Mortgage Loans are
subject to a maximum per annum interest rate ranging from [ ]% to [ ]% per
annum, subject to applicable usury limitations. See "Legal Aspects of the Loans
-- Applicability of Usury Laws" in the prospectus. The daily periodic rate on
the mortgage loans (i.e., the loan rate) is the sum of the index rate plus the
applicable margin, divided by 365 days. The margin generally ranges between
[ ]% and [ ]%. The index rate is based on the highest "prime rate" published
in the "Money Rates" table of The Wall Street Journal as of the first business
day of each calendar month.
The second mortgage ratio for a mortgage loan in a second lien position is
the credit limit for the related mortgage loan divided by the sum of the credit
limit and the outstanding principal balance of any mortgage loan senior to the
related mortgage loan as of the date of related loan application. The weighted
average second mortgage loan ratio for the Loan Group [ ] Statistic
S-28
<PAGE>
Calculation Pool Mortgage Loans was approximately [ ]%. The weighted average
second mortgage ratio for the Loan Group [ ] Statistic Calculation Pool
Mortgage Loans was approximately [ ]%.
First Tennessee generally offers introductory loan rates on its home equity
lines of credit. The introductory rate applies to payments made during the
[first three months or first six months] after origination. After the
introductory period, the loan rate will adjust to the index rate plus the
applicable margin.
In general, the home equity loans may be drawn on during a draw period of
[five] years. Home equity loans with a draw period of [five] years (which
generally may be extendible for an additional [five] years, with First
Tennessee's approval) constitute approximately [ ]% of the Loan Group [ ]
Statistic Calculation Pool Mortgage Loans and approximately [ ]% of the Loan
Group [ ] Statistic Calculation Pool Mortgage Loans, each by Statistic
Calculation Date Principal Balance. These loans are generally subject to a
[fifteen] year repayment period following the end of the draw period. During
this repayment period, the outstanding principal balance of the loan will be
paid in monthly installments equal to [1/180] of the outstanding principal
balance at the end of the draw period.
The minimum payment due during the draw period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period, any past due finance charges and any other
charges owed. The minimum payment due during the repayment period will be equal
to the sum of the finance charges accrued on the outstanding principal balance
of the mortgage loan during the related billing period, any amounts past due,
any other charges owed and the principal payment described above.
The principal balance of a mortgage loan (other than a Liquidated Mortgage
Loan) on any day is equal to its principal balance as of the cut-off date for
the mortgage loans purchased on the Closing Date [and as of the relevant date
for the future home equity loans] plus any Additional Balances for the mortgage
loan, minus all collections credited against the principal balance of the
mortgage loan in accordance with the related credit line agreement before the
relevant day.
The principal balance of a Liquidated Mortgage Loan after final recovery of
related liquidation proceeds shall be zero.
Difference between Statistic Calculation Pool and Cut-off Date Pool
The statistical information presented in this prospectus supplement for
each loan group reflects the mortgage loans originated by the seller through the
Statistic Calculation Date, and is based on the number and the principal
balances of the mortgage loans in each loan group as of the Statistic
Calculation Date. The depositor expects that the actual pool as of the Closing
Date will represent approximately $[ ] aggregate principal balance of
mortgage loans. Loan group [ ], which has a Statistic Calculation Date
Principal Balance of approximately $[ ], is expected to have a cut-off
date principal balance of approximately $[ ]. Loan group [ ], which has
a Statistic Calculation Date Principal Balance of approximately $[ ], is
expected to have a cut-off date principal balance of $[ ]. [The trust
also will include approximately $[ ] for loan group [ ] and $[ ] for
loan group [ ] in the relevant prefunding accounts that may be applied to the
purchase of additional mortgage loans as described below.] The [initial]
mortgage loans to be included in the cut-off date pool will represent mortgage
loans originated by the seller on or before the cut-off date and sold by the
seller to the depositor, and by the depositor to the trust fund, on the Closing
Date. In addition, with respect to the Statistic Calculation Pool Mortgage
Loans, as to which statistical information is presented in this prospectus
supplement, some amortization will occur and some Additional Balances may be
created before the cut-off date. Moreover, certain Statistic Calculation Pool
Mortgage Loans may prepay in full or may be
S-29
<PAGE>
determined not to meet the eligibility requirements for the final cut-off date
pool and as a result may not be included in the cut-off date pool. As a result
of the foregoing, the statistical distribution of characteristics as of the cut-
off date for the cut-off date mortgage loan pool will vary from the statistical
distribution of characteristics of each Statistic Calculation Loan Group as
presented in this prospectus supplement, although the variance will not be
material. If the seller does not, as of the cut-off date, have the full amount
of mortgage loans that the depositor expects to purchase from the seller and
sell to the trust fund on the cut-off date (i.e. approximately $[ ] aggregate
principal balance of mortgage loans), the depositor may reduce the size of the
offering. Likewise, if the seller has more mortgage loans than anticipated, the
depositor may increase the size of the offering. The original principal amount
of either class of Notes may not decrease or increase by more than [10]%. [For
each loan group, the excess of the original principal balance of the related
Notes over the cut-off date principal balance of that loan group will be
deposited into an account (the account for loan group [ ], the "Prefunding
Account"). These funds are expected to be used to acquire future home equity
loans not in the cut-off date pool (these loans for loan group [ ], the
"Subsequent Home Equity Loans"). Consequently, the statistical distribution
characteristics of loan group [ ] after the addition of Subsequent Home Equity
Loans will vary from that of both the loan group [ ] cut-off date mortgage
loan pool and the Loan Group [ ] Statistical Calculation Pool Mortgage Loans.
Any funds remaining in the Prefunding Account on [ ] will be used to prepay
the Class [ ] Notes on the first distribution date].
The sum of the columns below may not equal the total indicated for each
loan group due to rounding. The following tables describe the Statistic
Calculation Pool Mortgage Loans in each loan group and the related mortgaged
properties based upon the Loan Group [ ] Statistic Calculation Pool or the Loan
Group [ ] Statistic Calculation Pool, as applicable, as of the close of
business on the Statistic Calculation Date:
LOAN GROUP [ ]
PRINCIPAL BALANCES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Number of Aggregate Unpaid Aggregate Principal
Principal Balances Mortgage Loans Principal Balance Balance
-------------------- -------------- ----------------- -------
$ - $................ $ %
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
$ - $................
Total........... $ 100%
S-30
<PAGE>
The combined loan-to-value ratio in the following table is a fraction whose
numerator is the sum of (i) the credit limit of the mortgage loans and (ii) any
outstanding principal balances of mortgage loans senior or of equal priority to
the mortgage loans (calculated generally at the date of origination of the
mortgage loans) and whose denominator is the lesser of (i) the appraised value
of the related mortgaged property as stated in loan files at the date of
origination or (ii) in the case of a mortgaged property purchased within one
year of the origination of the related mortgage loan, the purchase price of the
mortgaged property.
COMBINED LOAN-TO-VALUE RATIOS(1)
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Combined Loan- Number of Aggregate Unpaid Aggregate Principal
to-Value Ratios Mortgage Loans Principal Balance Balance
--------------- -------------- ----------------- -------
Less than %........ $ %
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
Total............ $ 100%
S-31
<PAGE>
The loan rates in the following table reflect the fact that approximately
[ ]% of the Loan Group [ ] Statistic Calculation Pool Mortgage Loans
by Statistic Calculation Date Principal Balance are currently subject to an
introductory rate of [ ]% per annum and [ ]% of the Loan Group [ ]
Statistic Calculation Pool Mortgage Loans by Statistic Calculation Date
Principal Balance are currently subject to an introductory rate of [ ]% per
annum.
LOAN RATES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Loan Rates Mortgage Loans Principal Balance Balance
------------------- -------------- ----------------- -------
Less than % $ %
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
Total............ $ 100%
S-32
<PAGE>
GEOGRAPHIC DISTRIBUTION
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
State Mortgage Loans Principal Balance Balance
----- -------------- ----------------- -------
.................. $ %
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
Total............ $ 100%
The geographic location used for the above table is determined by the
address of the mortgaged property securing the related mortgage loan.
S-33
<PAGE>
PROPERTY TYPE
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Property Type Mortgage Loans Principal Balance Balance
------------- -------------- ----------------- -------
Single Family......... $ %
PUD...................
Lo Condo..............
2 - 4 Units...........
Total.............. $ 100%
LIEN PROPERTY
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Lien Property Mortgage Loans Principal Balance Balance
------------- -------------- ----------------- -------
1/st/ Liens.......... $ %
2/nd/ Liens..........
Total............. $ 100%
S-34
<PAGE>
MARGINS
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Margins Mortgage Loans Principal Balance Balance
---------------- -------------- ----------------- -------
%................... $ %
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
Total............ $ 100%
The credit limit utilization rates in the following table are determined by
dividing the Loan Group [ ] Statistic Calculation Date Balance for the
particular grouping by the aggregate of the credit limits of the related credit
line agreements.
CREDIT LIMIT UTILIZATION RATES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Credit Limit Number of Aggregate Unpaid Aggregate Principal
Utilization Rates Mortgage Loans Principal Balance Balance
----------------- -------------- ----------------- -------
%................... $ %
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
-...................
Total............ $ 100%
S-35
<PAGE>
MAXIMUM RATES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Maximum Rates Mortgage Loans Principal Balance Balance
------------- -------------- ----------------- -------
%.............. $ %
Total....... $ 100%
MONTHS REMAINING TO SCHEDULE MATURITY
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Months Remaining Number of Aggregate Unpaid Aggregate Principal
to Scheduled Maturity Mortgage Loans Principal Balance Balance
--------------------- -------------- ----------------- -------
-........................ $ %
-........................
-........................
-........................
Total $ 100%
The above table assumes that the draw period for Loan Group [ ]
Statistic Calculation Pool Mortgage Loans with (a) five year draw periods and
fifteen year repayment periods will be extended for an additional five years and
(b) five year draw periods and ten year repayment periods will not be extended.
ORIGINATION YEAR
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Origination Year Mortgage Loans Principal Balance Balance
---------------- -------------- ----------------- -------
.................. $ %
Total.......... $ 100%
S-36
<PAGE>
DELINQUENCY STATUS
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Number of Days Delinquent Mortgage Loans Principal Balance Balance
------------------------- -------------- ----------------- -------
Current.................. $ %
Total................. $ 100%
CREDIT LIMITS
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Credit Limits Mortgage Loans Principal Balance Balance
---------------------- -------------- ----------------- -------
$ - $.................... $ %
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
$ - $....................
Total................... $ 100%
S-37
<PAGE>
LOAN GROUP [ ]
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Principal Balances Mortgage Loans Principal Balance Balance
--------------------------- -------------- ----------------- -------
<S> <C> <C> <C>
$ - $........................ $ %
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
$ - $........................
Total....................... $ 100%
</TABLE>
S-38
<PAGE>
The combined loan-to-value ratio in the following table is a fraction whose
numerator is the sum of (i) the credit limit of the mortgage loans and (ii) any
outstanding principal balances of mortgage loans senior or of equal priority to
the mortgage loans (calculated generally at the date of origination of the
mortgage loans) and whose denominator is the lesser of (i) the appraised value
of the related mortgaged property as stated in loan files at the date of
origination or (ii) in the case of a mortgaged property purchased within one
year of the origination of the related mortgage loan, the purchase price of the
mortgaged property.
COMBINED LOAN-TO-VALUE RATIOS
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Combined Number of Aggregate Unpaid Aggregate Principal
Loan-to-Value Ratios Mortgage Loans Principal Balance Balance
-------------------- -------------- ----------------- -------
Less than %.......... $ %
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
Total............. $ 100%
S-39
<PAGE>
The loan rates in the following table reflect the fact that approximately
[ ]% of the Loan Group [ ] Statistic Calculation Pool Mortgage Loans by
Statistic Calculation Date Principal Balance are currently subject to an
introductory rate of [ ]% per annum and [ ]% of the Loan Group [ ]
Statistic Calculation Pool Mortgage introductory rate of [ ]% per annum.
LOAN RATES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Loan Rates Mortgage Loans Principal Balance Balance
------------------- -------------- ----------------- -------
- .................... $ %
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
- ....................
Total.............. $ 100%
S-40
<PAGE>
GEOGRAPHIC DISTRIBUTION
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
State Mortgage Loans Principal Balance Balance
----- -------------- ----------------- -------
.............. $ %
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
Total........ $ 100%
The geographic location used for the above table is determined by the
address of the mortgaged property securing the related mortgage loan.
S-41
<PAGE>
PROPERTY TYPE
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Property Type Mortgage Loans Principal Balance Balance
------------- -------------- ----------------- -------
Single Family........ $ %
PUD..................
Lo Condo.............
2 - 4 Units..........
Total............. $ 100%
LIEN PROPERTY
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Lien Property Mortgage Loans Principal Balance Balance
------------- -------------- ----------------- -------
1/st/ Liens.......... $ %
2/nd/ Liens..........
Total............. $ 100%
S-42
<PAGE>
MARGINS
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Margins Mortgage Loans Principal Balance Balance
---------------- -------------- ----------------- -------
%..................... $ %
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
Total................ $ 100%
The credit limit utilization rates in the following table are determined by
dividing the Loan Group [ ] Statistic Calculation Date Balance for the
particular grouping by the aggregate of the credit limits of the related credit
line agreements.
CREDIT LIMIT UTILIZATION RATES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Credit Limit Number of Aggregate Unpaid Aggregate Principal
Utilization Rates Mortgage Loans Principal Balance Balance
----------------- -------------- ----------------- -------
%..................... $ %
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
-.....................
Total.............. $ 100%
S-43
<PAGE>
MAXIMUM RATES
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Maximum Rates Mortgage Loans Principal Balance Balance
------------- -------------- ----------------- -------
%............. $ %
Total........ $ 100%
MONTHS REMAINING TO SCHEDULE MATURITY
<TABLE>
<CAPTION>
Percentage of Loan
Group [ ] Statistic
Calculation Date
Range of Months Remaining Number of Aggregate Unpaid Aggregate Principal
to Scheduled Maturity Mortgage Loans Principal Balance Balance
-------------------- -------------- ----------------- -------
<S> <C> <C> <C>
-.................... $ %
-....................
-....................
-....................
Total.............. $ 100%
</TABLE>
The above table assumes that the draw period for Loan Group [ ]
Statistic Calculation Pool Mortgage Loans with (a) five year draw periods and
fifteen year repayment periods will be extended for an additional five years and
(b) five year draw periods and ten year repayment periods will not be extended.
ORIGINATION YEAR
<TABLE>
<CAPTION>
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Origination Year Mortgage Loans Principal Balance Balance
---------------- -------------- ----------------- -------
<S> <C> <C> <C>
................... $ %
Total............ $ 100%
</TABLE>
S-44
<PAGE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Number of Days Delinquent Mortgage Loans Principal Balance Balance
------------------------- -------------- ----------------- -------
<S> <C> <C> <C>
Current.................. $ %
Total.................. $ 100%
</TABLE>
CREDIT LIMITS
<TABLE>
<CAPTION>
Percentage of Loan
Group [ ] Statistic
Calculation Date
Number of Aggregate Unpaid Aggregate Principal
Range of Credit Limits Mortgage Loans Principal Balance Balance
---------------------- -------------- ----------------- -------
<S> <C> <C> <C>
$ - $ ................... $ %
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
$ - $ ...................
Total................. $ 100%
</TABLE>
S-45
<PAGE>
Conveyance of Mortgage Loans
The obligation of the trust fund to purchase mortgage loans [for loan
group [ ]] on the Closing Date is subject to the following requirements[, any
of which requirements may be waived or modified in any respect by the Note
Insurer]: the mortgage loan may not be 60 or more days delinquent as of the
Closing Date; the remaining term to stated maturity of the mortgage loan will
not exceed [ ] months; the mortgage loan will be secured by a mortgage in a
first or second lien position; the mortgage loan will not have a loan rate less
than [ ]%;[ the mortgage loan will be otherwise acceptable to the Note
Insurer;] following the purchase of the mortgage loan by the trust fund, the
mortgage loans as of the Closing Date (a) will have a weighted average loan rate
of at least [ ]%; (b) will have a weighted average remaining term to stated
maturity of not more than [ ] months; (c) will have a weighted average
combined loan-to-value ratio of not more than [ ]%; (d) will have no mortgage
loan with a principal balance in excess of $[ ]; (e) will have a
concentration in any one state not in excess of [ ]%; and will have a
concentration in any one zip code not in excess of [ ]%; (f) will have not
more than [ ]% in aggregate principal balance of mortgage loans relating to
non-owner occupied properties; and (g) will not have more than [ ]% in
aggregate principal balance of mortgage loans that were appraised
electronically; the mortgage loan shall have a combined loan-to-value ratio not
in excess of [ ]; the mortgage loan will have a credit limit between $[ ]
and $[ ]; the mortgage loan will have a margin between [ ]% and [ ]%;
and the mortgage loan will comply with the representations and warranties in the
sale and servicing agreement.
[The trust fund may acquire Subsequent Home Equity Loans through [
] [that will be included in loan group [ ]] so long as they conform to the
criteria listed above. Each Subsequent Home Equity Loan will have been
underwritten substantially in accordance with the criteria described under "The
Home Equity Loan Program -- Underwriting Procedures Relating to Home Equity
Loans." Subsequent Home Equity Loans will be purchased using amounts on deposit
in the Prefunding Account[s] at a cash purchase price of [100]% of their
principal balance on a designated cut-off date before [ ]. The amount
paid from the Prefunding Account[s] for Subsequent Home Equity Loans will not
include accrued interest. Following each purchase of Subsequent Home Equity
Loans [for a loan group], the aggregate principal balance of [the relevant] loan
group [ ] will increase by an amount equal to the aggregate principal balance
of the Subsequent Home Equity Loans so acquired and the amount in the Prefunding
Account will decrease accordingly.
Any conveyance of Subsequent Home Equity Loans is subject to various
conditions including: that they satisfy substantially the same loan
representations and warranties as the initial home equity loans; that they were
identified by means of a selection process reasonably believed not to be adverse
to the interests of the holders of the Notes [and the Note Insurer]; that the
trust fund receive opinions of counsel [acceptable to the Note Insurer] and the
indenture trustee with respect to the validity of the conveyance of the
Subsequent Home Equity Loans; and that as of their cut-off date, each Subsequent
Home Equity Loan satisfied the eligibility requirements that the mortgage loans
had to satisfy on the closing date.
No discretion will be exercised in the selection of the Subsequent
Home Equity Loans to be acquired by the trust fund. They will all be mortgage
loans that had been applied for by the related borrowers before the cut-off
date, but that were not included in the cut-off date pool. The exact mortgage
loans to be acquired will be determined on a first-in, first-out basis. Mortgage
loans otherwise meeting the eligibility requirements will be aggregated by the
date on which they were funded, and all of these Subsequent Home Equity Loans
will be purchased in date order up through the day substantially all of the
funds in the Prefunding Account are expended. On that last day, the Subsequent
Home Equity Loans will be ordered and acquired alphabetically by the last name
of the primary obligor. These acquisitions may occur in one or more closings
after the initial closing date.]
S-46
<PAGE>
[The Prefunding Account
The assets of the trust fund will include the Prefunding Account[s] that
will contain approximately $[ ] on the closing date representing the excess of
the original principal balance of the [Class [ ]] Notes over the cut-off date
principal balance of the mortgage loans [in loan group [ ]] initially
transferred to the trust fund on the closing date. Monies in the Prefunding
Account[s] are expected to be used to purchase Subsequent Home Equity Loans
through [ ]. The Prefunding Account[s] will be part of the trust fund, but will
not be available to cover losses on the mortgage loans. Any funds remaining on
deposit in the Prefunding Account[s] on [ ] will be used to prepay the [relevant
class of] [Class [ ]] Notes on the first distribution date. Net income on
investment of funds in the Prefunding Account[s] will be paid to the master
servicer, and will not be available for payment on the Notes.]
MATURITY AND PREPAYMENT CONSIDERATIONS
The sale and servicing agreement, except as otherwise described in this
prospectus supplement, provides that the noteholders will be entitled to receive
on each distribution date distributions of principal, in the amounts described
under "Description of the Notes -- Distributions on the Notes," until the Note
principal balance is reduced to zero. During the Managed Amortization Period,
noteholders will receive amounts from principal collections based on the
applicable Investor Fixed Allocation Percentage for the related loan group,
subject to reduction as described below. [In addition, the funds remaining in
the Prefunding Account[s] on [ ] after the purchase of any Subsequent Home
Equity Loans on that date will be used to prepay the [relevant class of] [Class
[ ]] Notes on the first distribution date.]
For any date of calculation through the first distribution date on which
the balance of the transferor interest for a loan group is greater than or equal
to the applicable Required Transferor Subordinated Amount, the "Investor Fixed
Allocation Percentage" will equal the greater of (i)[ ]% and (ii) 100% minus
the percentage obtained by dividing the amount of the transferor interest
allocable to a loan group at the beginning of the relevant Collection Period by
the loan group balance at the beginning of the relevant Collection Period.
Thereafter, the Investor Fixed Allocation Percentage will equal [ ]%. During a
Rapid Amortization Period, noteholders will receive amounts from principal
collections based solely on the Investor Fixed Allocation Percentage for the
related loan group. Because prior distributions of principal collections to
noteholders serve to reduce the related Investor Floating Allocation Percentage
but may not change the related Investor Fixed Allocation Percentage in all
instances, allocations of principal collections from the mortgage loans in a
loan group based on the related Investor Fixed Allocation Percentage may result
in distributions of principal to the noteholders in amounts that are, in most
cases, greater relative to the declining balance of the mortgage loans in that
loan group than would be the case if the related Investor Floating Allocation
Percentage were used to determine the percentage of principal collections from
the mortgage loans in that loan group distributed to noteholders. This is
especially true during the Rapid Amortization Period when the noteholders are
entitled to receive their respective Investor Principal Collections and not a
lesser amount.
In addition, respective Investor Interest Collections may be distributed as
principal to noteholders of Notes in a particular loan group in connection with
the applicable Accelerated Principal Distribution Amount, if any. Moreover, to
the extent of losses allocable to the Notes related to a particular loan group,
those noteholders may also receive the amount of those losses as payment of
principal from the related Investor Interest Collections, Investor Interest
Collections from the other loan group, the Subordinated Transferor Collections,
[the Reserve Fund,] or, in some instances, draws under [the Policy] [or payments
under any third party
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enhancement]. The level of losses may therefore affect the rate of payment of
principal on the Notes.
[As of the closing date, the transferor interest with respect to each loan
group will be $0. The transferor interest is expected to grow in the early
months of the transaction due to the payment of the applicable Accelerated
Principal Distribution Amount.] [In addition,] to the extent obligors make more
draws than principal payments on the mortgage loans in a loan group, the
transferor interest may grow. An increase in the transferor interest due to
additional draws may also result in noteholders receiving principal at a greater
rate during the Rapid Amortization Period because the noteholders' share of
principal collections on the mortgage loans in a loan group is based on the
applicable Investor Fixed Allocation Percentage (without reduction). The sale
and servicing agreement and the indenture permit the transferor, at its option,
but subject to the satisfaction of certain conditions specified in the sale and
servicing agreement, including the conditions described below, to remove certain
mortgage loans from a loan group and release them from the lien of the indenture
at any time during the life of the trust fund, so long as the portion of the
transferor interest related to the applicable loan group (after giving effect to
the removal) is not less than the related Minimum Transferor Interest. See
"Description of the Sale and Servicing Agreement -- Optional Transfers of
Mortgage Loans to the Transferor."
All of the mortgage loans may be prepaid in full or in part at any time.
However, mortgage loans secured by mortgaged properties in California are
subject to an account termination fee equal to the lesser of $[ ] or [ ]
months interest on the amount prepaid, to the extent the prepaid amount exceeds
[ ]% of the unpaid principal balance, if the account is terminated on or before
its fifth year anniversary. In addition, mortgage loans secured by mortgaged
properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, account termination fees do not exceed
$[ ] and do not apply to accounts terminated after a date designated in the
related mortgage note that, depending on the jurisdiction, ranges between [ ]
months and [ ] years following origination. The prepayment experience of the
mortgage loans in a loan group will affect the weighted average life of the
related Notes.
The rate of prepayment on the mortgage loans cannot be predicted.
Generally, it is assumed that home equity revolving credit lines are not viewed
by borrowers as permanent financing. Accordingly, the mortgage loans may
experience a higher rate of prepayment than traditional first mortgage loans. On
the other hand, because the mortgage loans amortize as described under
"Description of the Mortgage Loans -- Mortgage Loan Terms," rates of principal
payments on the mortgage loans will generally be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
the mortgage loans. The prepayment experience of the mortgage loans in a loan
group may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the credit line agreements and changes affecting the deductibility for federal
income tax purposes of interest payments on home equity credit lines.
Substantially all of the mortgage loans contain "due-on-sale" provisions, and
the master servicer intends to enforce them, unless enforcement is not permitted
by applicable law or the master servicer permits the purchaser of the related
mortgaged property to assume the mortgage loan in a manner consistent with
reasonable commercial practice.
The enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related mortgage loan. See "Legal Aspects of the Loans -- Due-
on-Sale Clauses" in the prospectus.
The seller is not required to deliver certain documents relating to the
mortgage loans to the indenture trustee until [30] days after the Closing Date
[(or in the case of the Subsequent
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Home Equity Loans, until 21 days after they are acquired by the trust fund)].
See "Description of the Sale and Servicing Agreement -- Assignment of Mortgage
Loans." Should the seller fail to deliver all or a portion of the required
documents for any mortgage loan to the depositor, or, at the depositor's
direction, to the indenture trustee within the required period, the seller must
accept the transfer of the mortgage loan from the trust fund. The principal
balance of any mortgage loan so transferred will be deducted from the related
loan group balance, thus reducing the amount of the transferor interest related
to relevant loan group. If the deduction would cause the portion of the
transferor interest related to the relevant loan group to become less than the
related Minimum Transferor Interest at the time, the seller must either
substitute an Eligible Substitute Mortgage Loan or make a deposit into the
collection account equal to the amount by which the portion of the transferor
interest would be reduced to less than the related Minimum Transferor Interest
at the time. Except to the extent substituted for by an Eligible Substitute
Mortgage Loan, the transfer of the mortgage loan out of the trust fund will be
treated as a payment in full of the mortgage loan.
The yield to an investor who purchases the Notes in the secondary market at
a price other than par will vary from the anticipated yield if the rate of
prepayment on the mortgage loans in the related loan group is actually different
than the rate anticipated by the investor at the time the Notes were purchased.
Collections on the mortgage loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for the month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges on the mortgage loan. Borrowers
may fail to make scheduled payments. Collections on the mortgage loans may vary
due to seasonal purchasing and payment habits of borrowers.
We cannot predict the level of prepayments that will be experienced by the
trust fund and investors may expect that a portion of borrowers will not prepay
their mortgage loans to any significant degree. See "Yield and Prepayment
Considerations" in the prospectus.
POOL FACTOR
The pool factor is a seven-digit decimal that the indenture trustee will
compute monthly expressing the Note principal balance of each class of Notes as
of each distribution date as a proportion of the Original Note Principal Balance
after giving effect to any distribution of principal to that class of Notes on
the distribution date. On the Closing Date, the pool factor for each class of
Notes will be 1.0000000. See "Description of the Notes -- Distributions on the
Notes." Thereafter, the pool factor for each class of Notes will decline to
reflect reductions in the related Note principal balance resulting from
distributions of principal to that class of Notes and the related Invested
Amount of any unreimbursed Liquidation Loss Amounts from mortgage loans in the
related loan group.
Under the sale and servicing agreement and the indenture, monthly reports
concerning the Invested Amount, the pool factor and various other items of
information for each class of Notes will be made available to the noteholders.
In addition, within [60] days after the end of each calendar year, beginning
with the 200[ ]calendar year, information for tax reporting purposes will be
made available to each person who has been a noteholder of record at any time
during the preceding calendar year. See "Description of the Notes -- Book-Entry
Notes" and "Description of the Indenture -- Reports to Noteholders."
DESCRIPTION OF THE NOTES
The Revolving Home Equity Loan Asset Backed Notes Class [ ] and Class [
] (each is sometimes referred to as a "Class"), Series 200[ ]-[ ] (the
"Notes") will be issued under the
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indenture. The form of the indenture has been filed as an exhibit to the
Registration Statement of which this prospectus supplement and the prospectus is
a part.
General
The [Class [ ]] Notes will be issued in denominations of $[25,000] and
multiples of $[1,000] in excess of that. The repayment of the Class [ ] Notes
will be secured by a securities interest in loan group [ ] and the repayment
of the Class [ ] Notes [(which are not offered by this prospectus supplement)]
will be secured by a security interest in loan group [ ].
Definitive Notes, if issued, will be transferable and exchangeable at the
corporate trust office of the indenture trustee, which will initially maintain
the note register for the Notes. See " -- Book-Entry Notes" below. No service
charge will be made for any registration of exchange or transfer of Notes, but
the indenture trustee may require payment of a sum sufficient to cover any tax
or other governmental charge.
The aggregate undivided interest in the trust fund represented by the Notes
as of the Closing Date is expected to equal approximately $[ ] (the
"Original Invested Amount"), which represents approximately 100% of the sum of
the cut-off date pool balance [and the prefunding accounts].
As of the Closing Date, the Class [ ] Notes are expected to equal
approximately $[ ] (the "Class [ ] Original Invested Amount"), which
represents approximately 100% of the sum of the cut-off date loan group [ ]
principal balance [and approximately $[ ] deposited in the related
prefunding account]. The "Class [ ] Original Note Principal Balance" is
expected to equal approximately $[ ].
As of the Closing Date, the Class [ ] Notes are expected to equal
approximately $[ ] (the "Class [ ] Original Invested Amount"), which
represents approximately 100% of the sum of the cut-off date loan group [ ]
principal balance [and the amount deposited in the Prefunding Account]. The
"Class [ ]Original Note Principal Balance" is expected to equal approximately
$[ ]. [Of the Class [ ] Original Invested Amount approximately $[ ]
represents the proceeds deposited into the Prefunding Account which may be used
through [ ] to purchase future home equity loans for addition to loan
group [ ].]
Following the Closing Date, the "Invested Amount" for each class of Notes
for any distribution date will be an amount equal to the Original Invested
Amount for the class of Notes minus the amount of the related Investor Principal
Collections previously distributed on the class of Notes [and any return of the
related prefunding account funds], and minus an amount equal to the product of
the related Investor Floating Allocation Percentage and the Liquidation Loss
Amounts on the mortgage loans in the related loan group for the distribution
date.
For each class of Notes, the principal amount of the outstanding Notes in
that class on any distribution date is equal to the applicable Original Note
Principal Balance minus the aggregate of amounts actually distributed as
principal to the Notes in that class. See " -- Distributions on the Notes"
below. Each Note represents the right to receive payments of interest at the
related note rate and payments of principal as described below.
The residual interest in the mortgage loans in the trust fund will be
represented by a single transferor interest that will be owned by the
transferor. The portion of the transferor interest related to a loan group, as
of any date of determination, will equal the related loan group balance as of
the close of business on the day preceding the date of determination, less the
Invested Amount for the loan group as of the close of business on the preceding
distribution date.
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The Required Transferor Subordinated Amount initially is approximately
$[ ], which, in the aggregate, will represent approximately [ ]% of the cut-off
date loan group [ ] balance [and the amount originally deposited in the related
prefunding account] plus approximately [ ]% of the cut-off date loan group [ ]
balance [and the amount originally deposited in the Prefunding Account], but the
indenture requires the transferor interest (once it is fully funded) to be at
least equal to the Minimum Transferor Interest. The owner of the transferor
interest will initially be the seller (or one of its affiliates). In general,
the loan group balance of each loan group will vary each day as principal is
paid on the mortgage loans in that loan group, liquidation losses are incurred
and Additional Balances are drawn down by borrowers on mortgage loans i n that
loan group and transferred to the related loan group.
[The Note Insurer requires, based on the Insurance Agreement, that the
portion of the transferor's interest related to each class of Notes be
maintained at the related Required Transferor Subordinated Amount for the
class.] The portion of the transferor's interest related to each class of Notes
as of the closing date will be zero, which is less than the initial Required
Transferor Subordinated Amount, thus requiring an increase in the transferor's
interest on future distribution dates until it equals the Required Transferor
Subordinated Amount.
Book-entry Notes
Each class of book-entry notes will be issued in one or more certificates
which equal the aggregate initial class principal balance of the class of notes
and which will be held by a depository, initially a nominee of The Depository
Trust Company. Beneficial interests in the book-entry notes will be held
indirectly by investors through the book-entry facilities of the depository, as
described in this prospectus supplement. Investors may hold beneficial
interests in the book-entry notes in the minimum denominations set forth on page
S-[ ] and integral multiples of $[ ] in excess thereof. One investor
of each class of book-entry notes may hold a beneficial interest in a book entry
note that is not an integral multiple of $[ ]. The depositor has been
informed by the depository that its nominee will be CEDE & Co. Accordingly, CEDE
& Co. is expected to be the holder of record of the book-entry notes. Except as
described in the prospectus under "Description of the Securities -- Book-Entry
Securities," no beneficial owner of a book-entry note will be entitled to
receive a physical certificate.
Unless and until definitive notes are issued, it is anticipated that the
only holder of the book-entry notes will be CEDE & Co., as nominee of the
depository. Beneficial owners of the book-entry notes will not be noteholders,
as that term is used in the indenture. Beneficial owners are only permitted to
exercise the rights of noteholders indirectly through financial intermediaries
and the depository. Monthly and annual reports on the trust fund provided to
CEDE & Co., as nominee of the depository, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the depository, and to the financial intermediaries to
whose depository accounts the book-entry notes of the beneficial owners are
credited.
For a description of the procedures generally applicable to the book-entry
notes, see "Description of the Securities -- Book-Entry Securities" in the
prospectus.
Distributions on the Notes
Beginning with the first distribution date (which will occur on [ ]),
distributions on the Notes will be made by the indenture trustee or the
paying agent on each distribution date to the persons in whose names the Notes
are registered at the close of business on the day before each distribution date
or, if the Notes are no longer book-entry notes, at the close of business on the
record date (which is the [last] day of the month preceding the distribution
date). The term distribution date means the [fifteenth] day of each month or, if
that day is not a business day, then
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the next business day. Generally, distributions on the [Class [ ]] Notes will be
made by check or money order mailed to the address of the person entitled to it
(which, in the case of book-entry notes, will be DTC or its nominee) as it
appears on the note register on the determination date. At the request of a
noteholder owning at least $[1,000,000] principal amount of Notes, distributions
will be made by wire transfer or as otherwise agreed between the noteholder and
the indenture trustee. However, the final distribution on the Notes will be made
only on their presentation and surrender at the office or the agency of the
indenture trustee specified in the notice to noteholders of the final
distribution. A "business day" is any day other than a Saturday or Sunday or a
day on which banking institutions in the states of New York, California or
Illinois are required or authorized by law to be closed.
Application of Interest Collections. On each distribution date, the
indenture trustee or a paying agent will apply the Investor Interest Collections
for [a] loan group [ ] in the following order of priority: (1) to pay the
indenture trustee's fees under the indenture and the owner trustee's fees under
the trust; [(2) to pay the Note Insurer for the portion of the premium for the
Policy [related to loan group [ ];] (3) to pay noteholders the interest accrued
at the related note rate and any overdue accrued interest (with interest on
overdue interest to the extent permitted by applicable law) on the principal
balance of the Notes; (4) to pay noteholders the related Investor Loss Amount
for the distribution date; (5) to pay noteholders for any related Investor Loss
Amount for a previous distribution date that was not previously (a) funded by
related Investor Interest Collections, (b) absorbed by a reduction in the
related portion of the transferor interest, (c) funded by related Subordinated
Transferor Collections [, (d) funded by the Reserve Fund, (e) funded under
clause (9) below] or [(f) funded by draws on the Policy;] [(6) to reimburse the
Note Insurer for prior draws made from the Policy (with interest on the draws);]
(7) to pay noteholders the principal of the Notes until the related portion of
the transferor interest equals the related Required Transferor Subordinated
Amount (the principal so paid, the "Accelerated Principal Distribution Amount");
[(8) to pay any other amounts owed to the Note Insurer under the Insurance
Agreement;] (9) [to pay the other class of notes any deficiency in items (3),
(4) and (5) above, after taking into account the allocation of 100% of the other
class' Investor Interest Collections on the distribution date (the amount of one
class' remaining Investor Interest Collections allocated to the other class on a
distribution date is a "Crossover Amount");] (10) [to the Reserve Fund for
application under the indenture, to the extent that the sum of the portion of
the transferor's interest for [both] loan groups as of the distribution date is
less than the sum of the Required Transferor Subordinated Amounts for [both]
loan groups as of the distribution date;] (11) to pay the master servicer
amounts required to be paid under the sale and servicing agreement; (12) to pay
the noteholders any Basis Risk Carryforward of the Notes; and (13) the remaining
amounts to the transferor.
Payments to noteholders under clause (3) will be interest payments on the
Notes. Payments to noteholders under clauses (4), (5) and (7) will be principal
payments on the Notes and will therefore reduce the related Note principal
balance; however, payments under clause (7) will not reduce the related Invested
Amount.[ The Accelerated Principal Distribution Amount for a Class is not
guaranteed by the Policy.]
[On each distribution date, if Investor Interest Collections for a class of
Notes, plus any Crossover Amount available from the other class of Notes, are
insufficient to pay the amounts specified in items (3), (4) and (5) above for a
class of Notes, the amount of the insufficiency shall be withdrawn from the
Reserve Fund to the extent of funds on deposit in it.]
[The amount on deposit in the Reserve Fund will not exceed the excess of
(x) the sum of the Required Transferor Subordinated Amounts for [both] loan
groups over (y) the sum of the portion of the transferor's interest for each
loan group. Amounts in the Reserve Fund may only be withdrawn and applied under
the indenture.]
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[To the extent that Investor Interest Collections from a loan group are
applied to pay the interest on the related class of Notes, Investor Interest
Collections for that loan group may be insufficient to cover related Investor
Loss Amounts. If this insufficiency exists after the related Available
Transferor Subordinated Amount[, the Crossover Amount and the Reserve Fund]
[have each] [has] been reduced to zero and results in the related Note principal
balance exceeding the related Invested Amount, a draw will be made on the Policy
in accordance with the Policy.]
The "Investor Loss Amount" for a loan group is the product of the Investor
Floating Allocation Percentage for that loan group and the Liquidation Loss
Amount for that loan group for the distribution date. The Investor Loss Amount
for a loan group will be allocated to the Notes related to that loan group.
The "Liquidation Loss Amount" for any Liquidated Mortgage Loan is its
unrecovered principal balance at the end of the Collection Period in which the
mortgage loan became a Liquidated Mortgage Loan, after giving effect to its Net
Liquidation Proceeds.
A "Liquidated Mortgage Loan" means, as to any distribution date, any
mortgage loan in respect of which the master servicer has determined, based on
the servicing procedures specified in the sale and servicing agreement, as of
the end of the preceding Collection Period, that all liquidation proceeds that
it expects to recover in the disposition of the mortgage loan or the related
mortgaged property have been recovered.
The "Collection Period" related to a distribution date is the calendar
month preceding the distribution date (or, in the case of the first Collection
Period, the period beginning on the cut-off date and ending on the last day of [
], 200[ ]).
Interest will be distributed on each distribution date at the applicable
note rate for the related Interest Period. The note rate for the [Class [ ]]
Notes for a distribution date will generally equal a per annum rate equal to the
least of: (a) the sum of the London Interbank offered rate for one-month United
States dollar deposits ("LIBOR"), plus [ ]% [for the Class [ ] Notes and [
]% for the Class [ ] Notes]; (b) a per annum rate equal to the weighted
average of the loan rates of the mortgage loans in loan group [ ] net of the
servicing fee rate, the rate at which the fees payable to the indenture trustee
and the owner trustee are calculated, [the rate at which the premium payable to
the Note Insurer] [and the guaranty fee to Fannie Mae are each] [is] calculated
and, commencing with the distribution date in [ ], [ ]% per annum,
weighted on the basis of the daily average balance of each mortgage loan
included in loan group [ ],during the related billing cycle before the
Collection Period relating to the distribution date, and (c) [ ]%.
However, on any distribution date for which the note rate for a class of
notes has been determined under clause (b) of note rate, the excess of the
amount of interest that would have accrued on those notes during the related
Interest Period had interest been determined under clause (a) of note rate (but
not at a rate in excess of [ ]% per annum) over the interest actually accrued
on those notes during the Interest Period (the excess is referred to as "Basis
Risk Carryforward") will accrue interest at the note rate calculated under
clause (a) (as adjusted from time to time), but not to exceed clause (c), and
will be paid on future distribution dates to the extent funds are available
therefor.
Interest on the Notes for any distribution date will accrue on the Note
principal balance from the preceding distribution date (or in the case of the
first distribution date, from the Closing Date) through the day preceding the
distribution date (each period, an "Interest Period") on the basis of the actual
number of days in the Interest Period and a 360-day year. Interest payments on
the Notes will be funded from Investor Interest Collections, Subordinated
Transferor Collections, [the Reserve Fund,] [and, if necessary, from draws on
the Policy].
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Calculation of the LIBOR Rate. On each reset date, the indenture trustee
shall determine LIBOR for the Interest Period commencing on the distribution
date. The reset date for each Interest Period is the second LIBOR business day
before the distribution date. LIBOR for the first Interest Period will be
determined on the second LIBOR business day before the Closing Date. LIBOR will
equal the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 A.M., London time, on the reset date
for an Interest Period. Telerate Screen Page 3750 means the display designated
as page 3750 on the Bridge Telerate Service (or any page replacing page 3750 on
that service for the purpose of displaying London interbank offered rates of
major banks). If this rate does not appear on Telerate Screen Page 3750 (or if
that service is no longer offered, another service for displaying LIBOR or
comparable rates selected by the depositor after consultation with the indenture
trustee), the rate will be the reference bank rate. The reference bank rate will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the reference banks as of 11:00 A.M., London time, on the
reset date for the Interest Period to prime banks in the London interbank market
for one month in amounts approximately equal to the principal amount of the
Notes then outstanding. The reference banks will be three major banks that are
engaged in transactions in the London interbank market selected by the depositor
after consultation with the indenture trustee. The indenture trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will be
the arithmetic mean of the quotations. If on the reset date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
depositor after consultation with the indenture trustee, as of 11:00 A.M., New
York City time, on the reset date for loans in United States dollars to leading
European banks for one month in amounts approximately equal to the principal
amount of the Notes then outstanding. If no quotations can be obtained, the rate
will be LIBOR for the preceding Interest Period. LIBOR business day means any
day other than a Saturday or a Sunday or a day on which banking institutions in
the State of New York or in the city of London, England are required or
authorized by law to be closed.
Transferor Collections. Collections allocable to the transferor interest in
respect of a loan group will be distributed to the transferor only to the extent
that the distribution will not reduce the amount of the portion of the
transferor interest relating to that loan group as of the related distribution
date below the applicable Minimum Transferor Interest. Amounts not distributed
to the transferor because of these limitations will be retained in the
collection account until the portion of the transferor interest relating to each
loan group exceeds the applicable Minimum Transferor Interest, at which time the
excess shall be released to the transferor. Any of these amounts in the
collection account at the start of the Rapid Amortization Period will be paid to
the noteholders of the related class of notes as a reduction of the related Note
principal balance.
Distributions of Principal Collections. For each loan group, the period
beginning on the Closing Date and, unless a Rapid Amortization Event shall have
earlier occurred, through and including the distribution date in [ ] is
the "Managed Amortization Period." The amount of principal collections payable
to noteholders for each distribution date during the Managed Amortization Period
will equal, to the extent funds are available therefor, the Scheduled Principal
Collections Distribution Amount for the loan group and distribution date. The
Scheduled Principal Collections Distribution Amount for the first Collection
Period is computed for the period beginning on the cut-off date and ending on
the last day of [ ]. On any distribution date during the Managed
Amortization Period, the "Scheduled Principal Collections Distribution Amount"
for a loan group is the lesser of the applicable Maximum Principal Payment and
the applicable Alternative Principal Payment. For any loan group and
distribution date, the "Maximum Principal Payment" is the product of the
Investor Fixed Allocation Percentage for the loan group and principal
collections for the loan group and distribution date. For any loan group and
distribution date, the "Alternative Principal Payment" for the loan group
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is the sum of the amount of principal collections for the loan group and
distribution date minus the aggregate of Additional Balances created on the
mortgage loans in that loan group during the related Collection Period, but not
less than zero.
Beginning with the first distribution date following the end of the Managed
Amortization Period (the "Rapid Amortization Period"), the amount of principal
collections payable to noteholders on each distribution date will be equal to
the Maximum Principal Payment for that loan group.
If on any distribution date the Required Transferor Subordinated Amount for
a loan group is reduced below the then existing Available Transferor
Subordinated Amount for that loan group, the amount of principal collections
from the mortgage loans in that loan group payable to noteholders on the
distribution date will be correspondingly reduced by the amount of the
reduction.
Distributions of principal collections from the mortgage loans in a loan
group based on the related Investor Fixed Allocation Percentage may result in
distributions of principal to the related noteholders in amounts that are
greater relative to the declining balance of that loan group than would be the
case if the related Investor Floating Allocation Percentage were used to
determine the percentage of principal collections distributed in respect of the
Invested Amount. Principal collections from the mortgage loans in a loan group
not allocated to the noteholders will be allocated to the portion of the
transferor interest related to that loan group. The aggregate distributions of
principal to the noteholders will not exceed the Original Note Principal
Balance.
In addition, to the extent of funds available therefor [(including funds
available under the Policy)], on the distribution date in [ ], noteholders
will be entitled to receive as a payment of principal an amount equal to the
outstanding Note principal balance.
The Paying Agent. The paying agent shall initially be the indenture
trustee. The paying agent shall have the revocable power to withdraw funds from
the collection account for the purpose of making distributions to the
noteholders.
Limited Subordination of Transferor Interest
If Investor Interest Collections[, Crossover Amounts and amounts on deposit
in the Reserve Fund] on any distribution date are insufficient to pay (i)
accrued interest due and any overdue accrued interest (with interest on overdue
interest to the extent permitted by applicable law) on the related Notes and
(ii) the applicable Investor Loss Amount on the distribution date (the
insufficiency being the "Required Amount"), a portion of the interest
collections from the mortgage loans in that loan group and principal collections
allocable to the portion of the transferor interest related to that loan group
(but not in excess of the applicable Available Transferor Subordinated Amount)
(the "Subordinated Transferor Collections") will be applied to cover the
Required Amount for that loan group. The portion of the Required Amount for a
loan group in respect of clause (ii) above not covered by the Subordinated
Transferor Collections will be reallocated to the portion of the transferor
interest related to that loan group, thereby reducing the transferor interest
(up to the applicable remaining Available Transferor Subordinated Amount and not
in excess of the Investor Loss Amounts for that loan group). The portion of the
Required Amount not covered by the application of funds under the preceding
sentence may then be satisfied by amounts available from the remaining Available
Transferor Subordinated Amount from the other loan group. [If the Investor
Interest Collections for a loan group[, Crossover Amounts, amounts on deposit in
the Reserve Fund] and the amount of Subordinated Transferor Collections that
have been so applied to cover the applicable Required Amount are together
insufficient to pay the amounts in item (i) of the definition of Required
Amount, then a draw will be made on the Policy to cover the amount of the
shortfall. In addition, if on any distribution date
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on which the Available Transferor Subordinated Amount for a loan group is
reduced to zero the Note principal balance for that loan group exceeds the
applicable Invested Amount (after giving effect to all allocations and
distributions of principal to be made on the Notes on the distribution date), a
draw will be made on the Policy in the amount of the excess. See "Description of
the Indenture -- The Policy."]
The "Available Transferor Subordinated Amount" for any distribution date
and loan group is the lesser of the portion of the transferor interest for that
loan group and the related Required Transferor Subordinated Amount for the
distribution date.
DESCRIPTION OF THE INDENTURE
The following is a description of the material provisions of the indenture.
Wherever particular defined terms of the indenture are referred to, the defined
terms are incorporated in this prospectus supplement by this reference.
Payments on Mortgage Loans; Deposits to Collection Account
The master servicer will establish and maintain a collection account in
trust for the noteholders, the transferor[, the Note Insurer] [and any other
third party credit enhancer], as their interests may appear. The collection
account will be an Eligible Account. Except for amounts representing
administrative charges, annual fees, taxes, assessments, credit insurance
charges, insurance proceeds to be applied to the restoration or repair of a
mortgaged property, or similar items, the master servicer will deposit all
amounts collected on the mortgage loans in the collection account within two
business days of receipt unless the master servicer qualifies for monthly
depositing. Mortgage loan collections may be remitted to the collection account
by the master servicer on a monthly basis not later than the business day before
the related distribution date.
Amounts deposited in the collection account may be invested in Eligible
Investments maturing no later than one business day before the next distribution
date or on the next distribution date if approved by the Rating Agencies[, the
Note Insurer] [and any other third party credit enhancer]. Not later than the
[fifth] business day before each distribution date (the "Determination Date"),
the master servicer will notify the indenture trustee of the amount of the
deposit to be included in funds available for the related distribution date.
An "Eligible Account" is an account that is maintained with a depository
institution whose debt obligations throughout the time of any deposit in it have
the highest short-term debt rating by the Rating Agencies, an account with a
depository institution having a minimum long-term unsecured debt rating of
["BBB" by Standard & Poor's and "Baa3" by Moody's], which accounts are fully
insured by either the Savings Association Insurance Fund or the Bank Insurance
Fund of the Federal Deposit Insurance Corporation, a segregated trust account
maintained with the indenture trustee or an affiliate of the indenture trustee
in its fiduciary capacity or otherwise acceptable to each Rating Agency [and the
Note Insurer] as evidenced by a letter from each Rating Agency [and the Note
Insurer] to the indenture trustee, without reduction or withdrawal of each
Rating Agency's then current ratings of the Notes [without regard to the Policy]
[or any other third party credit enhancement].
Eligible Investments are limited to:
(i) obligations of the United States;
(ii) obligations of any agency of the United States the timely payment of
which are backed by the full faith and credit of the United States;
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(iii) general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia receiving the highest
long-term debt 0 rating of each Rating Agency, or a lower rating
which will not result in the downgrading or withdrawal of the
ratings then assigned to the Notes by each Rating Agency [without
regard to the Policy] [or any other third party credit enhancement];
(iv) commercial or finance company paper that is then receiving the
highest commercial or finance company paper rating of each Rating
Agency, or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to the Notes by any Rating
Agency [without regard to the Policy] [or any other third party
credit enhancement];
(v) notes of deposit, demand or time deposits, or bankers' acceptances
issued by any depository institution or trust company incorporated
under the laws of the United States or any of its states and subject
to supervision and examination by federal or state banking
authorities, if the commercial paper or long term unsecured debt
obligations of the depository institution or trust company (or in
the case of the principal depository institution in a holding
company system, the commercial paper or long-term unsecured debt
obligations of the holding company, but only if Moody's is not a
Rating Agency) are then rated one of the two highest long-term and
the highest short-term ratings of each Rating Agency for the
securities, or lower ratings which will not result in the
downgrading or withdrawal of the rating then assigned to the Notes
by any Rating Agency [without regard to the Policy] [or any other
third party credit enhancement];
(vi) demand or time deposits or notes of deposit issued by any bank or
trust company or savings institution to the extent that the deposits
are fully insured by the FDIC;
(vii) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance
of the agreements, conditions as will not result in the downgrading
or withdrawal of the rating then assigned to the Notes by any Rating
Agency [without regard to the Policy] [or any other third party
credit enhancement];
(viii) repurchase obligations with respect to any security described in the
first and second bullet points, in either case entered into with a
depository institution or trust company (acting as principal)
described in the fifth bullet point;
(ix) securities (other than stripped bonds, stripped coupons, or
instruments sold at a purchase price in excess of 115% of their face
amount) bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States or any
of its states that, at the time of the investment, have one of the
two highest ratings of each Rating Agency (except if the Rating
Agency is Moody's, the rating shall be the highest commercial paper
rating of Moody's for the securities), or lower rating that will not
result in the downgrading or withdrawal of the rating then assigned
to the Notes by any Rating Agency [without regard to the Policy] [or
any other third party credit enhancement], as evidenced by a signed
writing delivered by each Rating Agency; and
(xii) any other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency that
will not result in the downgrading or withdrawal of the rating then
assigned to the Notes by any Rating
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Agency [without regard to the Policy] [or any other third party
credit enhancement], as evidenced by a signed writing delivered by
each Rating Agency.
However, no instrument is an Eligible Investment if it evidences the right
to receive interest only payments on the obligations underlying it or both
principal and interest payments derived from obligations underlying the
instrument and the interest and principal payments from the instrument provide a
yield to maturity at par greater than 120% of the yield to maturity at par of
the underlying obligations.
No instrument otherwise described as an Eligible Investment may be
purchased at a price greater than par if it may be prepaid or called at a price
less than its purchase price before its stated maturity.
Allocations and Collections
All collections on the mortgage loans will generally be allocated in
accordance with the credit line agreements between interest and principal.
Interest collections for any distribution date will be determined on a loan
group basis and will be equal to the amounts collected during the related
Collection Period allocated to interest under the credit line agreements,
including portions of net liquidation proceeds, less servicing fees for the
related Collection Period and amounts payable to the master servicer under the
sale and servicing agreement as reimbursement of optional advances of the
interest component of any delinquent monthly payments on the mortgage loans.
Principal collections will be determined for any distribution date on a
loan group basis and will be equal to the sum of the amounts collected during
the related Collection Period allocated to principal under the credit line
agreements, including portions of net liquidation proceeds, and any Transfer
Deposit Amounts.
Net liquidation proceeds of a mortgage loan are the liquidation proceeds
reduced by related expenses, but not in excess of the principal balance of the
mortgage loan plus accrued and unpaid interest thereon to the end of the
Collection Period during which the mortgage loan became a Liquidated Mortgage
Loan. Liquidation proceeds are the proceeds [(excluding any amounts drawn on the
Policy)] received in connection with the liquidation of any mortgage loan,
whether through trustee's sale, foreclosure sale or otherwise.
The portion of interest collections allocable to the related class of Notes
("Investor Interest Collections") for any distribution date and loan group will
equal the product of (a) interest collections for the distribution date and loan
group and (b) the Investor Floating Allocation Percentage for the loan group.
The "Investor Floating Allocation Percentage" for any distribution date and loan
group is a fraction whose numerator is the Invested Amount at the close of
business on the preceding distribution date (or the Closing Date in the case of
the first distribution date) and whose denominator is the loan group balance for
the loan group at the beginning of the related Collection Period. The remaining
amount of interest collections will be allocated to the portion of the
transferor interest related to that loan group.
Principal collections on the mortgage loans in each loan group will be
allocated between the noteholders and the transferor ("Investor Principal
Collections" and "Transferor Principal Collections," respectively).
[The indenture trustee will apply any amounts drawn under the Policy as
provided in the indenture.] The loan group balance for any date and loan group
is the aggregate of the principal balances of all mortgage loans in that loan
group as of the date. The principal balance of a mortgage loan (other than a
Liquidated Mortgage Loan) on any day is equal to its cut-off date
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principal balance, plus (1) any Additional Balances for the mortgage loan minus
(2) all collections credited against the principal balance of the mortgage loan
in accordance with the related credit line agreement before the day. The
principal balance of a Liquidated Mortgage Loan after final recovery of related
liquidation proceeds shall be zero.
Certain excess cashflow for each class of Notes will be applied as a
payment of principal of that class of Notes on each distribution date to
increase or maintain the portion of the transferor's interest related to that
class to or at the Required Transferor Subordinated Amount for the class for the
distribution date. The amount of the excess cashflow of a class of Notes so
applied as a payment of principal on a distribution date is an "Accelerated
Principal Distribution Amount" for the related class of Notes. The requirement
to maintain the transferor's interest at the Required Transferor Subordinated
Amount, or to increase it to the Required Transferor Subordinated Amount, is not
an obligation of the seller, the master servicer, the indenture trustee, [the
Note Insurer] or any other person.
[The indenture requires excess cashflow not required to maintain or achieve
the Required Transferor Subordinated Amount of the related class of Notes to be
applied to the funding of a reserve fund[, which has been required by the Note
Insurer] to be established and maintained for the Notes (the "Reserve Fund").
The amount on deposit in the Reserve Fund will not exceed the excess of (x) the
sum of the Required Transferor Subordinated Amounts for each class of Notes over
(y) the sum of the portion of the transferor's interest related to each class of
Notes. Amounts in the Reserve Fund may only be withdrawn and applied under the
indenture.]
[The Note Insurer may permit the Required Transferor Subordinated Amount
for a class of Notes to decrease or "step down" over time, subject to certain
floors and triggers. The dollar amount of any decrease in a Required Transferor
Subordinated Amount is an "Overcollateralization Reduction Amount" which, with
respect to each class of Notes, may result in a release of cash from the trust
fund in an amount up to the Overcollateralization Reduction Amounts [(net of any
Reimbursement Amounts due to the Note Insurer)], or result in the removal of
cash or mortgage loans from the trust fund on distribution dates occurring after
the step-downs take effect. The dollar amount of any Overcollateralization
Reduction Amount for a class will first be released from the Reserve Fund, to
the extent of the amount on deposit. If the amount on deposit in the Reserve
Fund for a class is not sufficient to fund the full amount of the
Overcollateralization Reduction Amount for the class, then an amount equal to
the remaining portion of the Overcollateralization Reduction Amount will be
released from the monthly cashflow for the class, thus reducing the portion of
the transferor's interest for the class.]
[The Policy
The Policy will be issued by the Note Insurer by the Closing Date in
accordance with the Insurance and Indemnity Agreement (the "Insurance
Agreement") to be dated as of the Closing Date, among the seller, the depositor,
the master servicer, the indenture trustee and the Note Insurer.
The Policy will irrevocably and unconditionally guarantee payment on each
distribution date to the indenture trustee for the benefit of the noteholders of
each class of Notes the full and complete payment of Insured Amounts with
respect to the related Notes for the distribution date. An "Insured Amount" for
each class of Notes as of any distribution date is any shortfall in amounts
available in the collection account to pay (a) (i) the Guaranteed Principal
Distribution Amount for the related Notes for the distribution date and (ii) the
Guaranteed Distributions for the related Notes for the distribution date and (b)
any Preference Amount that occurs before the related determination date. The
effect of the Policy is to guarantee the timely payment of interest on, and the
ultimate payment of the principal amount of, all of the Notes. The Policy does
not cover any Basis Risk Carryforward.
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The "Guaranteed Principal Distribution Amount" for any class of Notes on
the distribution date in [ ] is the amount needed to pay the outstanding
principal balance of the Notes, and for any other distribution date on which the
sum of the Available Transferor Subordinated Amounts for [both] loan groups and
the Reserve Fund has been reduced to or equals zero, is the amount by which the
Note principal balance of the class of Notes exceeds the related Invested Amount
as of the distribution date. All calculations under the Policy are after giving
effect to all other amounts distributable and allocable to principal on the
Notes for the distribution date.
"Guaranteed Distributions" are accrued and unpaid interest for a
distribution date due on the related Notes calculated in accordance with the
original terms of the Notes or the indenture after giving effect to amendments
or modifications to which the Note Insurer has given its written consent.
A "Preference Amount" means any amount previously distributed to a
noteholder that is recoverable and recovered as a voidable preference by a
trustee in bankruptcy under the United States Bankruptcy Code, as amended from
time to time, in accordance with a final nonappealable order of a court having
competent jurisdiction.
Payment of claims on the Policy will be made by the Note Insurer following
receipt by the Note Insurer of the appropriate notice for payment (and any other
required documentation) on the later to occur of (i) 12:00 NOON, New York City
time, on the second Business Day following Receipt of the notice for payment and
(ii) 12:00 NOON, New York City time, on the relevant distribution date.
Receipt means actual delivery to the Note Insurer and occurs on the day
delivered if delivered before 12:00 NOON, New York City time, on a business day,
or on the next business day if delivered either on a day that is not a business
day or after 12:00 NOON, New York City time. If any notice or note given under
the Policy by the indenture trustee is not in proper form or is not properly
completed, executed or delivered, it is not received, and the Note Insurer shall
promptly so advise the indenture trustee and the indenture trustee may submit an
amended notice.
Under the Policy, "business day" means any day other than a Saturday or
Sunday or a day on which banking institutions in the states of New York,
California or Illinois or the city in which the corporate trust office of the
indenture trustee or the Note Insurer is located are authorized or obligated by
law or executive order to be closed.
The Note Insurer's obligations under the Policy with respect to Insured
Amounts will be discharged to the extent funds are transferred to the indenture
trustee as provided in the Policy, whether or not the funds are properly applied
by the indenture trustee. The Note Insurer will be subrogated to the rights of
each noteholder to receive payments of principal and interest, as applicable, on
the Notes to the extent of any payment by the Note Insurer under the Policy. The
Policy cannot be modified, altered or affected by any other agreement or
instrument, or by the merger, consolidation or dissolution of the seller. The
Policy by its terms may not be cancelled or revoked. The Policy is governed by
the laws of the State of New York.
Insured Amounts will be paid only at the time stated in the Policy and no
accelerated Insured Amounts shall be paid regardless of any acceleration of the
Notes, unless the acceleration is at the sole option of the Note Insurer. The
Policy does not cover shortfalls attributable to the liability of the trust fund
or the indenture trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
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Under the sale and servicing agreement, unless a Note Insurer default
exists, the Note Insurer will be treated as a noteholder for certain purposes,
will be entitled to exercise all rights of the noteholders under the indenture
without the consent of the noteholders, and the noteholders may exercise their
rights under the indenture only with the written consent of the Note Insurer. In
addition, the Note Insurer will have certain additional rights as a third party
beneficiary to the sale and servicing agreement and the indenture.]
Rapid Amortization Events
The Managed Amortization Period will continue through and including the
distribution date in [ ], unless a Rapid Amortization Event occurs before
then. "Rapid Amortization Event" refers to any of the following events: (a) the
failure of the seller to make a payment or deposit required under the sale and
servicing agreement within four business days after the date the payment or
deposit must be made, to record assignments of mortgage loans when required
under the sale and servicing agreement or to observe or perform in any material
respect any other covenants or agreements of the seller in the sale and
servicing agreement, which failure materially and adversely affects the
interests of the noteholders[, the Note Insurer] [or any other third party
credit enhancer] and, with certain exceptions, continues unremedied for 60 days
after written notice; (b) any representation or warranty made by the seller or
the depositor in the sale and servicing agreement proves to have been incorrect
in any material respect when made and continues to be incorrect in any material
respect for 45 days after written notice and as a result of which the interests
of the noteholders[, the Note Insurer] [or any other third party credit
enhancer] are materially and adversely affected; except that a Rapid
Amortization Event will not occur if the seller has purchased or made a
substitution for the related mortgage loan or mortgage loans if applicable
during the period (or within an additional 60 days with the consent of the
indenture trustee) under the provisions of the sale and servicing agreement; (c)
the occurrence of certain events of bankruptcy, insolvency or receivership
relating to the transferor; (d) the trust fund becomes subject to regulation by
the Securities and Exchange Commission as an investment company within the
meaning of the Investment Company Act of 1940, as amended[; or (e) the
aggregate of all draws under the Policy [or amounts paid in accordance with
third party credit enhancement for loan group [ ]] incurred during the Managed
Amortization Period exceeds [ ]% of the Original Invested Amount].
If any event described in clause (a) or (b) occurs, a Rapid Amortization
Event will occur only if, after the applicable grace period, either the
indenture trustee or noteholders holding Notes evidencing more than 51% of the
aggregate principal amount of the Notes[, the Note Insurer (so long as there is
no default by the Note Insurer in the performance of its obligations under the
Policy)] [or any other third party credit enhancer], by written notice to the
transferor, the depositor and the master servicer (and to the indenture trustee,
if given by [the Note Insurer,] [any other third party credit enhancer] or the
noteholders) declare that a Rapid Amortization Event has occurred. If any event
described in clause (c), (d) or (e) occurs, a Rapid Amortization Event will
occur without any notice or other action on the part of the indenture trustee[,
the Note Insurer] or the noteholders immediately on the occurrence of the event.
Notwithstanding the foregoing, if a conservator, receiver or trustee-in-
bankruptcy is appointed for the transferor and no Rapid Amortization Event
exists other than the conservatorship, receivership or insolvency of the
transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period.
Reports to Noteholders
Concurrently with each distribution to the noteholders, the master servicer
will forward to the indenture trustee for mailing to each noteholder a statement
setting forth among other items:
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[(i) the Investor Floating Allocation Percentage for each loan group
for the preceding Collection Period;
(ii) the amount being distributed to each class of Notes;
(iii) the amount of interest included in the distribution and the
related note rate for each class of Notes;
(iv) the amount of overdue accrued interest for a class of Notes
included in the distribution (and the amount of interest or
overdue interest to the extent permitted by applicable law);
(v) the amount of the remaining overdue accrued interest for a class
of Notes after giving effect to the distribution;
(vi) the amount of principal included in the distribution;
(vii) the amount of the reimbursement of previous Investor Loss Amounts
for a class of notes included in the distribution;
(viii) the amount of Basis Risk Carryforward for a class of notes paid
and the amount of Basis Risk Carryforward accrued;
(ix) the amount of the aggregate unreimbursed Investor Loss Amounts for
a class of notes after giving effect to the distribution;
(x) the servicing fee for the distribution date;
(xi) for each class of notes: the Invested Amount, the Note principal
balance and the pool factor, each after giving effect to the
distribution;
(xii) the loan group balance of each loan group as of the end of the
preceding Collection Period;
(xiii) the number and aggregate principal balances of the mortgage loans
in each loan group as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Collection Period;
(xiv) the book value of any real estate in each loan group that is 1
acquired by the trust fund through foreclosure or grant of deed in
lieu of foreclosure;
(xv) the amount of any draws on [the Policy] [or payments under third
party credit enhancement for loan group [ ]];
(xvi) [the amount on deposit in the Reserve Fund on the preceding
distribution date, after giving effect to all distributions made
on that date, the amount withdrawn from the Reserve Fund with
respect to this distribution date, and the amount remaining on
deposit in the Reserve Fund;] and
(xvii) with respect to the first and second distribution dates, the
number and aggregate balance of any mortgage loans in [either]
loan group not delivered to the indenture trustee within 30 days
after the Closing Date.
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The amounts in clauses (iii), (iv), (v), (vi), (vii) and (viii) above shall
be expressed as a dollar amount per $1,000 increment of Notes.
Within 60 days after the end of each calendar year commencing in 200[ ], the
master servicer will be required to forward to the indenture trustee a statement
containing the information in clauses (iii) and (vi) above aggregated for the
calendar year.]
EVENTS OF DEFAULT UNDER THE INDENTURE
Events of Default under the indenture include:
(i) a default in the payment of any principal or interest when it
becomes due and continuance of the default for five days;
(ii) failure by the trust to perform in any material respect any
covenant or agreement under the indenture (other than a covenant
covered in clause (i) hereof) or the breach of a representation or
warranty of the trust under the indenture or the sale and
servicing agreement, that continues for thirty days after notice
of it is given; and
(iii) certain events of bankruptcy, insolvency, receivership, or
liquidation of the trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an event of default under the indenture has occurred and is continuing,
either the indenture trustee or noteholders representing a majority of the then
outstanding principal amount of the Notes may declare the principal amount of
the Notes payable immediately. A declaration of acceleration may be rescinded by
noteholders representing a majority of the then outstanding principal amount of
the Notes. Although a declaration of acceleration has occurred, the indenture
trustee may elect not to liquidate the assets of the trust if the assets are
generating sufficient cash to pay interest and principal as it becomes due
without taking into account the declaration of acceleration.
The indenture trustee may not sell or otherwise liquidate the assets of the
trust following an event of default unless the holders of 100% of the Notes [and
the Note Insurer] consent to the sale, or the proceeds of the sale or
liquidation are sufficient to pay all amounts due to the noteholders [and the
Note Insurer], or the indenture trustee determines that the trust fund would
not be sufficient on an ongoing basis to make all payments on the Notes as they
become due and the indenture trustee obtains the consent of the holders of 66
2/3% of the aggregate outstanding principal balance of the Notes.
No noteholder may institute any proceeding with respect to the indenture
unless [the Note Insurer has consented in writing to the institution of the
proceeding and] the holder has previously notified the indenture trustee of a
default and unless noteholders representing not less than a majority of the
aggregate outstanding principal balance of the Notes have requested the
indenture trustee to institute the proceeding and have offered the indenture
trustee reasonable indemnity, and the indenture trustee for 60 days has
neglected or refused to institute the proceeding. The indenture trustee is not
obligated to exercise any of the trusts or powers vested in it unless the
noteholders requesting the action have offered the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities that may be
incurred [and the Note Insurer has consented to the action].
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE
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Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be liable to the trust or the noteholders for taking any
action or for refraining from the taking of any action in good faith under the
indenture, or for errors in judgment. However, none of the indenture trustee or
any of its directors, officers or employees will be protected against any
liability that would otherwise be imposed on it for willful malfeasance, bad
faith or negligence in the performance of its duties or for its reckless
disregard of its obligations under the indenture.
The indenture trustee and any of its affiliates may hold Notes in their own
names or as pledgees. To meet the legal requirements of certain jurisdictions,
the indenture trustee may appoint co-trustees or separate trustees of any part
of the trust fund under the indenture. All rights and obligations conferred or
imposed on the indenture trustee by the indenture will be conferred or imposed
on any separate trustee or co-trustee. In any jurisdiction in which the
indenture trustee is incompetent or unqualified to perform certain acts, the
separate trustee or co-trustee will perform the acts solely at the direction of
the indenture trustee.
Duties of the Indenture Trustee
The indenture trustee will make no representations about the validity or
sufficiency of the indenture, the Notes (other than their execution and
authentication) or of any mortgage loans or related documents, and will not be
accountable for the use or application by the depositor or the master servicer
of any funds paid to the depositor or the master servicer on the Notes or the
mortgage loans, or the use or investment of any monies by the master servicer
before being deposited into a collection account. So long as no event of default
under the indenture has occurred and is continuing, the indenture trustee will
be required to perform only those duties specifically required of it under the
indenture. Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
indenture trustee under the indenture, in which case it will only be required to
examine them to determine whether they conform to the requirements of the
indenture. The indenture trustee will not be charged with knowledge of a failure
by the master servicer to perform its duties under the trust agreement or sale
and servicing agreement unless the indenture trustee has actual knowledge of the
failure.
Amendment
The indenture provides that, without the consent of any noteholder but with
[the consent of the Note Insurer and] notice to the trust and the indenture
trustee, the trust may enter into one or more supplemental indentures (which
will conform to the provisions of the Trust Indenture Act of 1939, as amended
(the "TIA")), in form satisfactory to the indenture trustee, for any of the
following purposes:
(i) to correct or amplify the description of any property at any time
subject to the lien of the indenture, or better to assure, convey
and confirm to the indenture trustee any property subject or
required to be subjected to the lien of the indenture, or to
subject to the lien of the indenture additional property;
(ii) to add to the covenants of the trust for the benefit of the
noteholders, or to surrender any right of the trust in the
indenture;
(iii) to convey, transfer, assign, mortgage or pledge any property to the
indenture trustee;
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(iv) to cure any ambiguity, to correct or supplement any provision in
the indenture or in any supplemental indenture that may be
inconsistent with any other provision in the indenture or in any
supplemental indenture;
(v) to evidence the succession, in compliance with the applicable
provisions in the indenture, of another person to the trust, and
the assumption by any such successor of the covenants of the trust
in the indenture and in the notes contained;
(vi) to evidence and provide for the acceptance of the appointment under
the indenture of a successor trustee and to add to or change any of
the provisions of the indenture necessary to facilitate the
administration of its trusts by more than one trustee; or
(vii) to modify, eliminate or add to the provisions of the indenture to
the extent necessary to effect the qualification of the indenture
under the TIA or under any similar federal statute enacted after
the date of the indenture and to add to the indenture other
provisions required by the TIA.
No supplemental indentures will be entered into unless the indenture
trustee shall have received an opinion of counsel to the effect that entering
into the supplemental indenture will not have any material adverse tax
consequences to the noteholders.
The indenture also provides that the indenture trustee, at the request of
the trust, may, [with prior notice to the Note Insurer and] with the consent of
[the Note Insurer and] the Noteholders affected thereby representing not less
than a majority of the aggregate outstanding principal balance of the Notes,
enter into a supplemental indenture to add any provisions to, or change in any
manner or eliminate any of the provisions of, the indenture or to modify in any
manner the rights of the noteholders, except that no supplemental indenture may,
without the consent of each noteholder affected thereby:
(i) change the date of payment of any installment of principal of or
interest on any Note, or reduce its principal amount or interest
rate, change the provisions of the indenture relating to the
application of collections on, or the proceeds of the sale of, the
corpus of the trust to payment of principal or interest on the
Notes, or change any place of payment where, or the coin or
currency in which, any Note or its interest is payable, or impair
the right to institute suit for the enforcement of the provisions
of the indenture requiring the application of funds available
therefor to the payment of an amount due on the Notes on or after
the respective dates they become due;
(ii) reduce the percentage of the outstanding principal balances of the
Notes the consent of the holders of which is required for any
supplemental indenture, or the consent of the holders of which is
required for any waiver of compliance with provisions of the
indenture or defaults under the indenture and their consequences;
(iii) modify or alter the provisions of the proviso to the definition of
the term "Outstanding" in the indenture or modify or alter the
exception in the definition of the term "Holder";
(iv) reduce the percentage of the outstanding principal balances of the
Notes required to direct the indenture trustee to direct the trust
to sell or liquidate the corpus of the trust under the indenture;
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(v) modify any provision of the amendment provisions of the indenture
except to increase any percentage specified in the indenture or to
provide that certain additional provisions of the indenture cannot
be modified or waived without the consent of each Noteholder
affected thereby;
(vi) modify any of the provisions of the indenture in a manner as to
affect the calculation of the amount of any payment of interest or
principal due on any Note on any distribution date; or
(vii) permit the creation of any lien ranking before or on a parity with
the lien of the indenture on any part of the trust fund or, except
as otherwise permitted or contemplated in the indenture, terminate
the lien of the indenture on any property at any time subject
thereto or deprive any noteholders of the security provided by the
lien of the indenture.
TERMINATION; RETIREMENT OF THE NOTES
The indenture will terminate on the distribution date following the later
of:
(i) payment in full of all amounts owing to [the Note Insurer] [and any
other third party credit enhancer] and
(ii) the earliest of the distribution date on which the Note principal
balance of each class of Notes has been reduced to zero, the final
payment or other liquidation of the last mortgage loan in the trust
fund, the optional transfer to the transferor of the mortgage
loans, as described below; and the distribution date in [ ].
The mortgage loans will be subject to optional transfer to the transferor
on any distribution date on or after which the aggregate Note principal balance
of both classes of Notes is reduced to an amount less than or equal to [ ]%
of the aggregate Original Note Principal Balance for both classes of Notes [and
all amounts due to the Note Insurer] [and any other third party credit enhancer]
including any unreimbursed draws on [the Policy] [and unreimbursed payments
under other third party credit enhancement], together with interest thereon, as
provided under the Insurance Agreement, have been paid. The transfer price will
be equal to the sum of the outstanding Note principal balance of each class of
Notes plus accrued and unpaid interest on them at the applicable note rate
through the day preceding the final distribution date and an amount equal to
any Basis Risk Carryforward for each class of Notes plus accrued and unpaid
interest on it.
[In addition, Notes must be prepaid and redeemed in part with any funds
remaining in the relevant prefunding account on [ ] after the purchase of
any Subsequent Home Equity Loans on that day.]
The Indenture Trustee
[Name of indenture trustee], a [ ] banking association with its
principal place of business in [ ], is the indenture trustee.
The commercial bank or trust company serving as indenture trustee may own
Notes and have normal banking relationships with the master servicer, the
transferor [and the Note Insurer] and their affiliates.
The indenture trustee may resign at any time, in which event the trust must
appoint a successor indenture trustee [with the consent of the Note Insurer].
[The Note Insurer may also
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remove the indenture trustee if the indenture trustee ceases to be eligible to
continue as the indenture trustee under the indenture or if the indenture
trustee becomes insolvent.] Any resignation or removal of the indenture trustee
and appointment of a successor indenture trustee will not become effective until
acceptance of the appointment by the successor indenture trustee.
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT
Assignment of Mortgage Loans
At the time of issuance of the Notes, the depositor will transfer to the
trust fund [the amounts to be deposited into the prefunding accounts and] all of
its interest in each mortgage loan acquired on the closing date (including any
Additional Balances arising in the future), related credit line agreements,
mortgages and certain other related documents (collectively, the "Related
Documents"), including all collections received on each mortgage loan after the
cut-off date (exclusive of payments of accrued interest due on or before the
cut-off date). The owner trustee, concurrently with the transfer, will deliver
the Notes to the depositor and the transferor certificate to the transferor.
[Future closings may occur for the purchase of Subsequent Home Equity Loans on
dates specified by the depositor through [ ], 200[ ]. On those closing
dates the depositor will transfer to the trust fund all of its interest in the
Subsequent Home Equity Loans being acquired by the trust fund that day, the
Related Documents and all collections received on the Subsequent Home Equity
Loans after a date designated in connection with the transfer.] Each mortgage
loan transferred to the trust fund will be identified on a mortgage loan
schedule delivered to the owner trustee under the sale and servicing agreement.
The mortgage loan schedule will include information as to the cut-off date
principal balance of each mortgage loan as well as information with respect to
the loan rate.
The sale and servicing agreement will require that [First Tennessee]
deliver to the depositor for delivery to the owner trustee or, at the
depositor's direction, directly to the owner trustee, the mortgage notes related
to the mortgage loans endorsed in blank and the Related Documents on the
[initial] Closing Date, with respect to not less than [50]% of the mortgage
loans transferred to the trust fund on that date; not later than [30] days after
the initial Closing Date, with respect to the [remaining] mortgage loans; [and]
[not later than [21] days after the relevant closing date, with respect to the
Subsequent Home Equity Loans.]
In lieu of delivery of original documentation, [First Tennessee] may
deliver documents that have been imaged optically on delivery of an opinion of
counsel that the imaged documents are enforceable to the same extent as the
originals and do not impair the enforceability of the transfer to the trust fund
of the mortgage loans, provided the retention of the imaged documents in the
delivered format will not result in a reduction in the then current rating of
the Notes [without regard to the Policy] [or any other third party credit
enhancements].
[In addition, with respect to any of the mortgage loans, in lieu of
transferring the related mortgage to the trustee as one of the Related
Documents, the depositor may at its discretion provide evidence that the related
mortgage is held through the MERS "r" System. In addition, the mortgage for some
or all of the mortgage loans in the trust fund that are not already held in the
MERS "r" System may, at the discretion of the master servicer, in the future be
held through the MERS "r" System. For any mortgage held through the MERS "r"
System, the mortgage is recorded in the name of the Mortgage Electronic
Registration System, Inc. or MERS, as nominee for the owner of the mortgage
loan, and future assignments of the mortgage were, or in the future may be, at
the discretion of the master servicer, registered electronically through the
MERS "r" System. For each of these mortgage loans, MERS serves as a mortgagee of
record on the mortgage solely as a nominee in an administrative capacity on
behalf of the owner trustee, and does not have any interest in that mortgage
loan.]
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The sale and servicing agreement will not require [First Tennessee] to
record assignments of the mortgage loans to the owner trustee or the indenture
trustee in jurisdictions where recordation of the assignments or delivery of the
documentation is not required to protect the interest of the transferor, the
owner trustee and the indenture trustee in the mortgage loans.
Within 90 days of the Closing Date with respect to the mortgage loans
acquired on the Closing Date [and within 90 days of the relevant closing date
with respect to Subsequent Home Equity Loans], the indenture trustee will review
the mortgage loans and the Related Documents and if any mortgage loan or Related
Document is found to be defective in any material respect and the defect is not
cured within 90 days following notification of it to the seller and the
depositor by the indenture trustee, the seller must accept the transfer of the
mortgage loan from the trust fund. The principal balance of any mortgage loan
so transferred will be deducted from the applicable loan group balance, thus
reducing the amount of the transferor interest. If the deduction would cause the
portion of the transferor interest related to the loan group to become less than
the related Minimum Transferor Interest at the time (a "Transfer Deficiency"),
the seller must either substitute an Eligible Substitute Mortgage Loan or make a
deposit into the collection account (the "Transfer Deposit Amount") equal to the
amount by which the portion of the transferor interest related to that loan
group would be reduced to less than the related Minimum Transferor Interest at
the time. Except to the extent substituted for by an Eligible Substitute
Mortgage Loan, the transfer of the mortgage loan out of the trust fund will be
treated under the sale and servicing agreement as a payment in full of the
mortgage loan. Any Transfer Deposit Amount will be treated as a principal
collection on the related loan group. No transfer shall be considered to have
occurred unless all required deposits to the collection account are actually
made. The obligation of the seller to accept a transfer of a Defective Mortgage
Loan and to make any required deposits are the sole remedies for any defects in
the mortgage loans and Related Documents available to the owner trustee, the
indenture trustee or the noteholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the seller for a defective mortgage loan that must, on the date of substitution,
have a principal balance (or in the case of a substitution of more than one
mortgage loan for a Defective Mortgage Loan, an aggregate principal balance)
outstanding that is not 10% more or less than the Transfer Deficiency relating
to the Defective Mortgage Loan; have a loan rate not less than the loan rate of
the Defective Mortgage Loan and not more than 1% in excess of the loan rate of
the Defective Mortgage Loan; have a loan rate based on the same index (prime
rate) with adjustments to the loan rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; have a mortgage of the
same or higher level of priority as the mortgage relating to the Defective
Mortgage Loan; have a remaining term to maturity not more than twelve months
earlier than the remaining term to maturity of the Defective Mortgage Loan;
comply with each representation and warranty regarding the mortgage loans in the
sale and servicing agreement (deemed to be made as of the date of substitution);
have an original combined loan-to-value ratio not greater than that of the
Defective Mortgage Loan; and satisfy certain other conditions specified in the
sale and servicing agreement.
The seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the owner
trustee on behalf of the trust fund with respect to each mortgage loan (e.g.,
cut-off date principal balance and loan rate). In addition, the seller will
represent and warrant on the Closing Date that at the time of transfer to the
depositor, the seller has transferred or assigned all of its interest in each
mortgage loan and the Related Documents, free of any lien [, and likewise
represent and warrant on each relevant closing date with respect to each
Subsequent Home Equity Loan]. Upon discovery of a breach of any representation
and warranty that materially and adversely affects the interests of the
noteholders[, the Note Insurer] [or any other third party credit enhancer] in
the related mortgage loan and Related Documents, the seller will have a period
of 90 days after discovery or notice of
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the breach to effect a cure. If the breach cannot be cured within the 90-day
period, the seller must accept a transfer of the Defective Mortgage Loan from
the trust fund. The same procedure and limitations as in the second preceding
paragraph for the transfer of Defective Mortgage Loans will apply to the
transfer of a mortgage loan that must be transferred because of a breach of a
representation or warranty in the sale and servicing agreement that materially
and adversely affects the interests of the noteholders. Mortgage loans required
to be transferred to the seller as described in the preceding paragraphs are
referred to as "Defective Mortgage Loans."
Amendments to Credit Line Agreements
Subject to applicable law and to certain limitations described in the sale
and servicing agreement, the master servicer may change the terms of the credit
line agreements at any time provided that the changes do not materially and
adversely affect the interest of the noteholders[, the Note Insurer] [or any
other third party credit enhancer], and are consistent with prudent business
practice.
In addition, the sale and servicing agreement permits the master servicer,
within certain limits, to increase the credit limit of the related mortgage loan
or reduce the margin for the mortgage loan.
[Optional Transfers of Mortgage Loans to the Transferor
To permit the transferor to reduce the transferor interest any time the
portion of the transferor interest related to a loan group exceeds the level
required by [the Note Insurer][, any other third party credit enhancer] and the
Rating Agencies, on any distribution date the transferor may, but is not
obligated to, remove on the distribution date (the "Transfer Date") from the
loan group, certain mortgage loans without notice to the noteholders. The
transferor is permitted to designate the mortgage loans to be removed. Mortgage
loans so designated will only be removed upon satisfaction of the following
conditions:
(i) no Rapid Amortization Event has occurred;
(ii) the portion of the transferor interest allocable to the loan group
as of the Transfer Date (after giving effect to the removal)
exceeds the Minimum Transferor Interest;
(iii) the transfer of any mortgage loans from [either] loan group on any
Transfer Date during the Managed Amortization Period will not, in
the reasonable belief of the transferor, cause a Rapid Amortization
Event or an event that with notice or lapse of time or both would
constitute a Rapid Amortization Event to occur;
(iv) the transferor delivers to the owner trustee and the indenture
trustee a mortgage loan schedule containing a list of all mortgage
loans remaining in the related loan group after the removal;
(v) the transferor represents and warrants that no selection procedures
that the transferor reasonably believes are adverse to the
interests of the noteholders[, the Note Insurer] [or any other
third party credit enhancer] were used by the transferor in
selecting the mortgage loans;
(vi) in connection with each retransfer of mortgage loans, the Rating
Agencies [and the Note Insurer] shall have been notified of the
proposed transfer and before the
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Transfer Date no Rating Agency has notified the transferor [or the
Note Insurer] in writing that the transfer would result in a
reduction or withdrawal of the ratings assigned to either class of
Notes [without regard to the Policy] [or any other third party
credit enhancement]; and
(vii) the transferor shall have delivered to the owner trustee, the
indenture trustee [and the Note Insurer] an officer's note
confirming the six conditions preceding this one.
As of any date of determination within any Collection Period, the "Minimum
Transferor Interest" for either loan group is an amount equal to [the lesser of
(a) 5% of the related loan group balance at the end of the immediately preceding
Collection Period and (b) 1.5% of the cut-off date balance of the related loan
group].]
Collection and Other Servicing Procedures on Mortgage Loans
The master servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with the sale and
servicing agreement, follow collection procedures it follows servicing home
equity loans in its servicing portfolio comparable to the mortgage loans.
Consistent with the above, the master servicer may in its discretion waive any
late payment charge or any assumption or other fee or charge that may be
collected in the ordinary course of servicing the mortgage loans.
The master servicer may arrange with a borrower of a mortgage loan a
schedule for the payment of interest due and unpaid for a period so long as the
arrangement is consistent with the master servicer's policies with respect to
mortgage loans it owns or services. Under the sale and servicing agreement, the
master servicer may consent under certain circumstances to the placing of a
future senior lien ahead of a mortgage loan.
Hazard Insurance
The sale and servicing agreement provides that the master servicer maintain
hazard insurance on the mortgaged properties relating to the mortgage loans.
While the related credit line agreements generally require borrowers to maintain
hazard insurance, the master servicer will not monitor the maintenance of hazard
insurance.
The sale and servicing agreement requires the master servicer to maintain
for any mortgaged property relating to a mortgage loan acquired in foreclosure
of a mortgage loan, or by deed in lieu of foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of the maximum insurable
value of the mortgaged property or the outstanding balance of the mortgage loan
plus the outstanding balance on any mortgage loan senior to the mortgage loan at
the time of foreclosure or deed in lieu of foreclosure, plus accrued interest
and the master servicer's good faith estimate of the related liquidation
expenses to be incurred in connection therewith.
The sale and servicing agreement provides that the master servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on the mortgaged properties. If the
blanket policy contains a deductible clause, the master servicer must deposit in
the collection account the sums that would have been deposited but for the
deductible. The master servicer will satisfy these requirements by maintaining a
blanket policy. As stated above, all amounts collected by the master servicer
(net of any reimbursements to the master servicer) under any hazard policy
(except for amounts to be applied to the restoration or repair of the mortgaged
property) will ultimately be deposited in the collection account.
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In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers and therefore will not contain identical terms, their basic
terms are dictated by state laws and most of them typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reactions, 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 or an exact description of the insurance policies relating to the
mortgaged properties.
Realization on Defaulted Mortgage Loans
The master servicer will foreclose on or otherwise comparably convert to
ownership mortgaged properties securing mortgage loans that come into default
when, in accordance with applicable servicing procedures under the sale and
servicing agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with a foreclosure or other conversion,
the master servicer will follow practices it deems appropriate and in keeping
with its general mortgage servicing activities. The master servicer need not
expend its own funds in connection with any foreclosure or other conversion,
correction of default on a related senior mortgage loan, or restoration of any
property unless, in its sole judgment, the expenditure of funds in the
foreclosure, correction or restoration will increase net liquidation proceeds.
The master servicer will be reimbursed out of liquidation proceeds and, if
necessary, from other collections on the mortgage loans for advances of its own
funds as liquidation expenses before any net liquidation proceeds are
distributed to noteholders or the transferor.
Optional Purchase of Defaulted Loan
The master servicer may, at its option, purchase from the trust fund any
mortgage loan that is delinquent in payment for 91 days or more. Any purchase of
a delinquent mortgage loan will be at a price equal to 100% of the principal
balance of the mortgage loan plus accrued interest at the applicable loan rate
from the date through which interest was last paid by the related mortgagor to
the first day of the month in which the purchase proceeds are to be distributed
to noteholders.
Servicing Compensation and Payment of Expenses
The master servicer will receive from interest received on the mortgage
loans for each Collection Period a portion of the interest collections as a
monthly servicing fee in the amount equal to [ ]% per annum on the aggregate
principal balances of the mortgage loans as of the first day of the related
Collection Period. All assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the master
servicer as additional servicing compensation.
The master servicer will pay certain ongoing expenses associated with the
trust fund and incurred by it in connection with its responsibilities under the
sale and servicing agreement. In addition, the master servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted mortgage loans and in connection with the restoration of mortgaged
properties, its right of reimbursement being before the rights of noteholders to
receive any related net liquidation proceeds and, if necessary, other
collections on the mortgage loans.
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Evidence as to Compliance
The sale and servicing agreement provides for delivery by [ ] in each
year, beginning [ , [200[ ]], to the indenture trustee of an annual statement
signed by an officer of the master servicer to the effect that the master
servicer has fulfilled its material obligations under the sale and servicing
agreement throughout the preceding fiscal year, except as specified in the
statement.
By [ ] of each year, beginning [ , [200[ ]], the master servicer will
furnish a report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the master servicer or the
transferor) to the indenture trustee[, the Note Insurer][, any other third party
credit enhancer] and the Rating Agencies to the effect that it has examined
certain documents and the records relating to servicing of the mortgage loans
under the sale and servicing agreement and that, on the basis of its
examination, the firm believes that the servicing was conducted in compliance
with the sale and servicing agreement except for exceptions the firm believes to
be immaterial and any other exceptions specified in the report.
Certain Matters Regarding the Master Servicer and the Transferor
The sale and servicing agreement provides that the master servicer may not
resign as master servicer, except in connection with a permitted transfer of
servicing, unless
(a) its obligations as master servicer are no longer permissible under
applicable law or are in material conflict by reason of applicable law
with any other activities of a type and nature presently carried on by
it or its affiliate or
(b) on satisfaction of the following conditions:
the master servicer has proposed a successor servicer to the indenture trustee
in writing and the proposed successor servicer is reasonably acceptable to the
indenture trustee; the Rating Agencies have confirmed to the trustee that the
appointment of the proposed successor servicer as the master servicer will not
result in the reduction or withdrawal of the then current rating of the Notes
[without regard to the Policy] [or any other third party credit enhancement][;
and the proposed successor servicer is reasonably acceptable to the Note
Insurer].
No resignation of the master servicer will become effective until the
indenture trustee or a successor servicer has assumed the master servicer's
duties under the sale and servicing agreement.
The master servicer may perform any of its obligations under the sale and
servicing agreement through subservicers or delegates, which may be affiliates
of the master servicer. Notwithstanding any subservicing arrangement, the master
servicer will remain liable to the indenture trustee and the noteholders for the
master servicer's obligations under the sale and servicing agreement, without
any diminution of its obligations and as if the master servicer itself were
performing the obligations.
The sale and servicing agreement provides that the master servicer will
indemnify the trust fund and the owner trustee against any loss, liability,
expense, damage or injury suffered as a result of the master servicer's actions
or omissions in connection with the servicing and administration of the mortgage
loans that are not in accordance with the sale and servicing agreement. Under
the sale and servicing agreement, the transferor will indemnify an injured party
for the entire amount of any losses, claims, damages or liabilities arising out
of the sale and servicing agreement to the extent provided in the sale and
servicing agreement (other than losses resulting from defaults under the
mortgage loans). The sale and servicing agreement provides
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that other than the indemnification by the master servicer neither the
depositor, the transferor nor the master servicer nor their directors, officers,
employees or agents will be liable to the trust fund, the owner trustee, the
noteholders or any other person for any action taken or for refraining from
taking any action under the sale and servicing agreement. However, neither the
depositor, the transferor nor the master servicer will be protected against any
liability that would otherwise be imposed for willful misconduct, bad faith or
gross negligence of the depositor, the transferor or the master servicer in the
performance of its duties under the sale and servicing agreement or for reckless
disregard of its obligations under the sale and servicing agreement. In
addition, the sale and servicing agreement provides that the master servicer
need not appear in, prosecute or defend any legal action that is not incidental
to its servicing responsibilities under the sale and servicing agreement and
that in its opinion may expose it to any expense or liability. The master
servicer may, in its sole discretion, undertake any legal action that it deems
appropriate with respect to the sale and servicing agreement.
EVENTS OF SERVICING TERMINATION
The "Events of Servicing Termination" are:
(i) any failure by the master servicer to deposit in the collection
account any deposit required to be made under the sale and
servicing agreement, which failure continues unremedied for five
business days (or, if the master servicer is permitted to remit
collections on the mortgage loans to the collection account on a
monthly basis as described under " -- Payments on Mortgage Loans;
Deposits to Collection Account," three business days) after the
giving of written notice of the failure to the master servicer by
the indenture trustee, or to the master servicer and the indenture
trustee by [the Note Insurer] [, any other third party credit
enhancer] or noteholders evidencing an aggregate undivided interest
in the trust fund of at least 25% of the aggregate Note principal
balance;
(ii) any failure by the master servicer duly to observe or perform in
any material respect any other of its covenants or agreements in
the Notes or the sale and servicing agreement that, in each case,
materially and adversely affects the interests of the noteholders[,
any other third party credit enhancer] [or the Note Insurer] and
continues unremedied for 60 days after the giving of written notice
of the failure to the master servicer by the indenture trustee, or
to the master servicer and the indenture trustee by [the Note
Insurer][, any other third party credit enhancer] or noteholders
evidencing an aggregate, undivided interest in the trust fund of at
least 25% of the aggregate Note principal balance; or
(iii) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings relating to the
master servicer and certain actions by the master servicer
indicating insolvency, reorganization or inability to pay its
obligations.
Under certain other circumstances, [the Note Insurer or] the holders of
Notes evidencing an aggregate, undivided interest in the trust fund of at least
51% of the aggregate Note principal balance may deliver written notice to the
master servicer terminating all the rights and obligations of the master
servicer under the sale and servicing agreement.
[Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for five or more business days or referred to
under clause (ii) above for 60 or more days, will not constitute an Event of
Servicing Termination if the delay or failure could not be prevented by the
exercise of reasonable diligence by the master servicer and the delay or failure
was caused by an act of God or other similar occurrence.] The master servicer
shall not be
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relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the sale and servicing agreement by an act of God or
other similar occurrence, and the master servicer shall provide the indenture
trustee, the depositor, the transferor[, the Note Insurer][, any other third
party credit enhancer] and the noteholders prompt notice of any failure or delay
by it, together with a description of its efforts to perform its obligations.
Rights after an Event of Servicing Termination
So long as an Event of Servicing Termination remains unremedied, either the
indenture trustee, or noteholders evidencing an aggregate undivided interest in
the trust fund of at least 51% of the aggregate Note principal balance [(with
the consent of the Note Insurer) or the Note Insurer], may terminate all of the
rights and obligations of the master servicer under the sale and servicing
agreement, whereupon the indenture trustee will succeed to all the obligations
of the master servicer under the sale and servicing agreement and will be
entitled to similar compensation arrangements. If the indenture trustee would be
obligated to succeed the master servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the sale and servicing agreement and having a net worth of at
least $[ ] [and acceptable to the Note Insurer]to act as successor to the
master servicer under the sale and servicing agreement. Pending this
appointment, the indenture trustee must act as master servicer unless prohibited
by law. The successor master servicer will be entitled to receive the same
compensation that the master servicer would otherwise have received (or lesser
compensation as the indenture trustee and the successor may agree on). A
receiver or conservator for the master servicer may be empowered to prevent the
termination and replacement of the master servicer where the Event of Servicing
Termination that has occurred is an insolvency event.
Amendment
The sale and servicing agreement may be amended from time to time by the
master servicer, the depositor and the indenture trustee [and with the consent
of the Note Insurer], but without the consent of the noteholders, to cure any
ambiguity, to correct any defective provision or to correct or supplement any
provisions in it that may be inconsistent with any other provisions of the sale
and servicing agreement, to add to the duties of the depositor, the seller, the
transferor or the master servicer, to add or amend any provisions of the sale
and servicing agreement as required by the Rating Agencies to maintain or
improve any rating of the Notes (after obtaining the ratings in effect on the
Closing Date, neither the transferor, the seller, the depositor, the owner
trustee, the indenture trustee nor the master servicer must obtain, maintain, or
improve any rating), to add any other provisions with respect to matters arising
under the sale and servicing agreement [or the Policy] that are not be
inconsistent with the sale and servicing agreement [or any other third party
credit enhancement], to comply with any requirement of the Internal Revenue Code
or to increase the limits in the sale and servicing agreement as to the amount
of senior liens that the master servicer may consent to, if the amendment will
not, as evidenced by an opinion of counsel, materially and adversely affect the
interests of any noteholder[, the Note Insurer] [or any other third party credit
enhancer].
No amendment will be considered to materially and adversely affect the
noteholders and no opinion of counsel will be required to be delivered if the
person requesting the amendment obtains a letter from the Rating Agencies
stating that the amendment would not result in a downgrading of the then current
rating of the Notes [without regard to the Policy] [or any other third party
credit enhancement].
The sale and servicing agreement may also be amended from time to time by
the seller, the master servicer, the depositor, and the owner trustee on behalf
of the trust fund, and the
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master servicer [and the Note Insurer] may from time to time consent to the
amendment [of the Policy, with the consent at least 51% of the Note principal
balance of the affected class and the Note Insurer] for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the sale and servicing agreement or of modifying in any manner the rights of
the noteholders, so long as the amendment does not reduce in any manner the
amount of, or delay the timing of, payments on the Notes [or distributions or
payments under the Policy that are required to be made on any Note] without the
consent of each affected noteholder, reduce the aforesaid percentage required to
consent to the amendment, without the consent of all the noteholders adversely
affect in any material respect the interests of [the Note Insurer] [or any other
third party credit enhancer].
[The mortgage loans will be subject to optional transfer to the transferor
on any distribution date on or after which the aggregate Note principal balance
[of both classes of Notes] is reduced to an amount less than or equal to [10]%
of the aggregate Original Note Principal Balance [for both classes of Notes] and
all amounts due and owing to [the Note Insurer] [and any other third party
credit enhancer] including any unreimbursed draws on [the Policy] [and
unreimbursed payments under other third party credit enhancement], together with
interest on the draws, as provided under the Insurance Agreement, have been
paid. The transfer price will be equal to the sum of the outstanding Note
principal balance of each class of Notes plus accrued interest at the applicable
note rate through the day preceding the final distribution date and an amount
equal to any Basis Risk Carryforward for each class of Notes plus accrued
interest.]
DESCRIPTION OF THE PURCHASE AGREEMENT
The mortgage loans to be transferred to the trust fund by the depositor
will be purchased by the depositor from the seller under a purchase agreement to
be entered into between the depositor, as purchaser of the mortgage loans, and
the seller, as transferor of the mortgage loans. Under the purchase agreement,
the seller will agree to transfer the mortgage loans and related Additional
Balances to the depositor. Under the sale and servicing agreement, the mortgage
loans will be immediately transferred by the depositor to the trust fund, and
the depositor will assign its rights under the purchase agreement to the trust
fund. The following is a description of the material provisions of the purchase
agreement.
TRANSFERS OF MORTGAGE LOANS
Under the purchase agreement, the seller will transfer and assign to the
depositor, all of its interest in the mortgage loans [(including any Subsequent
Home Equity Loans)] and all of the Additional Balances created later. The
purchase price of the mortgage loans is a specified percentage of their face
amount as of the time of transfer and is payable by the depositor in cash. The
purchase price of each Additional Balance comprising the principal balance of a
mortgage loan is the amount of the Additional Balance.
REPRESENTATIONS AND WARRANTIES
The seller will represent and warrant to the depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
purchase agreement. The seller will also represent and warrant to the depositor
that, among other things, immediately before the sale of the mortgage loans to
the depositor, the seller was the sole owner and holder of the mortgage loans
free and clear of any liens and security interests. The seller will make similar
representations and warranties in the sale and servicing agreement. The seller
will also represent and warrant to the depositor that, among other things, as of
the Closing Date, the purchase agreement constitutes a valid and legally binding
obligation of the seller and a valid sale to the depositor of all interest of
the seller in the mortgage loans and their proceeds.
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ASSIGNMENT TO TRUST FUND
The seller will expressly acknowledge and consent to the depositor's
transfer of its rights relating to the mortgage loans under the sale and
servicing agreement to the trust fund and the security interest granted in those
rights under the indenture. The seller also will agree to perform its
obligations under the purchase agreement for the benefit of the trust fund.
TERMINATION
The purchase agreement will terminate on the termination of the trust fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the [Class [ ]] Notes will
be applied by the depositor towards the purchase of the initial [loan group [ ]]
mortgage loans [and the deposit to the Prefunding Account].
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion, which summarizes the material U.S. federal income
tax aspects of the purchase, ownership and disposition of the Notes, is based on
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
the Treasury Regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to beneficial owners of [Class [ ]] Notes
in light of their personal investment circumstances or to certain types of
beneficial owners of [Class [ ]] Notes subject to special treatment under the
U.S. federal income tax laws (for example, banks and life insurance companies).
Accordingly, investors should consult their tax advisors regarding U.S. federal,
state, local, foreign and any other tax consequences to them of investing in the
Notes.
Characterization of the Notes as Indebtedness
Based on the application of existing law to the facts established by the
indenture and other relevant documents and assuming compliance with the
indenture as in effect on the date of issuance of the Notes, Andrews & Kurth
L.L.P., special tax counsel to the depositor ("Tax Counsel"), is of the opinion
that the Notes will be treated as debt instruments for federal income tax
purposes as of that date. Accordingly, upon issuance, the Notes will be treated
as "Debt Securities" as described in the prospectus. Furthermore, special tax
counsel to the depositor is of the opinion that neither the trust fund nor any
portion of the trust fund will be treated as either an association or a publicly
traded partnership taxable as a corporation or as a taxable mortgage pool. See
"Material Federal Income Tax Consequences" in the prospectus.
The transferor and the noteholders express in the sale and servicing
agreement their intent that, for applicable tax purposes, the notes will be
indebtedness secured by the mortgage loans. The transferor, the depositor and
the noteholders, by accepting the Notes, and each Note Owner by its acquisition
of a beneficial interest in a Note, have agreed to treat the Notes as
indebtedness for U.S. federal income tax purposes. However, because different
criteria are used
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<PAGE>
to determine the non-tax accounting characterization of the transaction, the
transferor intends to treat this transaction as a sale of an interest in the
principal balances of the mortgage loans for financial accounting purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service and the courts have
explained several factors to be taken into account in determining whether the
substance of a transaction is a sale of property or a secured loan, the primary
factor in making this determination is whether the transferee has assumed the
risk of loss or other economic burdens relating to the property and has obtained
the benefits of ownership thereof. Tax Counsel has analyzed and relied on
several factors in reaching its opinion that the weight of the benefits and
burdens of ownership of the mortgage loans has been retained by the transferor
and has not been transferred to the beneficial owners of [Class [ ]] Notes.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Notes as debt or otherwise makes the
rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF BENEFICIAL OWNERS
Assuming that the beneficial owners of [Class [ ]] Notes are holders of
debt obligations for U.S. federal income tax purposes, the Notes generally will
be taxable as Debt Securities. See "Material Federal Income Tax Consequences" in
the prospectus.
While it is not anticipated that the Notes will be issued at a greater than
de minimis discount, under Treasury regulations (the "OID Regulations") it is
possible that the Notes could nevertheless be deemed to have been issued with
original issue discount ("OID") if the interest were not treated as
"unconditionally payable" under the OID Regulations. If the OID Regulations were
to apply, all of the taxable income to be recognized with respect to the Notes
would be includible in income of beneficial owners of [Class [ ]] Notes as OID,
but would not be includible again when the interest is actually received. See
"Material Federal Income Tax Consequences --Taxation of Debt Securities;
Interest and Acquisition Discount" in the prospectus for a discussion of the
application of the OID rules if the Notes are in fact issued at a greater than
de minimis discount or are treated as having been issued with OID under the OID
Regulations. For purposes of calculating OID, it is likely that the Notes will
be treated as Pay-Through Securities.
Possible Classification of the Notes as a Partnership or Association Taxable as
a Corporation
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this prospectus
S-77
<PAGE>
Supplement and the accompanying prospectus with respect to the Notes constitutes
a sale of the mortgage loans (or an interest therein) to the beneficial owners
of [Class [ ]] Notes and that the proper classification of the legal
relationship between the transferor and the beneficial owners of [Class [ ]]
Notes resulting from this transaction is that of a partnership, a publicly
traded partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the Notes will be treated as
indebtedness in the hands of the noteholders for U.S. federal income tax
purposes, the transferor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the trust fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the mortgage loans,
which would reduce the amounts available for distribution to the beneficial
owners of [Class [ ]] Notes. Cash distributions to the beneficial owners of
[Class [ ]] Notes generally would be treated as dividends for tax purposes to
the extent of the corporation's earnings and profits.
If the transaction were treated as creating a partnership between the
beneficial owners of [Class [ ]] Notes and the transferor, the partnership
itself would not be subject to U.S. federal income tax (unless it were to be
characterized as a publicly traded partnership taxable as a corporation);
rather, the transferor and each Note Owner would be taxed individually on their
respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deductions
of the Note Owner could differ if the Notes were held to constitute partnership
interests rather than indebtedness. Assuming that all of the provisions of the
trust agreement, as in effect on the date of the issuance, are complied with, it
is the opinion of Tax Counsel that the trust fund will not be treated as either
an association or a partnership taxable as a corporation or as a taxable
mortgage pool.
Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity (or a
portion of an entity) that is a "taxable mortgage pool" will be classified as a
taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the entity's debt obligations (or an underlying
arrangement), payments on the debt obligations bear a relationship to the debt
instruments held by the entity.
Assuming that all of the provisions of the sale and servicing agreement and
the trust agreement, as in effect on the date of issuance, are complied with,
Tax Counsel is of the opinion that neither the trust fund nor any portion of the
trust fund will be a taxable mortgage pool under Section 7701(i) of the Code
because payments on each loan group support only one class of indebtedness.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the sale and servicing agreement and the trust
agreement is a taxable mortgage pool, the arrangement would be subject to U.S.
federal corporate income tax on its taxable income generated by ownership of the
mortgage loans. That a tax might reduce amounts available for distributions to
beneficial owners of [Class [ ]] Notes. The amount of the tax would depend upon
whether
S-78
<PAGE>
distributions to beneficial owners of [Class [ ]] Notes would be deductible as
interest expense in computing the taxable income of that arrangement as a
taxable mortgage pool.
Foreign Investors
In general, subject to certain exceptions, interest (including OID) paid on
a Note to a nonresident alien individual, foreign corporation or other non-
United States person is not subject to U.S. federal income tax, provided that
the interest is not effectively connected with a trade or business of the
recipient in the United States and the Note Owner provides the required foreign
person information certification. See "Material Federal Income Tax Consequences
-- Tax Treatment of Foreign Investors" in the prospectus.
Interest paid (or accrued) to a noteholder who is a non-U.S. Person will be
considered "portfolio interest" and generally will not be subject to United
States federal income tax and withholding tax, provided, that (i) the interest
is not effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Person, (ii) the non-U.S. Person provides the
trust fund or other person who is otherwise required to withhold U.S. tax with
respect to the Note with an appropriate statement (on Form W-8 or other similar
form), signed under penalties of perjury, certifying that the beneficial owner
of the Note is a foreign person and providing that non-U.S. person's name and
address. If a Note is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the non-U.S. Person that owns that interest in the mortgage loan. If the
interest does not constitute portfolio interest, then it will be subject to U.S.
federal income and withholding tax at a rate of 30%, unless reduced or
eliminated under an applicable tax treaty and the non-U.S. Person provides the
Trust Fund, or an organization or financial institution described above, with an
appropriate statement (e.g., a Form 1001), signed under penalties of perjury, to
that effect.
Final regulations dealing with backup withholding and information reporting
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. The discussion above
does not take the new withholding regulations into account. Prospective non-U.S.
persons who own interests in mortgage loans are strongly urged to consult their
own tax advisor with respect to the new withholding regulations.
If the interests of the beneficial owners of [Class [ ]] Notes were deemed
to be partnership interests, the partnership would be required, on a quarterly
basis, to pay withholding tax equal to the product, for each foreign partner, of
the foreign partner's distributive share of "effectively connected" income of
the partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, a corporate foreign partner would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each foreign
partner would be credited against the foreign partner's U.S. income tax
liability.
In addition, the interest paid on Notes could be subject to a 30%
withholding tax (or lower treaty rate) either because the interest on the
mortgage loans does not appear to satisfy the requirements to be treated as
"portfolio interest" under the Code, or because, even if the mortgage loan
interest were to be treated as portfolio interest, interest payments on the
Notes
S-79
<PAGE>
could be treated as "guaranteed payments" within the meaning of the partnership
provisions of the Code.
If the trust fund were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless the rate were reduced by an applicable
tax treaty.
Backup Withholding
Certain beneficial owners of [Class [ ]] Notes may be subject to backup
withholding at the rate of 31% with respect to interest paid on the Notes if the
Note Owner, upon issuance, fails to supply the indenture trustee or his broker
with his taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the indenture trustee or his broker with a certified statement,
under penalty of perjury, that he is not subject to backup withholding.
The indenture trustee will be required to report annually to the IRS, and
to each noteholder of record, the amount of interest paid (and OID accrued, if
any) on the Notes (and the amount of interest withheld for U.S. federal income
taxes, if any) for each calendar year, except as to exempt holders (generally,
holders that are corporations, certain tax-exempt organizations or nonresident
aliens who provide certification as to their status as nonresidents). As long as
the only "noteholder" of record is Cede & Co., as nominee for DTC, beneficial
owners of [Class [ ]] Notes and the IRS will receive tax and other information
including the amount of interest paid on the Notes owned from participants and
indirect participants rather than from the indenture trustee. (The indenture
trustee, however, will respond to requests for necessary information to enable
participants, indirect participants and certain other persons to complete their
reports.) Each non-exempt Note Owner will be required to provide, under penalty
of perjury, a note on IRS Form W-9 containing his or her name, address, correct
federal taxpayer identification number and a statement that he or she is not
subject to backup withholding. Should a nonexempt Note Owner fail to provide the
required certification, the participants or indirect participants (or the paying
agent) will be required to withhold 31% of the interest (and principal)
otherwise payable to the holder, and remit the withheld amount to the IRS as a
credit against the holder's federal income tax liability.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. The
discussion above does not take the new withholding regulations into account.
Prospective non-U.S. persons who own regular notes are strongly urged to consult
their own tax advisor with respect to the new withholding regulations.
State Taxes
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Notes under the tax laws of any state.
Investors considering an investment in the Notes should consult their own tax
advisors regarding the tax consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the notes.
ERISA CONSIDERATIONS
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Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements that are subject to ERISA or corresponding provisions of the
Code, including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which the plans, accounts, annuities or
arrangements are invested, persons acting on behalf of a plan, or persons using
the assets of a plan, SHOULD review carefully with their legal advisors whether
the purchase or holding of the Notes could either give rise to a transaction
that is prohibited under ERISA or the Code or cause the collateral securing the
Notes to be treated as plan assets for purposes of regulations of the Department
of Labor in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulation").
Prohibited Transactions
General. Section 406 of ERISA prohibits parties in interest or disqualified
persons with respect to a plan from engaging in certain transactions (including
loans) involving a plan and its assets unless a statutory, regulatory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes (or, in some cases, a civil penalty may be assessed
under section 502(i) of ERISA) on parties in interest or disqualified persons
which engage in non-exempt prohibited transactions.
Plan Asset Regulation and The Notes. The United States Department of Labor
has issued the Plan Asset Regulation concerning the definition of what
constitutes the assets of the plan for purposes of ERISA and the prohibited
transaction provisions of the Code. The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a plan invests will
be considered to be "plan assets" such that any person who exercises control
over the assets would be subject to ERISA's fiduciary standards. Under the Plan
Asset Regulation, generally when a plan invests in another entity, the plan's
assets do not include, solely by reason of the investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
plan acquires an "equity interest" in an entity, the assets of the entity will
be treated as assets of the plan investor unless certain exceptions not
applicable here apply.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Notes are not treated as equity interests in the issuer for
purposes of the Plan Asset Regulation, a plan's investment in the Notes would
not cause the assets of the issuer to be deemed plan assets. However, the
issuer, the master servicer, a servicer, the indenture trustee and the
underwriter may be the seller of or investment advisor with respect to one or
more plans. Because they may receive certain benefits in connection with the
sale of the Notes, the purchase of Notes using plan assets over which any of
them has investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may be
available.
The Notes may not be purchased with the assets of a plan if the issuer, the
master servicer, a servicer, the indenture trustee, the underwriter or any of
their respective affiliates:
. has investment or administrative discretion with respect to the plan
assets;
. has authority or responsibility to give, or regularly gives,
investment advice with respect to the plan assets, for a fee and in
accordance with an agreement or understanding that the advice
. will serve as a primary basis for investment decisions with
respect to the plan assets, and
S-81
<PAGE>
. will be based on the particular investment needs for the plan; or
is an employer maintaining or contributing to the plan.
If the Notes are deemed to be equity interests in the issuer, the issuer
could be considered to hold plan assets because of a plan's investment in the
Notes. In that event, the master servicer and other persons exercising
management or discretionary control over the assets of the issuer may be deemed
to be fiduciaries with respect to investing plans and thus subject to the
fiduciary responsibility provisions of Title 1 of ERISA, including the
prohibited transaction provisions of section 406 of ERISA, and section 4975 of
the Code with respect to transactions involving the issuer's assets. We cannot
assure you that any statutory, regulatory or administrative exemption will apply
to all prohibited transactions that might arise in connection with the purchase
or holding of a equity interest in the issuer by a plan.
Without regard to whether the Notes are considered to be equity interests
in the issuer, certain affiliates of the issuer or the master servicer might be
considered or might become parties in interest or disqualified persons with
respect to a plan. In either case, the acquisition or holding of Notes by or on
behalf of the plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more exemptions such as Prohibited Transaction Class Exemption ("PTCE")
84-14, which exempts certain transactions effected on behalf of a plan by a
"qualified professional asset manager;" PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE-91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts; or PTCE 96-23, which exempts certain transactions effected on
behalf of a plan by certain "in-house asset managers." Each purchaser or
transferee of a Note that is a plan investor shall be deemed to have represented
that the relevant conditions for exemptive relief under at least one of the
foregoing exemptions have been satisfied.
The sale of Notes to a plan is in no respect a representation by the issuer
or the underwriter that this investment meets all relevant legal requirements
with respect to investments by plans generally or any particular plan, or that
this investment is appropriate for plans generally or any particular plan.
Any plan investor proposing to invest in the notes should consult with its
counsel to confirm that the investment will not result in a prohibited
transaction that is not subject to an exemption and will satisfy the other
requirements of ERISA and the code applicable to plans.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the [Class [ ]] Notes will be
rated in the highest rating category of each of the Rating Agencies, the [Class
[ ]] Notes will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, because not all of the
mortgages securing the mortgage loans are first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to invest in the [Class [
]] Notes, which because they evidence interests in a pool that includes junior
mortgage loans are not "mortgage related securities" under SMMEA. See "Legal
Investment" in the prospectus.
UNDERWRITING
Under the underwriting agreement, dated [ ], 200[ ], between the
depositor and [ ] ("[ ]"), [which is an affiliate of the depositor, the seller
and the master servicer,] the depositor has agreed to sell to [ ], and [ ] has
agreed to purchase from the depositor, the [Class [ ]] Notes.
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Pursuant and subject to the underwriting agreement, [ ] has agreed to
purchase all the [Class [ ]] Notes if any of the [Class [ ]] Notes are
purchased.
The depositor has been advised by [ ] that it proposes initially to offer
the [Class [ ]] Notes to the public in Europe and the United States at the
offering price on the cover page and to certain dealers at the offering price
less a discount not in excess of [ ]% of the Note denominations. [ ] may allow
and the dealers may reallow a discount not in excess of [ ]% of the Note
denominations to certain other dealers. After the initial public offering, the
public offering price, the concessions and the discounts may be changed.
Until the distribution of the [Class [ ]] Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of [ ] and certain
selling group members to bid for and purchase the [Class [ ]] Notes. As an
exception to these rules, [ ] is permitted to engage in certain transactions
that stabilize the price of the [Class [ ]] Notes. Stabilizing transactions
consist of bids or purchases for the purposes of pegging, fixing or maintaining
the price of the [Class [ ]] Notes. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of stabilizing
purchases. Neither the depositor nor [ ] makes any representation or prediction
as to the direction or magnitude of any effect that the stabilizing transactions
may have on the prices of the Notes. In addition, neither the depositor nor [ ]
makes any representation that [ ] will engage in stabilizing transactions or
that stabilizing transactions, once commenced, will not be discontinued without
notice.
The underwriting agreement provides that the depositor will indemnify [ ]
against certain civil liabilities, including liabilities under the Act.
After the initial distribution of the notes offered hereby, this prospectus
and prospectus supplement may be used by [First Tennessee Securities
Corporation][First Tennessee Capital Markets], an affiliate of the depositor,
the seller and the master servicer, in connection with market making
transactions in such notes. [First Tennessee Securities Corporation][First
Tennessee Capital Markets] may act as principal or agent in these transactions.
These transactions will be at market prices at the time of sale and not at the
prices of the initial offering.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed on for the
depositor by Andrews & Kurth L.L.P., Dallas, Texas. [ ], will pass on certain
legal matters on behalf of the underwriters.
EXPERTS
[The consolidated financial statements of Note Insurer and subsidiaries, as
of [month] [day], [year] and [year] and for each of the years in the [number]-
year period ended [month] [day], [year], are incorporated by reference in this
prospectus supplement and in the registration statement in reliance upon the
report of [ ], independent certified public accountants, incorporated by
reference in this prospectus supplement, and on the authority of that firm as
experts in accounting and auditing.]
RATINGS
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It is a condition to the issuance of the Class [ ] [and Class [ ]] Notes
that they [each] be rated [ ] by [Rating Agency] and [ ] by [Rating Agency]
(each a "Rating Agency").
A securities rating addresses the likelihood of the receipt by noteholders
of distributions on the mortgage loans. The rating takes into consideration the
characteristics of the mortgage loans and the structural and legal aspects
associated with the [Class [ ]] Notes. The ratings on the [Class [ ]] Notes do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the mortgage loans or the possibility that noteholders might
realize a lower than anticipated yield. The ratings on the [Class [ ]] Notes do
not address the likelihood of the receipt by noteholders of Basis Risk
Carryforward.
[The ratings assigned to the [Class [ ]] Notes will depend primarily upon
the financial strength of the Note Insurer. Any reduction in a rating assigned
to the financial strength of the Note Insurer below the ratings initially
assigned to the [Class [ ]] Notes may result in a reduction of one or more of
the ratings assigned to the [Class [ ]] Notes.]
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating SHOULD be evaluated independently of
similar ratings on different securities.
The depositor has not requested a rating of the [Class [ ]] Notes by any
rating agency other than the Rating Agencies; however, we cannot assure you that
no other rating agency will rate the [Class [ ]] Notes or, if it does, what
rating would be assigned by another rating agency. The rating assigned by
another rating agency to the [Class [ ]] Notes could be lower than the
respective ratings assigned by the Rating Agencies.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Accelerated Principal Distribution Amount"....................................................S-52, S-59
"Additional Balances".............................................................................. S-21
"Alternative Principal Payment".................................................................... S-55
"Available Transferor Subordinated Amount"......................................................... S-56
"Basis Risk Carryforward".......................................................................... S-53
"business day".................................................................................S-52, S-60
"Class"............................................................................................ S-50
"Code"............................................................................................. S-77
"Collection Period"................................................................................ S-53
"Crossover Amount"................................................................................. S-52
"Debt Securities".................................................................................. S-77
"Detailed Description"............................................................................. S-28
"Determination Date"............................................................................... S-56
"Eligible Account"................................................................................. S-56
"Eligible Substitute Mortgage Loan"................................................................ S-68
"Events of Servicing Termination".................................................................. S-73
"First Tennessee".................................................................................. S-23
"Guaranteed Distributions"......................................................................... S-60
"Guaranteed Principal Distribution Amount"......................................................... S-60
"Insurance Agreement".............................................................................. S-60
"Insured Amount"................................................................................... S-60
"Interest Period" ................................................................................. S-54
"Investor Fixed Allocation Percentage"............................................................. S-47
"Investor Floating Allocation Percentage".......................................................... S-58
"Investor Interest Collections".................................................................... S-58
"Investor Loss Amount"............................................................................. S-53
"Investor Principal Collections"................................................................... S-59
"LIBOR"............................................................................................ S-53
"Liquidated Mortgage Loan"......................................................................... S-53
"Liquidation Loss Amount".......................................................................... S-53
"Maximum Principal Payment"........................................................................ S-55
"Minimum Transferor Interest"...................................................................... S-70
"New Withholding Regulations"...................................................................... S-80
"Note Insurer"..................................................................................... S-23
"Notes"............................................................................................ S-50
"OID Regulations".................................................................................. S-78
"OID".............................................................................................. S-78
"Original Invested Amount"......................................................................... S-50
"Overcollateralization Reduction Amount"........................................................... S-59
"Plan Asset Regulation"............................................................................ S-81
"Preference Amount"................................................................................ S-60
"Prefunding Account"............................................................................... S-30
"Rapid Amortization Event"......................................................................... S-61
"Rapid Amortization Period"........................................................................ S-55
"Rating Agency".................................................................................... S-84
"Related Documents"................................................................................ S-67
"Required Amount".................................................................................. S-55
"Reserve Fund"..................................................................................... S-59
"Scheduled Principal Collections Distribution Amount".............................................. S-55
"Statistic Calculation Date"....................................................................... S-28
"Statistic Calculation Pool Mortgage Loan"......................................................... S-28
"Statistic Calculation Pool"....................................................................... S-28
</TABLE>
<PAGE>
<TABLE>
<S> <C>
"Subordinated Transferor Collections".............................................................. S-55
"Subsequent Home Equity Loans"..................................................................... S-30
"Tax Counsel"...................................................................................... S-77
"TIA".............................................................................................. S-65
"Transfer Date".................................................................................... S-69
"Transfer Deficiency".............................................................................. S-68
"Transfer Deposit Amount".......................................................................... S-68
</TABLE>
<PAGE>
$[__________________]
(Approximate)
First Tennessee Bank National Association
Seller and Master Servicer
First Horizon Home Equity Loan Trust 200[ ]-[ ]
Issuer
Revolving Home Equity Loan Asset-Backed Notes, Series 200[ ]-[ ]
_______________
Prospectus Supplement
[ ], 200[ ]
_______________
[UNDERWRITER]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Series 200[ ]-[ ] Revolving Home Equity Loan Asset
Backed Notes in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 200[ ]-[ ] Revolving Home Equity Loan Asset Backed
Notes and with respect to their unsold allotments or subscriptions. In addition,
all dealers selling the Series 200[ ]-[ ] Revolving Home Equity Loan Asset
Backed Notes will be required to deliver a prospectus supplement and prospectus
until [ ], 200[ ].
[ ], 200[ ]
<PAGE>
PROSPECTUS
First Horizon Asset Securities Inc.
Depositor
Mortgage and Asset Backed Securities
(Issuable in Series)
--------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page 6 of this
prospectus.
--------------------------------------------------------------------------------
The Trusts
Each trust will be established to hold assets in its trust fund transferred to
it by First Horizon Asset Securities Inc. The assets in each trust fund will be
specified in the prospectus supplement for the particular trust and will
generally consist of:
. first lien mortgage loans secured by one- to four-family
residential properties or participations in that type of
loan,
. mortgage pass-through securities issued or guaranteed by
Ginnie Mae, Fannie Mae, or Freddie Mac, or
. private mortgage-backed securities backed by first lien
mortgage loans secured by one- to four-family residential
properties or participations in that type of loan.
. closed-end and/or revolving home equity loans, secured in
whole or in part by first and/or subordinate liens on one-
to four-family residential properties or participations in
that type of loan, or
. home improvement installment sale contracts and installment
loan agreements that are secured by first or subordinate
liens on one- to four-family residential properties or
participations in those types of contracts.
The Securities
The securities of a series will consist of certificates which evidence
beneficial ownership of a trust established by the depositor, and/or notes
secured by the assets of a trust fund. The depositor or a trust established by
the depositor will sell the securities pursuant to a prospectus supplement. The
securities will be grouped into one or more series, each having its own distinct
designation. Each series of securities will be issued in one or more classes and
each class will evidence the right to receive a specified portion of future
payments on the assets in the trust fund that the series relates to. A
prospectus supplement for a series will specify all of the terms of the series
and of each of the classes in the series.
Offers of Securities
The securities may be offered to the public through several different methods,
including offerings through underwriters.
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
January 5, 2001
<PAGE>
TABLE OF CONTENTS
PAGE
----
RISK FACTORS .............................................................. 6
THE TRUST FUND ............................................................ 20
General .......................................................... 20
The Loans ........................................................ 22
Substitution of Trust Fund Assets ................................ 27
AVAILABLE INFORMATION ..................................................... 27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ........................... 28
REPORTS TO SECURITYHOLDERS ................................................ 28
USE OF PROCEEDS ........................................................... 28
THE DEPOSITOR ............................................................. 29
LOAN PROGRAM .............................................................. 29
Underwriting Standards ........................................... 29
Qualifications of Sellers ........................................ 31
Representations by Sellers; Repurchases .......................... 31
DESCRIPTION OF THE SECURITIES ............................................. 33
General .......................................................... 34
Distributions on Securities ...................................... 36
Advances ......................................................... 38
Reports to Securityholders ....................................... 39
Categories of Classes of Securities .............................. 41
Indices Applicable to Floating Rate and Inverse Floating
Rate Classes .................................................... 44
Book-entry Registration of Securities ............................ 49
CREDIT ENHANCEMENT ........................................................ 53
General .......................................................... 53
Subordination .................................................... 54
Letter of Credit ................................................. 55
Insurance Policies, Surety Bonds and Guaranties .................. 55
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<PAGE>
Over-collateralization .......................................... 56
Reserve Accounts ................................................ 56
Pool Insurance Policies ......................................... 58
Cross Support ................................................... 60
YIELD AND PREPAYMENT CONSIDERATIONS ...................................... 61
THE AGREEMENTS ........................................................... 64
Assignment of the Trust Fund Assets ............................. 64
Payments on Loans; Deposits to Security Account ................. 66
Pre-funding Account ............................................. 69
Sub-servicing by Sellers ........................................ 70
Collection Procedures ........................................... 70
Hazard Insurance ................................................ 71
Realization upon Defaulted Loans ................................ 74
Servicing and Other Compensation and Payment of Expenses ........ 75
Evidence as to Compliance ....................................... 75
Certain Matters Regarding the Master Servicer and the
Depositor ...................................................... 76
Events of Default; Rights upon Event of Default ................. 77
Amendment ....................................................... 80
Termination; Optional Termination ............................... 82
The Trustee ..................................................... 83
LEGAL ASPECTS OF THE LOANS ............................................... 83
General ......................................................... 83
Foreclosure ..................................................... 85
Environmental Risks ............................................. 87
Rights of Redemption ............................................ 89
Anti-deficiency Legislation and Other Limitations on
Lenders ........................................................ 89
Due-on-sale Clauses ............................................. 91
Enforceability of Prepayment and Late Payment Fees .............. 91
Applicability of Usury Laws ..................................... 92
Home Improvement Contracts ...................................... 92
Installment Contracts ........................................... 94
Soldiers' and Sailors' Civil Relief Act ......................... 95
Junior Mortgages and Rights of Senior Mortgagees ................ 95
The Title I Program ............................................. 97
Consumer Protection Laws ........................................ 101
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ................................. 101
General ......................................................... 101
Taxation of Debt Securities ..................................... 102
Taxation of the REMIC and its Holders ........................... 108
-3-
<PAGE>
REMIC Expenses; Single Class REMICs ............................. 109
Taxation of the REMIC ........................................... 110
Taxation of Holders of Residual Interest Securities ............. 111
Administrative Matters .......................................... 116
Tax Status as a Grantor Trust ................................... 116
Sale or Exchange ................................................ 119
Miscellaneous Tax Aspects ....................................... 120
Tax Treatment of Foreign Investors .............................. 121
Tax Characterization of the Trust Fund as a Partnership ......... 122
Tax Consequences to Holders of the Notes ........................ 122
Tax Consequences to Holders of the Certificates ................. 125
New Withholding Regulations ..................................... 130
STATE TAX CONSIDERATIONS ................................................. 130
ERISA CONSIDERATIONS ..................................................... 131
LEGAL INVESTMENT ......................................................... 137
METHOD OF DISTRIBUTION ................................................... 139
LEGAL MATTERS ............................................................ 140
FINANCIAL INFORMATION .................................................... 140
RATING ................................................................... 140
INDEX TO DEFINED TERMS ................................................... 142
-4-
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING
PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
. this prospectus, which provides general information, some of which may
not apply to a particular series; and
. the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
-------------------------------------
If you require additional information, the mailing address of our
principal executive offices is First Horizon Asset Securities Inc., 4000 Horizon
Way, Irving, Texas 75063 and the telephone number is (214) 441-4000. For other
means of acquiring additional information about us or a series of securities,
see "The Trust Fund -- Incorporation of Certain Documents by Reference"
beginning on page __.
-5-
<PAGE>
RISK FACTORS
You should carefully consider the following information since it
identifies significant risks associated with an investment in the securities.
Limited Source of Payments ---
No Recourse To Sellers,
Depositor or Servicer....... The applicable prospectus supplement may provide
that securities will be payable from other trust
funds in addition to their associated trust
fund, but if it does not, they will be payable
solely from their associated trust fund. If the
trust fund does not have sufficient assets to
distribute the full amount due to you as a
securityholder, your yield will be impaired, and
perhaps even the return of your principal may be
impaired, without your having recourse to anyone
else.
Furthermore, at the times specified in the
applicable prospectus supplement, some assets of
the trust fund may be released and paid out to
other people, such as the depositor, a servicer,
a credit enhancement provider, or any other
person entitled to payments from the trust fund.
Those assets will no longer be available to make
payments to you. Those payments are generally
made after other specified payments that may be
set forth in the applicable prospectus
supplement have been made.
You will not have any recourse against the
depositor or any servicer if you do not receive
a required distribution on the securities. Nor
will you have recourse against the assets of the
trust fund of any other series of securities.
The securities will not represent an interest in
the depositor, any servicer, any seller to the
depositor, or anyone else except the trust fund.
The only obligation of the depositor to a trust
fund comes from certain representations and
warranties made by it about assets transferred
to the trust fund. If these representations and
warranties turn out to be untrue,
-6-
<PAGE>
the depositor may be required to repurchase some
of the transferred assets. First Horizon Asset
Securities Inc., which is the depositor, does
not have significant assets and is unlikely to
have significant assets in the future. So if the
depositor were required to repurchase a loan
because of a breach of a representation, its
only sources of funds for the repurchase would
be:
. funds obtained from enforcing a
corresponding obligation of a seller or
originator of the loan, or
. funds from a reserve fund or similar
credit enhancement established to pay
for loan repurchases.
The only obligations of the master servicer to a
trust fund (other than its master servicing
obligations) come from certain representations
and warranties made by it in connection with its
loan servicing activities. If these
representations and warranties turn out to be
untrue, the master servicer may be required to
repurchase or substitute for some of the loans.
However, the master servicer may not have the
financial ability to make the required
repurchase or substitution.
The only obligations to a trust fund of a seller
of loans to the depositor comes from certain
representations and warranties made by it in
connection with its sale of the loans and
certain document delivery requirements. If these
representations and warranties turn out to be
untrue, or the seller fails to deliver required
documents, it may be required to repurchase or
substitute for some of the loans. However, the
seller may not have the financial ability to
make the required repurchase or substitution.
Credit Enhancement May Not
Be Sufficient To Protect
-7-
<PAGE>
You from Losses ........... Credit enhancement is intended to reduce the
effect of loan losses. But credit enhancements
may benefit only some classes of a series of
securities and the amount of any credit
enhancement will be limited as described in
the applicable prospectus supplement.
Furthermore, the amount of a credit
enhancement may decline over time pursuant to
a schedule or formula or otherwise, and could
be depleted from payments or for other reasons
before the securities covered by the credit
enhancement are paid in full. In addition, a
credit enhancement may not cover all potential
sources of loss. For example, a credit
enhancement may or may not cover fraud or
negligence by a loan originator or other
parties. Also, the trustee may be permitted to
reduce, substitute for, or even eliminate all
or a portion of a credit enhancement so long
as the rating agencies that have rated the
securities at the request of the depositor
indicate that the reduction would not cause
them to change adversely their rating of the
securities. Consequently, securityholders may
suffer losses even though a credit enhancement
exists and its provider does not default.
Nature of Mortgages
Junior Status of Liens Securing
Home Equity Loans Could
Adversely Affect You........... The mortgages and deeds of trust securing the
home equity loans will be primarily junior
liens subordinate to the rights of the
mortgagee under the related senior mortgage(s)
or deed(s) of trust. Accordingly, the proceeds
from any liquidation, insurance or
condemnation proceeds will be available to
satisfy the outstanding balance of the junior
lien only to the extent that the claims of the
related senior mortgagees have been satisfied
in full, including any related foreclosure
costs. In addition, if a junior mortgagee
forecloses on the property securing a junior
mortgage, it forecloses subject to any senior
mortgage and must take one of the following
steps to protect its interest in the property:
-8-
<PAGE>
. pay the senior mortgage in full at or
prior to the foreclosure sale, or
. assume the payments on the senior
mortgage in the event the mortgagor is
in default under the senior mortgage.
The trust fund may effectively be prevented from
foreclosing on the related property since it
will have no funds to satisfy any senior
mortgages or make payments due to any senior
mortgagees.
Some states have imposed legal limits on the
remedies of a secured lender in the event that
the proceeds of any sale under a deed of trust
or other foreclosure proceedings are
insufficient to pay amounts owed to that secured
lender. In some states, including California, if
a lender simultaneously originates a loan
secured by a senior lien on a particular
property and a loan secured by a junior lien on
the same property, that lender as the holder of
the junior lien may be precluded from obtaining
a deficiency judgment with respect to the excess
of:
. the aggregate amount owed under both the
senior and junior loans over
. the proceeds of any sale under a deed of
trust or other foreclosure proceedings.
See "Legal Aspects of the Loans --
Anti-Deficiency Legislation; Bankruptcy Laws;
Tax Liens."
Declines in Property Values May
Adversely Affect You The value of the properties underlying the loans
held in the trust fund may decline over time.
Among the factors that could adversely affect
the value of the properties are:
. an overall decline in the residential
real estate market in the areas in which
they are located,
-9-
<PAGE>
. a decline in their general condition
from the failure of borrowers to
maintain their property adequately, and
. natural disasters that are not covered
by insurance, such as earthquakes and
floods.
In the case of home equity loans, declining
property values could diminish or extinguish the
value of a junior mortgage before reducing the
value of a senior mortgage on the same property.
If property values decline, the actual rates of
delinquencies, foreclosures, and losses on all
underlying loans could be higher than those
currently experienced in the mortgage lending
industry in general. These losses, to the extent
not otherwise covered by a credit enhancement,
will be borne by the holder of one or more
classes of securities.
Delays In Liquidation May
Adversely Affect You...... Even if the properties underlying the loans held
in the trust fund provide adequate security for
the loans, substantial delays could occur before
defaulted loans are liquidated and their
proceeds are forwarded to investors. Property
foreclosure actions are regulated by state
statutes and rules and are subject to many of
the delays and expenses of other lawsuits if
defenses or counterclaims are made, sometimes
requiring several years to complete.
Furthermore, in some states if the proceeds of
the foreclosure are insufficient to repay the
loan, the borrower is not liable for the
deficit. Thus, if a borrower defaults, these
restrictions may impede the trust's ability to
dispose of the property and obtain sufficient
proceeds to repay the loan in full.
In addition, the servicer will be entitled to
deduct from liquidation proceeds all expenses
reasonably incurred in attempting to recover on
the defaulted loan, including legal fees and
costs, real estate
-10-
<PAGE>
taxes, and property maintenance and preservation
expenses.
Disproportionate Effect of
Liquidation Expenses May
Adversely Affect You ........ Liquidation expenses of defaulted loans
generally do not vary directly with the
outstanding principal balance of the loan at the
time of default. Therefore, if a servicer takes
the same steps for a defaulted loan having a
small remaining principal balance as it does for
a defaulted loan having a large remaining
principal balance, the amount realized after
expenses is smaller as a percentage of the
outstanding principal balance of the small loan
than it is for the defaulted loan having a large
remaining principal balance.
Consumer Protection Laws
May Adversely Affect You..... State laws generally regulate interest rates and
other charges, require specific disclosures, and
require licensing of mortgage loan originators
and servicers. In addition, most states have
other laws and public policies for the
protection of consumers that prohibit unfair and
deceptive practices in the origination,
servicing, and collection of mortgage loans.
Depending on the particular law and the specific
facts involved, violations may limit the ability
to collect all or part of the principal or
interest on the underlying loans held in the
trust fund.
In some cases, the borrower may even be entitled
to a refund of amounts previously paid.
The loans held in the trust fund may also be
subject to certain federal laws, including:
. the Federal Truth in Lending Act and its
regulations, which require disclosures
to the borrowers regarding the terms of
any mortgage loan;
-11-
<PAGE>
. the Equal Credit Opportunity Act and its
regulations, which prohibit
discrimination in the extension of
credit on the basis of age, race, color,
sex, religion, marital status, national
origin, receipt of publicassistance, or
the exercise of any right under the
Consumer Credit Protection Act; and
. the Fair Credit Reporting Act, which
regulates the use and reporting of
information related to the borrower's
credit experience.
Home Equity Loan Consumer Protection Act. For
----------------------------------------
loans that were originated or closed after
November 7, 1989, the Home Equity Loan Consumer
Protection Act of 1988, which requires
additional application disclosures, limits
changes that may be made to the loan documents
without the borrower's consent and restricts a
lender's ability to declare a default or to
suspend or reduce a borrower's credit limit to
certain enumerated events.
The Riegle Act. Certain mortgage loans may be
--------------
subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, known as the
Riegle Act, which incorporates the Home
Ownership and Equity Protection Act of 1994.
These provisions impose additional disclosure
and other requirements on creditors with respect
to non-purchase money mortgage loans with high
interest rates or high up-front fees and
charges. The provisions of the Riegle Act apply
on a mandatory basis to all mortgage loans
originated on or after October 1, 1995. These
provisions can impose specific statutory
liabilities upon creditors who fail to comply
with their provisions and may affect the
enforceability of the related loans. In
addition, any assignee of the creditor would
generally be subject to all claims and defenses
that the consumer could assert against the
creditor, including the right to rescind the
mortgage loan.
-12-
<PAGE>
Holder in Due Course Rules. The home improvement
--------------------------
contracts are also subject to the so-called
holder in due course rules which comprise the
Preservation of Consumers' Claims and Defenses
regulations of the Federal Trade Commission and
other similar federal and state statutes and
regulations. The holder in due course rules have
the effect of subjecting any assignee of the
seller in a consumer credit transaction to all
claims and defenses which the obligor in the
credit sale transaction could assert against the
seller of the goods.
Some violations of these federal laws may limit
the ability to collect the principal or interest
on the loans held in the trust fund, and in
addition could subject the trust fund to damages
and administrative enforcement. Losses on loans
from the application of those laws that are not
otherwise covered by a credit enhancement will
be borne by the holders of one or more classes
of securities.
Losses on Balloon Payment
Mortgages Are Borne by You .. Some of the mortgage loans held in the trust
fund may not be fully amortizing over their
terms to maturity and, thus, will require
substantial principal payments (that is, balloon
payments) at their stated maturity. Loans with
balloon payments involve a greater degree of
risk than fully amortizing loans because
typically the borrower must be able to refinance
the loan or sell the property to make the
balloon payment at maturity. The ability of a
borrower to do this will depend on factors such
as mortgage rates at the time of sale or
refinancing, the borrower's equity in the
property, the relative strength of the local
housing market, the financial condition of the
borrower, and tax laws. Losses on these loans
that are not otherwise covered by a credit
enhancement will be borne by the holders of one
or more classes of certificates.
Your Risk of Loss May Be
Higher than You Expect If
-13-
<PAGE>
Your Securities Are Backed
by Loans that Were Underwritten
to Standards which do not
Conform to the Standards of
Freddie Mac or Fannie Mae...... The trust fund may also include loans that were
originated under standards that were less
stringent than the standards generally
acceptable to Freddie Mac and Fannie Mae with
regard to the borrower's credit standing and
repayment ability. The related borrowers may
have payment histories and debt-to-income ratios
which would not satisfy Freddie Mac and Fannie
Mae underwriting guidelines and may have a
record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. On
a case by case basis, the related seller may
determine that, based upon compensating factors,
a prospective borrower not strictly qualifying
under its applicable underwriting risk category
guidelines warrants an underwriting exception.
As a result of the application of less stringent
underwriting standards, certain mortgage loans
in a mortgage pool may experience rates of
delinquency, foreclosure and bankruptcy that are
higher, and that may be substantially higher,
than those experienced by mortgage loans
underwritten in a more traditional manner.
Furthermore, changes in the values of the
related mortgaged properties may have a greater
effect on the delinquency, foreclosure,
bankruptcy and loss experience of these mortgage
loans than on mortgage loans originated in a
more traditional manner. No assurance can be
given that the values of the related mortgage
properties have remained or will remain at the
levels in effect on the dates of origination of
the related mortgage loans.
-14-
<PAGE>
Your Risk of Loss May Be
Higher than You Expect If
Your Securities Are Backed
by Partially Unsecured
Home Equity Loans.............. The trust fund may also include home equity
loans that were originated with loan-to-value
ratios or combined loan-to-value ratios in
excess of the value of the related mortgaged
property. Under these circumstances, the trust
fund could be treated as a general unsecured
creditor as to any unsecured portion of any
related loan. In the event of a default under a
loan that is unsecured in part, the trust fund
will have recourse only against the borrower's
assets generally for the unsecured portion of
the loan, along with all other general unsecured
creditors of the borrower.
You Could Be Adversely
Affected by Violations of
Environmental Laws............. Federal, state, and local laws and regulations
impose a wide range of requirements on
activities that may affect the environment,
health, and safety. In some circumstances, these
laws and regulations impose obligations on
owners or operators of residential properties
such as those that secure the loans held in the
trust fund. Failure to comply with these laws
and regulations can result in fines and
penalties that could be assessed against the
trust as owner of the related property.
In some states, a lien on the property due to
contamination has priority over the lien of an
existing mortgage. Also, a mortgage lender may
be held liable as an "owner" or "operator" for
costs associated with the release of petroleum
from an underground storage tank under some
circumstances. If the trust is considered the
owner or operator of a property, it will suffer
losses as a result of any liability imposed for
environmental hazards on the property.
Ratings of the Securities
Do Not Assure
-15-
<PAGE>
Their Payment ................ Any class of securities issued under this
prospectus and the accompanying prospectus
supplement may be rated by one or more
nationally recognized rating agencies. A rating
is based on the adequacy of the value of the
trust assets and any credit enhancement for that
class, and reflects the rating agency's
assessment of how likely it is that holders of
the class of securities will receive the
payments to which they are entitled. A rating
does not constitute an assessment of how likely
it is that principal prepayments on the
underlying loans will be made, the degree to
which the rate of prepayments might differ from
that originally anticipated, or the likelihood
that the securities will be redeemed early. A
rating is not a recommendation to purchase,
hold, or sell securities because it does not
address the market price of the securities or
the suitability of the securities for any
particular investor.
A rating may not remain in effect for any given
period of time and the rating agency could lower
or withdraw the rating entirely in the future.
For example, the rating agency could lower or
withdraw its rating due to:
. a decrease in the adequacy of the value
of the trust assets or any related
credit enhancement,
. an adverse change in the financial or
other condition of a credit enhancement
provider, or
. a change in the rating of the credit
enhancement provider's long-term debt.
The amount, type, and nature of credit
enhancement established for a class of
securities will be determined on the basis of
criteria established by each rating agency
rating classes of the securities. These criteria
are sometimes based upon an actuarial analysis
of the behavior of similar loans in a larger
group. That analysis is often the basis upon
-16-
<PAGE>
which each rating agency determines the amount
of credit enhancement required for a class. The
historical data supporting any actuarial
analysis may not accurately reflect future
experience, and the data derived from a large
pool of similar loans may not accurately predict
the delinquency, foreclosure, or loss experience
of any particular pool of mortgage loans.
Mortgaged properties may not retain their
values. If residential real estate markets
experience an overall decline in property values
such that the outstanding principal balances of
the loans held in a particular trust fund and
any secondary financing on the related mortgaged
properties become equal to or greater than the
value of the mortgaged properties, the rates of
delinquencies, foreclosures, and losses could be
higher than those now generally experienced in
the mortgage lending industry. In addition,
adverse economic conditions may affect timely
payment by mortgagors on their loans whether or
not the conditions affect real property values
and, accordingly, the rates of delinquencies,
foreclosures, and losses in any trust fund.
Losses from this that are not covered by a
credit enhancement will be borne, at least in
part, by the holders of one or more classes of
securities.
You may have difficulty
reselling your securities
due to a lack of a secondary
market, fluctuating market
values or periods of
illiquidity................. No market for any of the securities will exist
before they are issued. We cannot assure you
that a secondary market will develop or, if it
develops, that it will continue. Consequently,
you may not be able to sell your securities
readily or at prices that will enable you to
realize your desired return or yield to
maturity. The market values of the securities
are likely to fluctuate; these fluctuations may
be significant and could result in significant
losses to you. The secondary markets for
mortgage and asset backed securities have
experienced periods of illiquidity and can be
expected to do so in the future.
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Illiquidity can have a severely adverse effect
on the prices of securities that are especially
sensitive to prepayment, credit, or interest
rate risk. Illiquidity can also have an adverse
effect on the price of securities that have been
structured to support other classes of
certificates or that have been structured to
meet the investment requirements of limited
categories of investors. For example, a
particular investor may require a security with
a specified maturity date, a call protection
feature, or a specific type of amortization
feature. The unique nature of the security may
inhibit its marketability to other investors.
Book-entry Registration
Limited Liquidity........... Securities issued in book-entry form may have
only limited liquidity in the resale market,
since investors may be unwilling to purchase
securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer
or Pledge.................. Transactions in book-entry securities can be
effected only through The Depository Trust
Company, its participating organizations, its
indirect participants, and some banks.
Therefore, your ability to transfer or pledge
securities issued in book-entry form may be
limited.
Delays in Distributions..... You may experience some delay in the receipt of
distributions on book-entry securities since the
distributions will be forwarded by the trustee
to The Depository Trust Company for it to credit
the accounts of its participants. In turn, these
participants will then credit the distributions
to your account either directly or indirectly
through indirect participants.
Bankruptcy or Insolvency
May Affect the Timing and
Amount of Distributions on
The Securities................ The seller and the depositor will treat the
transfer of the loans held in the trust fund by
the seller to the
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depositor as a sale for accounting purposes. The
depositor and the trust fund will treat the
transfer of the loans from the depositor to the
trust fund as a sale for accounting purposes. If
these characterizations are correct, then if the
seller were to become bankrupt, the loans would
not be part of the seller's bankruptcy estate
and would not be available to the seller's
creditors. On the other hand, if the seller
becomes bankrupt, its bankruptcy trustee or one
of its creditors may attempt to recharacterize
the sale of the loans as a borrowing by the
seller, secured by a pledge of the loans.
Presenting this position to a bankruptcy court
could prevent timely payments on the securities
and even reduce the payments on the securities.
Similarly, if the characterizations of the
transfers as sales are correct, then if the
depositor were to become bankrupt, the loans
would not be part of the depositor's bankruptcy
estate and would not be available to the
depositor's creditors. On the other hand, if the
depositor becomes bankrupt, its bankruptcy
trustee or one of its creditors may attempt to
recharacterize the sale of the loans as a
borrowing by the depositor, secured by a pledge
of the loans. Presenting this position to a
bankruptcy court could prevent timely payments
on the securities and even reduce the payments
on the securities.
If the master servicer becomes bankrupt, the
bankruptcy trustee may have the power to prevent
the appointment of a successor master servicer.
The period during which cash collections may be
commingled with the master servicer's own funds
before each distribution date for securities
will be specified in the applicable prospectus
supplement. If the master servicer becomes
bankrupt and cash collections have been
commingled with the master servicer's own funds
for at least ten days, the trust fund will
likely not have a perfected interest in those
collections. In this case the trust might be an
unsecured creditor of the master servicer as to
the commingled funds and could recover only its
share
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as a general creditor, which might be nothing.
Collections commingled less than ten days but
still in an account of the master servicer might
also be included in the bankruptcy estate of the
master servicer even though the trust may have a
perfected security interest in them. Their
inclusion in the bankruptcy estate of the master
servicer may result in delays in payment and
failure to pay amounts due on the securities.
Federal and state statutory provisions affording
protection or relief to distressed borrowers may
affect the ability of the secured mortgage
lender to realize upon its security in other
situations as well. For example, in a proceeding
under the federal Bankruptcy Code, a lender may
not foreclose on a mortgaged property without
the permission of the bankruptcy court. And in
some instances a bankruptcy court may allow a
borrower to reduce the monthly payments, change
the rate of interest, and alter the mortgage
loan repayment schedule for under collateralized
mortgage loans. The effect of these types of
proceedings can be to cause delays in receiving
payments on the loans underlying securities and
even to reduce the aggregate amount of payments
on the loans underlying securities.
The principal amount of
securities may exceed
the market value of the
trust fund assets The market value of the assets relating to a
series of securities at any time may be less
than the principal amount of the securities of
that series then outstanding, plus accrued
interest. After an event of default and a sale
of the assets relating to a series of
securities, the trustee, the master servicer,
the credit enhancer, if any, and any other
service provider specified in the related
prospectus supplement generally will be entitled
to receive the proceeds of that sale to the
extent of unpaid fees and other amounts owing to
them under the related transaction document
prior to distributions to securityholders. Upon
any such sale, the proceeds may be
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insufficient to pay in full the principal of and
interest on the securities of the related
series.
Some capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. The capitalized terms used in this
prospectus are defined on the pages indicated under the caption "Index to
Defined Terms" beginning on page ___.
THE TRUST FUND
General
The securities of each series will represent interests in the assets of
the related trust fund, and the notes of each series will be secured by the
pledge of the assets of the related trust fund. The trust fund for each series
will be held by the trustee for the benefit of the related securityholders. Each
trust fund will consist of the trust fund assets (the "Trust Fund Assets")
consisting of a pool comprised of loans as specified in the related prospectus
supplement, together with payments relating to those loans as specified in the
related prospectus supplement.1 The pool will be created on the first day of the
month of the issuance of the related series of securities or another date as may
be specified in the related prospectus supplement. The securities will be
entitled to payment from the assets of the related trust fund or funds or other
assets pledged for the benefit of the securityholders, as specified in the
related prospectus supplement and will not be entitled to payments in respect of
the assets of any other trust fund established by the depositor.
The Trust Fund Assets will be acquired by the depositor, either
directly or through affiliates, from originators or sellers which may be
affiliates of the depositor (the "Sellers"), and conveyed without recourse by
the depositor to the related trust fund. Loans acquired by the depositor will
have been originated in accordance with the underwriting criteria specified
below under "Loan Program -- Underwriting Standards" or as otherwise described
in the related prospectus supplement. See "Loan Program -- Underwriting
Standards".
The depositor will cause the Trust Fund Assets to be assigned to the
trustee named in the related prospectus supplement for the benefit of the
holders of the securities of the related series. The master servicer named in
the related prospectus supplement will service the Trust Fund
---------------
/1/ Whenever the terms pool, certificates, notes and securities are used
in this prospectus, those terms will be considered to apply, unless the context
indicates otherwise, to one specific pool and the securities of one series
including the certificates representing undivided interests in, and/or notes
secured by the assets of, a single trust fund consisting primarily of the loans
in that pool. Similarly, the term "Pass-Through Rate" will refer to the pass-
through rate borne by the certificates and the term interest rate will refer to
the interest rate borne by the notes of one specific series, as applicable, and
the term trust fund will refer to one specific trust fund
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Assets, either directly or through other servicing institutions called
sub-servicers, pursuant to a Pooling and Servicing Agreement among the
depositor, the master servicer and the trustee with respect to a series
consisting of certificates, or a sale and servicing agreement (each, a "Sale and
Servicing Agreement") among the trustee, the seller, the issuer, the depositor
and the master servicer with respect to a series consisting of certificates and
notes, and will receive a fee for those services. See "Loan Program" and "The
Agreements". With respect to loans serviced by the master servicer through a
sub-servicer, the master servicer will remain liable for its servicing
obligations under the related Agreement as if the master servicer alone were
servicing the loans.
As used in this prospectus, "Agreement" means, with respect to a series
consisting of certificates, the Pooling and Servicing Agreement, and with
respect to a series consisting of certificates and notes, the Trust Agreement,
the Indenture and the Sale and Servicing Agreement, as the context requires.
If so specified in the related prospectus supplement, a trust fund
relating to a series of securities may be a business trust formed under the laws
of the state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the depositor and the trustee of
the trust fund.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated in this prospectus and in the related prospectus supplement and the
proceeds thereof, issuing securities and making payments and distributions
thereon and certain related activities. No trust fund is expected to have any
source of capital other than its assets and any related credit enhancement.
The applicable prospectus supplement may provide for additional
obligations of the depositor, but if it does not, the only obligations of the
depositor with respect to a series of securities will be to obtain certain
representations and warranties from the sellers and to assign to the trustee for
that series of securities the depositor's rights with respect to those
representations and warranties. See "The Agreements -- Assignment of the Trust
Fund Assets". The obligations of the master servicer with respect to the loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
sub-servicers or sellers, or both, as more fully described in this prospectus
under "Loan Program -- Representations by Sellers; Repurchases" and "The
Agreements -- Sub-Servicing By Sellers" and " -- Assignment of the Trust Fund
Assets") and its obligation, if any, to make certain cash advances in the event
of delinquencies in payments on or with respect to the loans in the amounts
described in this prospectus under "Description of the Securities -- Advances".
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
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The following is a brief description of the assets expected to be
included in the trust funds. If specific information respecting the Trust Fund
Assets is not known at the time the related series of securities initially is
offered, more general information of the nature described below will be provided
in the related prospectus supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
after the initial issuance of the securities (the "Detailed Description"). A
copy of the Agreement with respect to each series of securities will be attached
to the Form 8-K and will be available for inspection at the corporate trust
office of the trustee specified in the related prospectus supplement. A schedule
of the loans relating to the series will be attached to the Agreement delivered
to the trustee upon delivery of the securities.
The Loans
General. Loans will consist of single family mortgage loans, home
equity loans or home improvement contracts. For purposes hereof, "home equity
loans" includes "closed-end loans" and "revolving credit line loans". If so
specified, the loans may include cooperative apartment loans ("cooperative
loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. As more fully described in the
related prospectus supplement, the loans may be "conventional" loans or loans
that are insured or guaranteed by a governmental agency such as the Federal
Housing Administration (the "FHA") or the Department of Veterans' Affairs (the
"VA"). In addition, the loans may have been underwritten to standards that are
less stringent than the standards generally acceptable to Freddie Mac and Fannie
Mae with regard to the borrower's credit standing and repayment ability because
the standards focus more on the value of the mortgaged property.
The applicable prospectus supplement may specify the day on which
monthly payments on the loans in a pool will be due, but if it does not, all of
the mortgage loans in a pool will have monthly payments due on the first day of
each month. The payment terms of the loans to be included in a trust fund will
be described in the related prospectus supplement and may include any of the
following features or combination thereof or other features described in the
related prospectus supplement:
. Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in
the related prospectus supplement), a rate that is fixed for a
period of time or under certain circumstances and is followed by
an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a
combination of the limitations. Accrued interest may be deferred
and added to the principal of a loan for the periods and under
the circumstances as may be specified in the related prospectus
supplement.
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Loans may provide for the payment of interest at a rate lower
than the specified interest rate borne by the loan (the "Loan
Rate") for a period of time or for the life of the loan, and the
amount of any difference may be contributed from funds supplied
by the seller of the Property or another source.
. Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis
of an assumed amortization schedule that is significantly longer
than the original term to maturity or on an interest rate that
is different from the Loan Rate or may not be amortized during
all or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity,
called balloon payments. Principal may include interest that has
been deferred and added to the principal balance of the loan.
. Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time
or may change from period to period. The terms of a loan may
include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts
of monthly payments.
. The loans generally may be prepaid at any time. Prepayments of
principal may be subject to a prepayment fee, which may be fixed
for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods,
which are called lockout periods. Some loans may permit
prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection
with any subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The loans may include
"due-on-sale" clauses that permit the mortgagee to demand
payment of the entire loan in connection with the sale or
certain transfers of the related Property. Other loans may be
assumable by persons meeting the then applicable underwriting
standards of the seller.
A trust fund may contain buydown loans that include provisions whereby
a third party partially subsidizes the monthly payments of the obligors on the
loans during the early years of the loans, the difference to be made up from a
buydown fund contributed by the third party at the time of origination of the
loan. A buydown fund will be in an amount equal either to the discounted value
or full aggregate amount of future payment subsidies. Thereafter, buydown funds
are applied to the applicable loan upon receipt by the master servicer of the
mortgagor's portion of the monthly payment on the loan. The master servicer
administers the buydown fund to ensure that the monthly allocation from the
buydown fund combined with the monthly payment received from the mortgagor
equals the scheduled monthly payment on the applicable loan. The underlying
assumption of buydown plans is that the income of the mortgagor will increase
during the buydown period as a result of normal increases in compensation and
inflation, so that the mortgagor will be able to meet the full mortgage payments
at the end of the
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buydown period. To the extent that this assumption as to increased income is not
fulfilled, the possibility of defaults on buydown loans is increased. The
related prospectus supplement will contain information with respect to any
Buydown Loan concerning limitations on the interest rate paid by the mortgagor
initially, on annual increases in the interest rate and on the length of the
buydown period.
The loans will be secured by mortgages or deeds of trust or other
similar security instruments creating a lien on a mortgaged property. In the
case of home equity loans, the liens generally will be subordinated to one or
more senior liens on the related mortgaged properties as described in the
related prospectus supplement. In addition to being secured by mortgages on real
estate the home improvement contracts may also be secured by purchase money
security interests in the home improvements financed thereby. If so specified in
the related prospectus supplement, the home equity loans may include loans
(primarily for home improvement or debt consolidation purposes) that are in
amounts in excess of the value of the related mortgaged properties at the time
of origination. The mortgaged properties and the home improvements are
collectively referred to in this prospectus as the "Properties". The Properties
may be located in any one of the fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Mortgage Insurance Policy"). The existence,
extent and duration of coverage under a Primary Mortgage Insurance Policy will
be described in the applicable prospectus supplement.
The aggregate principal balance of loans secured by Properties that are
owner-occupied will be disclosed in the related prospectus supplement. The
applicable prospectus supplement may provide for the basis for representations
relating to Single Family Properties, but if it does not, the sole basis for a
representation that a given percentage of the loans is secured by Single Family
Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
Single Family Loans. The mortgaged properties relating to single family
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, manufactured housing that is permanently affixed and
treated as real property under local law, and certain other dwelling units
("Single Family Properties"). Single Family Properties may include vacation and
second homes, investment properties and leasehold interests. In the case of
leasehold interests, the applicable prospectus supplement may provide for the
leasehold term, but if it does not, the term of the leasehold will exceed the
scheduled maturity of the loan by at least five years.
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Home Equity Loans. The mortgaged properties relating to home equity
loans will consist of Single Family Properties. As more fully described in the
related prospectus supplement, interest on each revolving credit line loan,
excluding introductory rates offered from time to time during promotional
periods, is computed and payable monthly on the average daily outstanding
principal balance of the loan. Principal amounts on a revolving credit line loan
may be drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid under each revolving credit line loan from time to time,
but may be subject to a minimum periodic payment. Except to the extent provided
in the related prospectus supplement, the trust fund will not include any
amounts borrowed under a revolving credit line loan after the cut-off date. The
full amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount to fully amortize the loan at its stated maturity. Except to the extent
provided in the related prospectus supplement, the original terms to stated
maturity of closed-end loans will not exceed 360 months. Under some
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
Home Improvement Contracts. The Trust Fund Assets for a series of
securities may consist, in whole or in part, of home improvement contracts
originated by a home improvement contractor, a thrift or a commercial mortgage
banker in the ordinary course of business. The home improvements securing the
home improvement contracts may include, but are not limited to, replacement
windows, house siding, new roofs, swimming pools, satellite dishes, kitchen and
bathroom remodeling goods and solar heating panels. The home improvement
contracts will be secured by mortgages on Single Family Properties which are
generally subordinate to other mortgages on the same Property. In general, the
home improvement contracts will be fully amortizing and may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related prospectus supplement. The
initial Loan-to-Value Ratio of a home improvement contract is computed in the
manner described in the related prospectus supplement.
Additional Information. Each prospectus supplement will contain
information, as of the date of the prospectus supplement and to the extent then
specifically known to the depositor, with respect to the loans contained in the
related pool, including
. the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the first day
of the month of issuance of the related series of certificates
or another date specified in the related prospectus supplement
called a cut-off date,
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. the type of property securing the loans (e.g., single-family
residences, individual units in condominium apartment buildings
or in buildings owned by cooperatives other real property or
home improvements),
. the original terms to maturity of the loans,
. the largest principal balance and the smallest principal balance
of any of the loans,
. the earliest origination date and latest maturity date of any of
the loans,
. the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as
applicable, of the loans,
. the Loan Rates or annual percentage rates ("APR") or range of
Loan Rates or APR's borne by the loans,
. the maximum and minimum per annum Loan Rates and
. the geographical distribution of the loans.
If specific information respecting the loans is not known to the
depositor at the time the related securities are initially offered, more general
information of the nature described above will be provided in the detailed
description of Trust Assets.
The "Loan-to-Value Ratio" of a loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related loan and the denominator of which is the Collateral Value
of the related Property. The "Combined Loan-to-Value Ratio" of a loan at any
given time is the ratio, expressed as a percentage, of (i) the sum of (a) the
original principal balance of the loan (or, in the case of a revolving credit
line loan, the maximum amount thereof available) and (b) the outstanding
principal balance at the date of origination of the loan of any senior mortgage
loan(s) or, in the case of any open-ended senior mortgage loan, the maximum
available line of credit with respect to the mortgage loan, regardless of any
lesser amount actually outstanding at the date of origination of the loan, to
(ii) the Collateral Value of the related Property. The "Collateral Value" of the
Property, other than for loans the proceeds of which were used to refinance an
existing mortgage loan (each, a "Refinance Loan"), is the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of the loan and (b) the sales price for the Property. In the case of
Refinance Loans, the "Collateral Value" of the related Property is generally the
appraised value thereof determined in an appraisal obtained at the time of
refinancing.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related loans.
If the residential real estate market should experience an overall decline in
property values such that the outstanding principal
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balances of the loans, and any secondary financing on the Properties, in a
particular pool become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions and other factors (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to any pool. To the
extent that the losses are not covered by subordination provisions or
alternative arrangements, the losses will be borne, at least in part, by the
holders of the securities of the related series.
The Trust Fund Assets may include participation certificates evidencing
interests in loans or contracts. If those participation certificates were issued
by an issuer that is not affiliated with the depositor, the depositor must have
acquired them in a bona fide secondary market transaction or they must either
have been previously registered under the Securities Act or have been held for
at least the holding period required to be eligible for sale under Rule 144(k)
under the Securities Act.
Agency Securities
Agency securities are mortgage pass-through securities issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. All of the agency
securities will be registered in the name of the trustee or its nominee or, in
the case of agency securities issued only in book-entry form, a financial
intermediary that is a member of the Federal Reserve System or of a clearing
corporation on the books of which the security is held. The financial
intermediary may be the same entity as the trustee for a series of certificates.
Each agency security will evidence an interest in a pool of mortgage loans or
cooperative loans and in principal distributions and interest distributions on
those loans.
The descriptions of Ginnie Mae, Freddie Mac and Fannie Mae Certificates
that are set forth below are descriptions of certificates representing
proportionate interests in a pool of mortgage loans and in the payments of
principal and interest thereon. Ginnie Mae, Freddie Mac or Fannie Mae may also
issue mortgage-backed securities representing a right to receive distributions
of interest only or principal only or disproportionate distributions of
principal or interest or to receive distributions of principal or interest prior
or subsequent to distributions on other certificates representing interests in
the same pool of mortgage loans.
In addition, any of the issuers may issue certificates representing
interests in mortgage loans having characteristics that are different from the
types of mortgage loans described below. The terms of any certificates to be
included in a trust fund and of the underlying mortgage loans will be described
in the related prospectus supplement, and the descriptions that follow are
subject to modification as appropriate to reflect the terms of any certificates
that are actually included in a trust fund.
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Ginnie Mae. Ginnie Mae is a wholly-owned corporate instrumentality of
the United States within HUD. Section 306(g) of the Housing Act authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
certificates representing interests in a pool of mortgages insured by the FHA,
under the Housing Act or under Title V of the Housing Act of 1949, or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or under Chapter 37 of Title 38, United States Code.
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 guarantee under this subsection." In order to
meet its obligations under this guarantee, Ginnie Mae may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury an amount that is at
any time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate relating to a
series, which may be a "Ginnie Mae I Certificate" or a "Ginnie Mae II
Certificate" as referred to by Ginnie Mae, will be a "fully modified
pass-through" mortgage-backed certificate issued and serviced by a mortgage
banking company or other financial concern approved by Ginnie Mae, except with
respect to any stripped mortgage-backed securities guaranteed by Ginnie Mae or
any REMIC securities issued by Ginnie Mae. The characteristics of any Ginnie Mae
Certificates included in the trust fund for a series of certificates will be set
forth in the related prospectus supplement.
Freddie Mac. Freddie Mac is a corporate instrumentality of the United
States created pursuant to the Freddie Mac Act. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of needed housing. The principal activity of Freddie Mac currently
consists of purchasing first-lien, conventional, residential mortgage loans or
participation interests in mortgage loans and reselling the mortgage loans so
purchased in the form of guaranteed mortgage securities, primarily Freddie Mac
Certificates. In 1981, Freddie Mac initiated its Home Mortgage Guaranty Program
under which it purchases mortgage loans from sellers with Freddie Mac
Certificates representing interests in the mortgage loans so purchased. All
mortgage loans purchased by Freddie Mac must meet specific standards set forth
in the Freddie Mac Act. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality and type as to
meet generally the purchase standards imposed by private institutional mortgage
investors. Neither the United States nor any agency thereof is obligated to
finance Freddie Mac's operations or to assist Freddie Mac in any other manner.
Freddie Mac Certificates. Each Freddie Mac Certificate relating to a
series will represent an undivided interest in a pool of mortgage loans that
typically consists of conventional loans, FHA Loans or VA Loans purchased by
Freddie Mac, except with respect to any stripped mortgage-backed securities
issued by Freddie Mac. Each pool will consist of mortgage loans, substantially
all of which are secured by one- to four-family residential properties or, if
specified in the related prospectus supplement, are secured by five or more
family residential properties.
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The characteristics of any Freddie Mac Certificates included in the trust fund
for a series of certificates will be set forth in the related prospectus
supplement.
Fannie Mae. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C. (S)1716 et. seq.). It is the nation's largest
supplier of residential mortgage funds. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. Although the
Secretary of the Treasury of the United States has authority to lend Fannie Mae
up to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance Fannie Mae's operations or to assist
Fannie Mae in any other manner.
Fannie Mae Certificates. Each Fannie Mae Certificate relating to a
series will represent a fractional undivided interest in a pool of mortgage
loans formed by Fannie Mae, except with respect to any stripped mortgage-backed
securities issued by Fannie Mae. Mortgage loans underlying Fannie Mae
Certificates will consist of fixed, variable or adjustable rate conventional
mortgage loans or fixed-rate FHA Loans or VA Loans. Those mortgage loans may be
secured by either one- to four-family or multi-family residential properties.
The characteristics of any Fannie Mae Certificates included in the trust fund
for a series of certificates will be set forth in the related prospectus
supplement.
Private Mortgage-Backed Securities
Private mortgage-backed securities may consist of mortgage pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of mortgage loans or collateralized mortgage obligations secured by
mortgage loans. Private mortgage-backed securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all the
distributions) on some mortgage loans. Private mortgage-backed securities will
have been issued pursuant to a pooling and servicing agreement, an indenture or
similar agreement. The applicable prospectus supplement may provide that the
seller/servicer of the underlying mortgage loans will not have entered into a
pooling and servicing agreement with a private trustee, but if it does not, the
seller/servicer of the underlying mortgage loans will have entered into the
pooling and servicing agreement with a private trustee. The private trustee or
its agent, or a custodian, will possess the mortgage loans underlying the
private mortgage-backed security. Mortgage loans underlying a private
mortgage-backed security will be serviced by a private servicer directly or by
one or more subservicers who may be subject to the supervision of the private
servicer.
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The issuer of the private mortgage-backed securities will be a
financial institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state, local or
federal government, or a limited purpose corporation organized for the purpose
of establishing trusts and acquiring and selling housing loans to the trusts and
selling beneficial interests in the trusts. If so specified in the related
prospectus supplement, the issuer of private mortgage-backed securities may be
an affiliate of the depositor. The obligations of the issuer of private
mortgage-backed securities will generally be limited to its representations and
warranties with respect to the assets conveyed by it to the related trust fund.
The issuer of private mortgage-backed securities will not have guaranteed any of
the assets conveyed to the related trust fund or any of the private
mortgage-backed securities issued under the pooling and servicing agreement.
Additionally, although the mortgage loans underlying the private mortgage-backed
securities may be guaranteed by an agency or instrumentality of the United
States, the private mortgage-backed securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private mortgage-backed
securities by the private trustee or the private servicer. The issuer of private
mortgage-backed securities or the private servicer may have the right to
repurchase assets underlying the private mortgage-backed securities after a
specific date or under other circumstances specified in the related prospectus
supplement.
The mortgage loans underlying the private mortgage-backed securities
may consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans or loans
having balloon or other special payment features. The mortgage loans may be
secured by single family property or by an assignment of the proprietary lease
or occupancy agreement relating to a specific dwelling within a cooperative and
the related shares issued by the cooperative.
The prospectus supplement for a series for which the trust fund
includes private mortgage-backed securities will specify the aggregate
approximate principal amount and type of the private mortgage-backed securities
to be included in the trust fund and specific characteristics of the mortgage
loans that comprise the underlying assets for the private mortgage-backed
securities, including:
. the payment features of the mortgage loans,
. the approximate aggregate principal balance, if known, of
underlying mortgage loans insured or guaranteed by a
governmental entity,
. the servicing fee or range of servicing fees with respect to
the mortgage loans and
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. the minimum and maximum stated maturities of the underlying
mortgage loans at origination;
. the maximum original term-to-stated maturity of the private
mortgage-backed securities;
. the weighted average term-to stated maturity of the private
mortgage-backed securities;
. the pass-through or certificate rate of the private
mortgage-backed securities;
. the weighted average pass-through or certificate rate of the
private mortgage-backed securities;
. the issuer, the servicer and the trustee of the private
mortgage-backed securities;
. certain characteristics of credit support, if any, such as
reserve funds, insurance policies, surety bonds, letters of
credit or guaranties relating to the mortgage loans underlying
the private mortgage-backed securities or to the private
mortgage-backed securities themselves;
. the terms on which the underlying mortgage loans for the
private mortgage-backed securities may, or are required to, be
purchased before their stated maturity or the stated maturity
of the private mortgage-backed securities; and
. the terms on which mortgage loans may be substituted for those
originally underlying the private mortgage-backed securities.
Private mortgage-backed securities included in the trust fund for a
series of securities that were issued by an issuer of private mortgage-backed
securities that is not affiliated with the depositor must be acquired in bona
fide secondary market transactions or either have been previously registered
under the Securities Act or have been held for at least the holding period
required to be eligible for sale under Rule 144(k) under the Securities Act.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the trustee to be incomplete. The period during which
substitution will be permitted generally will be indicated in the related
prospectus supplement.
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AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, covering the securities. This prospectus,
which forms a part of the Registration Statement, and the prospectus supplement
relating to each series of certificates contain summaries of the material terms
of the documents referred to in this prospectus and in the prospectus
supplement, but do not contain all of the information in the Registration
Statement pursuant to the rules and regulations of the SEC. For further
information, reference is made to the Registration Statement and its exhibits.
The Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at its
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Seven
World Trade Center, New York, New York 10048. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet Web site that contains reports, information statements
and other information regarding the registrants that file electronically with
the SEC, including the depositor. The address of that Internet Web site is
http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the securities offered by this prospectus and the prospectus
supplement nor an offer of the securities to any person in any state or other
jurisdiction in which the offer would be unlawful.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed for the trust fund referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, are incorporated by
reference in this prospectus and are a part of this prospectus from the date of
their filing. Any statement contained in a document incorporated by reference in
this prospectus is modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the accompanying
prospectus supplement) or in any other subsequently filed document that also is
incorporated by reference differs from that statement. Any statement so modified
or superseded shall not, except as so modified or superseded, constitute a part
of this prospectus. Neither the depositor nor the master servicer intends to
file with the Securities and Exchange Commission periodic reports with respect
to the trust fund following completion of the reporting period required by Rule
15d-1 or Regulation 15D under the Securities Exchange Act of 1934.
The trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, on the person's written or
oral request, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this
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prospectus (not including exhibits to the information that is incorporated by
reference unless the exhibits are specifically incorporated by reference into
the information that this prospectus incorporates). Requests should be directed
to the corporate trust office of the trustee specified in the accompanying
prospectus supplement.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the trust fund will be forwarded
to securityholders. However, these reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities --
Reports to Securityholders."
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of Trust Fund Assets or will be used by
the depositor for general corporate purposes. The depositor expects to sell
securities in series from time to time, but the timing and amount of offerings
of securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
First Horizon Asset Securities Inc., a Delaware corporation, the
depositor, was incorporated in March 9, 1999 for the limited purpose of
acquiring, owning and transferring mortgage collateral and selling interests in
mortgage collateral or bonds secured by mortgage collateral. The depositor is a
wholly owned limited purpose finance subsidiary of First Horizon Home Loan
Corporation, a Kansas corporation ("First Horizon"). The depositor maintains its
principal office at 4000 Horizon Way, Irving, Texas 75063. Its telephone number
is (214) 441-4000.
Neither the depositor nor any of the depositor's affiliates will insure
or guarantee distributions on the securities of any series.
LOAN PROGRAM
The loans will have been purchased by the depositor, either directly or
through affiliates, from sellers. The applicable prospectus supplement may
provide for the underwriting criteria used in originating the loans, but if it
does not, the loans so acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Underwriting
Standards."
Underwriting Standards
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General Standards for First Lien Mortgage Loans. First Horizon's
underwriting standards with respect to first lien mortgage loans will generally
conform to those published in the Guide. The underwriting standards as set forth
in the Guide are continuously revised based on opportunities and prevailing
conditions in the residential mortgage market and the market for the depositor's
mortgage pass-through certificates. The mortgage loans may be underwritten by
First Horizon or by a designated third party. See " -- Qualifications of
Sellers." First Horizon may perform only sample quality assurance reviews to
determine whether the mortgage loans in any mortgage pool were underwritten in
accordance with applicable standards.
First Horizon's underwriting standards, as well as any other
underwriting standards that may be applicable to any first lien mortgage loans,
generally include a set of specific criteria pursuant to which the underwriting
evaluation is made. However, the application of those underwriting standards
does not imply that each specific criterion was satisfied individually. Rather,
a mortgage loan will be considered to be originated in accordance with a given
set of underwriting standards if, based on an overall qualitative evaluation,
the loan substantially complies with the underwriting standards. For example, a
mortgage loan may be considered to comply with a set of underwriting standards,
even if one or more specific criteria included in the underwriting standards
were not satisfied, if other factors compensated for the criteria that were not
satisfied or if the mortgage loan is considered to be in substantial compliance
with the underwriting standards.
The level of review by First Horizon, if any, of any mortgage loan for
conformity with the applicable underwriting standards will vary depending on any
one of a number of factors, including
. factors relating to the experience and status of the seller,
. characteristics of the specific mortgage loan, including the
principal balance, the loan-to-value ratio, the loan type or
loan program, and
. the applicable credit score of the related mortgagor used in
connection with the origination of the mortgage loan, as
determined based on a credit scoring model acceptable to First
Horizon.
Generally, credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the Mortgage Loans may be originated and reviewed may provide that
qualification for the loan, or the availability of specific loan features, such
as maximum loan amount, maximum loan-to-value ratio, property type and use, and
documentation level, may depend on the borrower's credit score.
First Horizon's underwriting standards for first lien mortgage loans
are generally intended to provide an underwriter with information to evaluate
the borrower's repayment ability
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and the adequacy of the Property as collateral. Due to the variety of
underwriting standards and review procedures that may be applicable to the
mortgage loans included in any mortgage pool, the related prospectus supplement
generally will not distinguish among the various underwriting standards
applicable to the mortgage loans nor describe any review for compliance with
applicable underwriting standards performed by First Horizon. Moreover, there
can be no assurance that every mortgage loan was originated in conformity with
the applicable underwriting standards in all material respects, or that the
quality or performance of mortgage loans underwritten pursuant to varying
standards as described above will be equivalent under all circumstances.
Guide Standards. The following is a brief description of the
underwriting standards set forth in the guide for First Horizon's alternative
documentation programs for first lien mortgage loans (the "Guide"). Initially, a
prospective borrower is required to fill out a detailed application providing
pertinent credit information. As part of the application, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report which summarizes the borrower's credit history with merchants
and lenders and any record of bankruptcy. Salaried prospective borrowers
generally are required to submit pay stubs covering a consecutive 30-day period
and their W-2 form for the most recent year. In addition, First Horizon
generally obtains a verbal verification of employment from the prospective
borrower's employer. If a prospective borrower is self-employed, the borrower
may be required to submit copies of signed tax returns or provide bank
statements. The borrower may also be required to authorize verification of
deposits at financial institutions where the borrower has accounts. In the case
of a mortgage loan secured by a Property owned by a trust, the foregoing
procedures may be waived where the mortgage note is executed on behalf of the
trust.
In determining the adequacy of the Property as collateral, an appraisal
is made of each Property considered for financing. The appraiser is required to
verify that the Property is in good condition and that construction, if new, has
been completed. The appraisal is based on various factors, including the market
value of comparable homes and the cost of replacing the improvements.
Information with respect to the credit scores for the mortgage loans
underlying a series of certificates may be supplied in the related prospectus
supplement. Credit scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a borrower's credit-worthiness.
In addition, credit scores may be obtained by First Horizon after the
origination of a mortgage loan if the seller does not provide a credit score to
First Horizon. Credit scores are obtained from credit reports provided by
various credit reporting organizations, each of which may employ differing
computer models and methodologies.
The credit score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things,
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payment history, delinquencies on accounts, levels of outstanding indebtedness,
length of credit history, types of credit, and bankruptcy experience. Credit
scores range from approximately 350 to approximately 840, with higher scores
indicating an individual with a more favorable credit history compared to an
individual with a lower score. However, a credit score purports only to be a
measurement of the relative degree of risk a borrower represents to a lender.
For example, a borrower with a higher credit score is statistically expected to
be less likely to default in payment than a borrower with a lower credit score.
In addition, it should be noted that credit scores were developed to indicate a
level of default probability over a two-year period, which does not correspond
to the life of a mortgage loan. Furthermore, credit scores were not developed
specifically for use in connection with mortgage loans, but for consumer loans
in general, and assess only the borrower's past credit history. Therefore, a
credit score does not take into consideration the differences between mortgage
loans and consumer loans generally, or the specific characteristics of the
related mortgage loan, such as the loan-to-value ratio, the collateral for the
mortgage loan, or the debt to income ratio. There can be no assurance that the
credit scores of the mortgagors will be an accurate predictor of the likelihood
of repayment of the related mortgage loans or that any mortgagor's credit score
would not be lower if obtained as of the date of the related prospectus
supplement.
Once all applicable employment, credit and Property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet its monthly obligations on the
proposed mortgage loan and other expenses related to the home, including
property taxes and hazard insurance, and its other financial obligations and
monthly living expenses. First Horizon will generally underwrite adjustable rate
mortgage loans, buy-down mortgage loans, graduated payment mortgage loans and
certain other mortgage loans on the basis of the borrower's ability to make
monthly payments as determined by reference to the mortgage rates in effect at
origination or the reduced initial monthly payments, as the case may be, and on
the basis of an assumption that the borrowers will likely be able to pay the
higher monthly payments that may result from later increases in the mortgage
rates or from later increases in the monthly payments, as the case may be, at
the time of the increase, even though the borrowers may not be able to make the
higher payments at the time of origination. The mortgage rate in effect from the
origination date of an ARM Loan or certain other types of loans to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable index and note margin. Similarly, the amount of
the monthly payment on buy-down mortgage loans and graduated payment mortgage
loans will increase periodically. If the borrowers' incomes do not increase in
an amount commensurate with the increases in monthly payments, the likelihood of
default will increase. In addition, in the case of either adjustable rate
mortgage loans or graduated payment mortgage loans that are subject to negative
amortization, due to the addition of deferred interest the principal balances of
the mortgage loans are more likely to equal or exceed the value of the
underlying mortgaged properties, thereby increasing the likelihood of defaults
and losses. With respect to balloon loans, payment of the balloon generally
depend on the borrower's ability to obtain refinancing or to sell the
Property before the maturity of the balloon
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loan, and there can be no assurance that the borrower will be able to refinance
or sell the Property before the balloon loan matures.
If so specified in the related prospectus supplement, a mortgage pool
may include mortgage loans that have been underwritten pursuant to a streamlined
documentation refinancing program, as set forth in the Guide. These programs
permit certain mortgage loans to be refinanced with only limited verification or
updating of the underwriting information that was obtained at the time that the
original mortgage loan was originated. For example, a new appraisal of the
Property may not be required if the refinanced mortgage loan was originated up
to approximately 24 months before the refinancing. In addition, the mortgagor's
income may not be verified, although continued employment is required to be
verified. In certain circumstances, the mortgagor may be permitted to borrow up
to 105% of the outstanding principal amount of the original mortgage loan. Each
mortgage loan underwritten pursuant to this program will be treated as having
been underwritten pursuant to the same underwriting documentation program as the
mortgage loan that it refinanced, including for purposes of the disclosure in
the related prospectus supplement.
The underwriting standards set forth in the Guide will be varied in
appropriate cases, including limited or reduced documentation programs. Certain
limited documentation programs, for example, do not require income, employment
or asset verifications. Generally, in order to be eligible for a limited
documentation program, the loan-to-value ratio must meet applicable guidelines,
the borrower must have a good credit history and the borrower's eligibility for
this type of program may be determined by use of a credit scoring model.
To the extent the seller fails or is unable to repurchase any mortgage
loan due to a breach of a representation and warranty, neither the depositor,
First Horizon nor any other entity will be so obligated. Furthermore, to the
extent that the appraised value of a Property has declined, the actual
loan-to-value ratio with respect to the related mortgage loan will be higher
than the loan-to-value ratio referenced in the related prospectus supplement.
In its evaluation of mortgage loans which have more than twelve months
of payment experience, First Horizon generally places greater weight on payment
history and may take into account market and other economic trends while placing
less weight on underwriting factors generally applied to newly originated
mortgage loans. Mortgage loans seasoned for over twelve months may be
underwritten for purchase by First Horizon based on the borrower's credit score
and payment history, with no current income verification, and under an
alternative property valuation method.
The mortgaged properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the Property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders."
First Horizon's underwriting standards applicable to all states,
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including anti-deficiency states, require that the value of the Property being
financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, although there can be no
assurance that the value of the Property will continue to support the loan
balance in the future.
General Standards for Home Equity and Home Improvement Loans. The
applicable prospectus supplement may provide for the seller's representations
and warranties relating to the home equity/home improvement loans, but if it
does not, each seller will represent and warrant that all home equity/home
improvement loans originated and/or sold by it to the depositor or one of its
affiliates will have been underwritten in accordance with standards consistent
with those utilized by mortgage lenders generally during the period of
origination for similar types of loans.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the related Property as collateral. In general, a prospective
borrower applying for a home equity/home improvement loan is required to fill
out a detailed application designed to provide to the underwriting officer
pertinent credit information, including the principal balance and payment
history with respect to any senior mortgage, if any. The applicable prospectus
supplement may specify whether that credit information will be verified by the
seller, but if it does not, the credit information supplied by the borrower will
be verified by the related seller. As part of the description of the borrower's
financial condition, the borrower generally is required to provide a current
list of assets and liabilities and a statement of income and expenses, as well
as an authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy. In
most cases, an employment verification is obtained from an independent source
(typically the borrower's employer) which verification reports, among other
things, the length of employment with that organization and the borrower's
current salary. If a prospective borrower is self-employed, the borrower may be
required to submit copies of signed tax returns. The borrower may also be
required to authorize verification of deposits at financial institutions where
the borrower has demand or savings accounts.
In determining the adequacy of the Property to be used as collateral,
an appraisal will generally be made of each Property considered for financing.
The appraiser is generally required to inspect the Property, issue a report on
its condition and, if applicable, verify construction, if new, has been
completed. The appraisal is generally based on the market value of comparable
homes, the estimated rental income (if considered applicable by the appraiser)
and the cost of replacing the home. The value of the Property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
The maximum loan amount will vary depending upon a borrower's credit
grade and loan program but will not generally exceed $1,000,000. Variations in
maximum loan amount limits will be permitted based on compensating factors.
Compensating factors may generally include, to the extent specified in the
related prospectus supplement, low loan-to-value ratio, low debt-to-
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income ratio, stable employment, favorable credit history and the nature of the
underlying first mortgage loan, if applicable.
Each seller's underwriting standards will generally permit home
equity/home improvement loans with loan-to-value ratios at origination of up to
125% depending on the loan program, type and use of the Property,
creditworthiness of the borrower and debt-to-income ratio. If so specified in
the related prospectus supplement, a seller's underwriting criteria may permit
home equity/home improvement loans with loan-to-value ratios at origination in
excess of 125%, such as for debt consolidation or home improvement purposes.
Loan-to-value ratios may not be evaluated in the case of Title I loans.
After obtaining all applicable employment, credit and Property
information, the related seller will use a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the mortgage loan
in addition to other monthly credit obligations. The "debt-to-income ratio" is
the ratio of the borrower's total monthly payments to the borrower's gross
monthly income. The maximum monthly debt-to-income ratio will vary depending
upon a borrower's credit grade and loan program but will not generally exceed
55%. Variations in the monthly debt-to-income ratio limit will be permitted
based on compensating factors to the extent specified in the related prospectus
supplement.
In the case of a home equity/home improvement loan secured by a
leasehold interest in Property, the title to which is held by a third party
lessor, the applicable prospectus supplement may provide for the related
representations and warranties of the seller, but if it does not, the related
seller will represent and warrant, among other things, that the remaining term
of the lease and any sublease is at least five years longer than the remaining
term on the home equity/home improvement loan.
Certain of the types of home equity/home improvement loans that may be
included in a trust fund are recently developed and may involve additional
uncertainties not present in traditional types of loans. For example, certain of
the loans may provide for escalating or variable payments by the borrower. These
types of home equity/home improvement loans are underwritten on the basis of a
judgment that the borrowers have the ability to make the monthly payments
required initially. In some instances, a borrower's income may not be sufficient
to permit continued loan payments as those payments increase. These types of
loans may also be underwritten primarily upon the basis of Loan-to-Value Ratios
or other favorable credit factors.
Qualifications of Sellers
Each seller will be required to satisfy the following qualifications.
Each seller must be an institution experienced in originating and servicing
loans of the type contained in the related pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate and service those loans. Each seller must be a seller/servicer
approved by
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either Fannie Mae or Freddie Mac. Each seller must be a mortgagee approved by
the FHA or an institution the deposit accounts of which are insured by the FDIC.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of
the loans sold by that seller and evidenced by all, or a part, of a series of
securities. These representations and warranties may include, among other
things:
. that title insurance (or in the case of Properties located in
areas where title insurance policies are generally not
available, an attorney's certificate of title) and any required
hazard insurance policy were effective at origination of each
loan, other than cooperative loans and certain home equity
loans, and that each policy (or certificate of title as
applicable) remained in effect on the date of purchase of the
loan from the seller by or on behalf of the depositor;
. that the seller had good title to each loan and the loan was
subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement may
forgive certain indebtedness of a borrower;
. that each loan constituted a valid lien on, or a perfected
security interest with respect to, the Property (subject only to
permissible liens disclosed, if applicable, title insurance
exceptions, if applicable, and certain other exceptions
described in the Agreement) and that the Property was free from
damage and was in acceptable condition;
. that there were no delinquent tax or assessment liens against
the Property;
. that no required payment on a loan was delinquent more than the
number of days specified in the related prospectus supplement;
and
. that each loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and
regulations in all material respects.
In addition, if any required payment on a mortgage loan was more than
31 days delinquent at any time during the twelve months before the cut-off date,
the related prospectus supplement shall so indicate.
As to any mortgage loan insured by the FHA or partially guaranteed by
the VA, the seller will represent that it has complied with underwriting
policies of the FHA or the VA, as the case may be.
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If so specified in the related prospectus supplement, the
representations and warranties of a seller in respect of a loan will be made not
as of the cut-off date but as of the date on which the seller sold the loan to
the depositor or one of its affiliates. Under those circumstances, a substantial
period of time may have elapsed between the sale date and the date of initial
issuance of the series of securities evidencing an interest in the loan. Since
the representations and warranties of a seller do not address events that may
occur following the sale of a loan by the seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a loan occurs after the date of
sale of the loan by the seller to the depositor or its affiliates or after the
origination of the mortgage loan, as the case may be. In addition, certain
representations, including the condition of the related Property, will be
limited to the extent the seller has knowledge and the seller will be under no
obligation to investigate the substance of the representation. However, the
depositor will not include any loan in the trust fund for any series of
securities if anything has come to the depositor's attention that would cause it
to believe that the representations and warranties of a seller will not be
accurate and complete in all material respects in respect of the loan as of the
date of initial issuance of the related series of securities. If the master
servicer is also a seller of loans with respect to a particular series of
securities, the representations will be in addition to the representations and
warranties made by the master servicer in its capacity as a master servicer.
The master servicer or the trustee, if the master servicer is the
seller, will promptly notify the relevant seller of any breach of any
representation or warranty made by it in respect of a loan which materially and
adversely affects the interests of the securityholders in the loan. If the
seller cannot cure the breach within 90 days following notice from the master
servicer or the trustee, as the case may be, the applicable prospectus
supplement may provide for the seller's obligations under those circumstances,
but if it does not, then the seller will be obligated either
. to repurchase the loan from the trust fund at a price (the
"Purchase Price") equal to 100% of the unpaid principal balance
thereof as of the date of the repurchase plus accrued interest
thereon to the first day of the month following the month of
repurchase at the Loan Rate (less any Advances or amount payable
as related servicing compensation if the seller is the master
servicer) or
. substitute for the loan a replacement loan that satisfies the
criteria specified in the related prospectus supplement.
If a REMIC election is to be made with respect to a trust fund, the
applicable prospectus supplement may provide for the obligations of the master
servicer or residual certificateholder, but if it does not, the master servicer
or a holder of the related residual certificate generally will be obligated to
pay any prohibited transaction tax which may arise in connection with any
repurchase or substitution and the trustee must have received a satisfactory
opinion of counsel that the repurchase or substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax. The master servicer may be entitled to reimbursement
for these tax payments from the assets of the related trust fund or from
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any holder of the related residual certificates. See "Description of the
Securities -- General". Except in those cases in which the master servicer is
the seller, the master servicer will be required under the applicable Agreement
to enforce this obligation for the benefit of the trustee and the holders of the
securities, following the practices it would employ in its good faith business
judgment were it the owner of the loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of securities or
the trustee for a breach of representation by a seller.
Neither the depositor nor the master servicer (unless the master
servicer is the seller) will be obligated to purchase or substitute a loan if a
seller defaults on its obligation to do so, and no assurance can be given that
sellers will carry out their respective repurchase or substitution obligations
with respect to loans. However, to the extent that a breach of a representation
and warranty of a seller may also constitute a breach of a representation made
by the master servicer, the master servicer may have a repurchase or
substitution obligation as described below under "The Agreements -- Assignment
of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each series of certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the depositor, the master servicer and the trustee. A form of Pooling and
Servicing Agreement and Trust Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus forms a part. Each series of
notes will be issued pursuant to an indenture (the "Indenture") between the
related trust fund and the entity named in the related prospectus supplement as
trustee with respect to the series, and the related loans will be serviced by
the master servicer pursuant to a Sale and Servicing Agreement. A form of
Indenture and Sale and Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus forms a part. A series of
securities may consist of both notes and certificates. Each Agreement, dated as
of the related cut-off date, will be among the depositor, the master servicer
and the trustee for the benefit of the holders of the securities of the series.
The provisions of each Agreement will vary depending upon the nature of the
securities to be issued thereunder and the nature of the related trust fund. The
following are descriptions of the material provisions which may appear in each
Agreement. The descriptions are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each series of
securities and the applicable prospectus supplement. The depositor will provide
a copy of the Agreement (without exhibits) relating to any series without charge
upon written request of a holder of record of a security of the series addressed
to First Horizon Asset Securities Inc., 4000 Horizon Way, Irving, Texas 75063,
Attention: Secretary.
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General
The securities of each series will be issued in book-entry or fully
registered form, in the authorized denominations specified in the related
prospectus supplement, will, in the case of certificates, evidence specified
beneficial ownership interests in, and in the case of notes, be secured by, the
assets of the related trust fund created pursuant to each Agreement and will not
be entitled to payments in respect of the assets included in any other trust
fund established by the depositor. The applicable prospectus supplement may
provide for guarantees or insurance obtained from a governmental entity or other
person, but if it does not, the Trust Fund Assets will not be guaranteed or
insured by any governmental entity or other person. Each trust fund will consist
of, to the extent provided in the related Agreement,
. the Trust Fund Assets, as from time to time are subject to the
related Agreement (exclusive of any amounts specified in the
related prospectus supplement ("Retained Interest")), including
all payments of interest and principal received with respect to
the loans after the cut-off date (to the extent not applied in
computing the principal balance of the loans as of the cut-off
date (the "Cut-off Date Principal Balance"));
. the assets required to be deposited in the related Security
Account from time to time;
. Property which secured a loan and which is acquired on behalf of
the securityholders by foreclosure or deed in lieu of
foreclosure and any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related
Agreement.
If so specified in the related prospectus supplement, a trust fund may
also include one or more of the following: reinvestment income on payments
received on the Trust Fund Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a surety bond, guaranties or similar instruments.
Each series of securities will be issued in one or more classes. Each
class of certificates of a series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on, and each class of notes of a series will be secured by, the related
Trust Fund Assets. A series of securities may include one or more classes that
are senior in right to payment to one or more other classes of securities of the
series. Certain series or classes of securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" in this prospectus and in the related
prospectus supplement. One or more classes of securities of a series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or
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more classes of a series of securities may be made prior to one or more other
classes, after the occurrence of specified events, in accordance with a schedule
or formula or on the basis of collections from designated portions of the
related Trust Fund Assets, in each case as specified in the related prospectus
supplement. The timing and amounts of distributions may vary among classes or
over time as specified in the related prospectus supplement.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related securities will be made by the
trustee on each distribution date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the related prospectus
supplement) in proportion to the percentages specified in the related prospectus
supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the dates specified in the
related prospectus supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related prospectus supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of securities (the "Security Register"); provided, however, that the final
distribution in retirement of the securities will be made only upon presentation
and surrender of the securities at the office or agency of the trustee or other
person specified in the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
Corporate Trust Office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series, but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
loans or a class of securities entitled to receive payments of interest and
principal on the loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested) subject to provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"), may result in prohibited
transactions, within the meaning of ERISA and the Code. See "ERISA
Considerations". The applicable prospectus supplement may provide for the
conditions for transferring a security of that type of class, but if it does
not, the transfer of securities of that class will not be registered unless the
transferee (i) represents that it is not, and is not purchasing on behalf of,
any plan, account or arrangement or (ii) provides an opinion of counsel
satisfactory to the trustee and the depositor that the purchase of securities of
that class by or on behalf of a plan, account or arrangement is permissible
under applicable law and will not subject the trustee, the master servicer or
the depositor to any obligation or liability in addition to those undertaken in
the Agreements.
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As to each series, an election may be made to treat the related trust
fund or designated portions thereof as a "real estate mortgage investment
conduit" or REMIC as defined in the Code. The related prospectus supplement will
specify whether a REMIC election is to be made. Alternatively, the Agreement for
a series may provide that a REMIC election may be made at the discretion of the
depositor or the master servicer and may only be made if certain conditions are
satisfied. As to any series for which a REMIC election will be made, the terms
and provisions applicable to the making of the REMIC election will be set forth
in the related prospectus supplement. If a REMIC election is made with respect
to a series, one of the classes will be designated as evidencing the sole class
of "residual interests" in the related REMIC, as defined in the Code. All other
classes of securities in the series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required in order to
comply with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The master servicer, unless otherwise provided in
the related prospectus supplement, will be entitled to reimbursement for these
payments from the assets of the trust fund or from any holder of the related
residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of
distributions on a particular series of securities will depend on the type of
credit support, if any, that is used with respect to the series. See "Credit
Enhancement". Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the securities of a particular
series. The prospectus supplement for each series of securities will describe
the method to be used in determining the amount of distributions on the
securities of the series.
Distributions allocable to principal and interest on the securities
will be made by the trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any reserve fund.
As between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest,
distributions made on any distribution date will be applied as specified in the
related prospectus supplement. The prospectus supplement will also describe the
method for allocating distributions among securities of a particular class.
Available Funds. All distributions on the securities of each series on
each distribution date will be made from the Available Funds described below, in
accordance with the terms described in the related prospectus supplement and
specified in the Agreement. "Available Funds" for each distribution date will
generally equal the amount on deposit in the related Security Account on the
distribution date (net of related fees and expenses payable by the related trust
fund) other than amounts to be held in the Security Account for distribution on
future distribution dates.
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Distributions of Interest. Interest will accrue on the aggregate
principal balance of the securities (or, in the case of securities entitled only
to distributions allocable to interest, the aggregate notional amount) of each
class of securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a fixed rate or rate adjustable as specified in the prospectus
supplement), and for the periods specified in the prospectus supplement. To the
extent funds are available therefor, interest accrued during each specified
period on each class of securities entitled to interest (other than a class of
securities that provides for interest that accrues, but is not currently
payable) will be distributable on the distribution dates specified in the
related prospectus supplement until the aggregate Class Security Balance of the
securities of the class has been distributed in full or, in the case of
securities entitled only to distributions allocable to interest, until the
aggregate notional amount of the securities is reduced to zero or for the period
of time designated in the related prospectus supplement. The original Class
Security Balance of each security will equal the aggregate distributions
allocable to principal to which the security is entitled. Distributions
allocable to interest on each security that is not entitled to distributions
allocable to principal will be calculated based on the notional amount of the
security. The notional amount of a security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Interest payable on the securities of a series on a distribution date
will include all interest accrued during the period specified in the related
prospectus supplement. In the event interest accrues over a period ending two or
more days prior to a distribution date, the effective yield to securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the security were to accrue through the day immediately preceding the
distribution date, and the effective yield (at par) to securityholders will be
less than the indicated coupon rate.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
a given distribution date will be added to the aggregate Class Security Balance
of the class of securities on that distribution date. Distributions of interest
on any class of accrual securities will commence only after the occurrence of
the events specified in the prospectus supplement. Prior to that time, the
beneficial ownership interest in the trust fund or the principal balance, as
applicable, of the class of accrued securities, as reflected in the aggregate
Class Security Balance of the class of accrual securities, will increase on each
distribution date by the amount of interest that accrued on the class of accrual
securities during the preceding interest accrual period but that was not
required to be distributed to that class on the distribution date. The class of
accrual securities will thereafter accrue interest on its outstanding Class
Security Balance as so adjusted.
Distributions of Principal. The related prospectus supplement will
specify the method by which the amount of principal to be distributed on the
securities on each distribution date will be calculated and the manner in which
the amount will be allocated among the classes of securities entitled to
distributions of principal. The aggregate Class Security Balance of any class of
securities entitled to distributions of principal generally will be the
aggregate original Class
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Security Balance of the class of securities specified in the prospectus
supplement, reduced by all distributions reported to the holders of the
securities as allocable to principal and,
. in the case of accrual securities, in general, increased by all
interest accrued but not then distributable on the accrual
securities; and
. in the case of adjustable rate securities, subject to the effect
of negative amortization, if applicable.
If so provided in the related prospectus supplement, one or more
classes of securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of the payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in the prospectus supplement. The allocation of Principal Prepayments
to a class or classes of securities will have the effect of accelerating the
amortization of those securities while increasing the interests evidenced by one
or more other classes of securities in the trust fund. Increasing the interests
of the other classes of securities relative to that of certain securities is
intended to preserve the availability of the subordination provided by the other
securities. See "Credit Enhancement -- Subordination".
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described below and in the prospectus supplement. If applicable, the trustee
will be required to make unscheduled distributions on the day and in the amount
specified in the related prospectus supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Trust Fund Assets, the
trustee or the master servicer determines that the funds available or
anticipated to be available from the Security Account and, if applicable, any
reserve fund, may be insufficient to make required distributions on the
securities on that distribution date. The applicable prospectus supplement may
provide for limits on the amount of an unscheduled distribution, but if it does
not, the amount of any unscheduled distribution that is allocable to principal
will not exceed the amount that would otherwise have been required to be
distributed as principal on the securities on the next distribution date. The
applicable prospectus supplement may specify whether the unscheduled
distribution will include interest, but if it does not, the unscheduled
distributions will include interest at the applicable Pass-Through Rate (if any)
or interest rate (if any) on the amount of the unscheduled distribution
allocable to principal for the period and to the date specified in the
prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the master
servicer will be required to advance on or before each distribution date (from
its own funds, funds advanced by sub-servicers or funds held in the Security
Account for future distributions to the holders of
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securities of the related series), an amount equal to the aggregate of payments
of interest and/or principal that were delinquent on the related Determination
Date (as that term is defined in the related prospectus supplement) and were not
advanced by any sub-servicer, subject to the master servicer's determination
that those advances may be recoverable out of late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise. In the case of
cooperative loans, the master servicer also may be required to advance any
unpaid maintenance fees and other charges under the related proprietary leases
as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
securities, rather than to guarantee or insure against losses. If advances are
made by the master servicer from cash being held for future distribution to
securityholders, the master servicer will replace those funds on or before any
future distribution date to the extent that funds in the applicable Security
Account on the future distribution date would be less than the amount required
to be available for distributions to securityholders on that distribution date.
Any master servicer funds advanced will be reimbursable to the master servicer
out of recoveries on the specific loans with respect to which those advances
were made (e.g., late payments made by the related borrower, any related
Insurance Proceeds, Liquidation Proceeds or proceeds of any loan purchased by
the depositor, a sub- servicer or a seller pursuant to the related Agreement).
advances by the master servicer (and any advances by a sub-servicer) also will
be reimbursable to the master servicer (or sub-servicer) from cash otherwise
distributable to securityholders (including the holders of Senior securities) to
the extent that the master servicer determines that the advances previously made
are not ultimately recoverable as described above. To the extent provided in the
related prospectus supplement, the master servicer also will be obligated to
make advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to the
master servicer to the extent permitted by the related Agreement. The
obligations of the master servicer to make advances may be supported by a cash
advance reserve fund, a surety bond or other arrangement of the type described
in this prospectus under "Credit Enhancement", in each case as described in the
related prospectus supplement.
In the event the master servicer or a sub-servicer fails to make a
required advance, the applicable prospectus supplement may specify whether
another party will have advancing obligations, but if it does not, the trustee
will be obligated to make the advance in its capacity as successor servicer. If
the trustee makes an advance, it will be entitled to be reimbursed for the
advance to the same extent and degree as the master servicer or a sub-servicer
is entitled to be reimbursed for advances. See "Description of the Securities --
Distributions on Securities".
Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date
the master servicer or the trustee will furnish to each securityholder of record
of the related series a statement setting forth, to the extent applicable to the
related series of securities, among other things:
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. the amount of the distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related prospectus
supplement, any applicable prepayment penalties included in the
distribution;
. the amount of the distribution allocable to interest;
. the amount of any advance;
. the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on the distribution date, and (b) withdrawn from
the reserve fund, if any, that is included in the amounts
distributed to the Senior Securityholders;
. the outstanding principal balance or notional amount of each
class of the related series after giving effect to the
distribution of principal on the distribution date;
. the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to
receive on the following distribution date;
. the percentage of Principal Prepayments on the loans, if any,
which each class will be entitled to receive on the following
distribution date;
. the related amount of the servicing compensation retained or
withdrawn from the Security Account by the master servicer, and
the amount of additional servicing compensation received by the
master servicer attributable to penalties, fees, excess
Liquidation Proceeds and other similar charges and items;
. the number and aggregate principal balances of loans (A)
delinquent (exclusive of loans in foreclosure) 1 to 30 days, 31
to 60 days, 61 to 90 days and 91 or more days and (B) in
foreclosure and delinquent 1 to 30 days, 31 to 60 days, 61 to 90
days and 91 or more days, as of the close of business on the
last day of the calendar month preceding the distribution date;
. the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
. the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any class
expected to be applicable to the next distribution to that
class;
. if applicable, the amount remaining in any reserve fund at the
close of business on the distribution date;
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. the Pass-Through Rate or interest rate, as applicable, as of the
day prior to the immediately preceding distribution date;
. any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement; and
. the servicing fee payable to the master servicer and any
subservicer, if applicable.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single security of the relevant class having the percentage
interest specified in the related prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
securityholder of record at any time during that calendar year a report as to
(a) the aggregate of amounts reported pursuant to (i) and (ii) above for that
calendar year or, in the event the person was a securityholder of record during
a portion of that calendar year, for the applicable portion of that calendar
year and (b) such other customary information as may be deemed necessary or
desirable for securityholders to prepare their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes.
These classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a series of securities may identify the classes which
comprise the series by reference to the following categories.
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Principal Types
Accretion Directed.......... A class that receives principal payments from
the accreted interest from specified Accrual
classes. An accretion directed class also may
receive principal payments from principal paid
on the underlying Trust Fund Assets for the
related series.
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Component Securities........ A class consisting of "components." The
components of a class of component securities
may have different principal and/or interest
payment characteristics but together constitute
a single class. Each component of a class of
component securities may be identified as
falling into one or more of the categories in
this chart.
Notional Amount Securities.. A class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Planned Principal Class or
PACs ..................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant
prepayment rates for the underlying Trust Fund
Assets. These two rates are the endpoints for
the "structuring range" for the planned
principal class. The planned principal classes
in any series of certificates may be subdivided
into different categories (e.g., primary planned
principal classes, secondary planned principal
classes and so forth) having different effective
structuring ranges and different principal
payment priorities. The structuring range for
the secondary planned principal class of a
series of certificates will be narrower than
that for the primary planned principal class of
the series.
Scheduled Principal Class..... A class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a Planned
Principal Class or Targeted Principal class. In
many cases, the schedule is derived by assuming
two constant prepayment rates for the underlying
Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the
scheduled principal class.
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Sequential Pay.............. Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules and
that under all circumstances receive payments of
principal continuously from the first
distribution date on which they receive
principal until they are retired. A single class
that receives principal payments before or after
all other classes in the same series of
securities may be identified as a sequential pay
class.
Strip ................... A class that receives a constant proportion, or
"strip," of the principal payments on the
underlying Trust Fund Assets.
Support Class (also sometimes
referred to as "companion
classes")................. A class that receives principal payments on any
distribution date only if scheduled payments
have been made on specified planned principal
classes, targeted principal classes and/or
Scheduled Principal Classes.
Targeted Principal Class
or TACs.................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying Trust Fund
Assets.
Interest Types
Fixed Rate.................. A class with an interest rate that is fixed
throughout the life of the class.
Floating Rate............... A class with an interest rate that resets
periodically based upon a designated index and
that varies directly with changes in the index.
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Inverse Floating Rate....... A class with an interest rate that resets
periodically based upon a designated index and
that varies inversely with changes in the index.
Variable Rate............... A class with an interest rate that resets
periodically and is calculated by reference to
the rate or rates of interest applicable to
specified assets or instruments (e.g., the Loan
Rates borne by the underlying loans).
Interest Only............... A class that receives some or all of the
interest payments made on the underlying Trust
Fund Assets and little or no principal. Interest
Only classes have either a nominal principal
balance or a notional amount. A nominal
principal balance represents actual principal
that will be paid on the class. It is referred
to as nominal since it is extremely small
compared to other classes. A notional amount is
the amount used as a reference to calculate the
amount of interest due on an Interest Only class
that is not entitled to any distributions in
respect of principal.
Principal Only.............. A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Partial Accrual............. A class that accretes a portion of the amount of
accrued interest thereon, which amount will be
added to the principal balance of that class on
each applicable distribution date, with the
remainder of the accrued interest to be
distributed currently as interest on that class.
This accretion may continue until a specified
event has occurred or until the Partial Accrual
class is retired.
Accrual...................... A class that accretes the amount of accrued
interest otherwise distributable on that class,
which amount will be added as principal to the
principal balance of that class on each
applicable distribution date. The accretion may
continue until some specified event has occurred
or until the Accrual class is retired.
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Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR
The applicable prospectus supplement may specify some other basis for
determining LIBOR, but if it does not, on the LIBOR determination date (as
defined in the related prospectus supplement) for each class of certificates of
a series for which the applicable interest rate is determined by reference to an
index denominated as LIBOR, the person designated in the related pooling and
servicing agreement as the calculation agent will determine LIBOR in accordance
with one of the two methods described below (which method will be specified in
the related prospectus supplement):
LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus for
making one-month United States dollar deposits in leading banks in the London
Interbank market, as of 11:00 a.m. (London time) on the LIBOR determination
date. In lieu of relying on the quotations for those reference banks that appear
at the time on the Reuters Screen LIBO Page, the calculation agent will request
each of the reference banks to provide the offered quotations at the time.
Under this method LIBOR will be established by the calculation agent on
each LIBOR determination date as follows:
(a) If on any LIBOR determination date two or more reference banks
provide offered quotations, LIBOR for the next interest accrual period shall be
the arithmetic mean of the offered quotations (rounded upwards if necessary to
the nearest whole multiple of 1/32%).
(b) If on any LIBOR determination date only one or none of the
reference banks provides offered quotations, LIBOR for the next interest accrual
period shall be whichever is the higher of
. LIBOR as determined on the previous LIBOR determination date, or
. the reserve interest rate.
The reserve interest rate shall be the rate per annum which the
calculation agent determines to be either
. the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/32%) of the one-month United
States dollar lending rates that New York City banks selected
by the calculation agent are quoting, on the relevant LIBOR
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determination date, to the principal London offices of at
least two of the reference banks to which the quotations are,
in the opinion of the calculation agent being so made, or
. if the calculation agent cannot determine the arithmetic mean,
the lowest one-month United States dollar lending rate which
New York City banks selected by the calculation agent are
quoting on the LIBOR determination date to leading European
banks.
(c) If on any LIBOR determination date for a class specified in the
related prospectus supplement, the calculation agent is required but is unable
to determine the reserve interest rate in the manner provided in paragraph (b)
above, LIBOR for the next interest accrual period shall be LIBOR as determined
on the preceding LIBOR determination date, or, in the case of the first LIBOR
determination date, LIBOR shall be considered to be the per annum rate specified
as such in the related prospectus supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not control,
be controlled by, or be under common control with the calculation agent; and
shall have an established place of business in London. If a reference bank
should be unwilling or unable to act as such or if appointment of a reference
bank is terminated, another leading bank meeting the criteria specified above
will be appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association "Interest
Settlement Rate" for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. The Interest Settlement Rates are calculated by
eliminating the two highest rates and the two lowest rates, averaging the four
remaining rates, carrying the result (expressed as a percentage) out to six
decimal places, and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
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COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: savings deposits, time
deposits, FHLBSF advances, repurchase agreements and all other borrowings.
Because the component funds represent a variety of maturities whose costs may
react in different ways to changing conditions, the Eleventh District Cost of
Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District
Cost of Funds Index, which may cause it to move in a manner different from
indices tied to specific interest rates, such as United States Treasury bills or
LIBOR. Because the liabilities upon which the Eleventh District Cost of Funds
Index is based were issued at various times under various market conditions and
with various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it its
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
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The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the last
working day" of the following month and also has stated that it "cannot
guarantee the announcement" of the index on an exact date. So long as the index
for a month is announced on or before the tenth day of the second following
month, the interest rate for each class of securities of a series as to which
the applicable interest rate is determined by reference to an index denominated
as COFI (each, a class of "COFI securities") for the Interest Accrual Period
commencing in the second following month will be based on the Eleventh District
Cost of Funds Index for the second preceding month. If publication is delayed
beyond the tenth day, the interest rate will be based on the Eleventh District
Cost of Funds Index for the third preceding month.
The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates the
most recently published Eleventh District Cost of Funds Index relates to a month
before the third preceding month, the index for the current interest accrual
period and for each succeeding interest accrual period will, except as described
in the next to last sentence of this paragraph, be based on the National Monthly
Median Cost of Funds Ratio to SAIF-Insured Institutions (the "National Cost of
Funds Index") published by the Office of Thrift Supervision (the "OTS") for the
third preceding month (or the fourth preceding month if the National Cost of
Funds Index for the third preceding month has not been published on the tenth
day of an interest accrual period). Information on the National Cost of Funds
Index may be obtained by writing the OTS at 1700 G Street, N.W., Washington,
D.C. 20552 or calling (202) 906-6677, and the current National Cost of Funds
Index may be obtained by calling (202) 906-6988. If on the tenth day of the
month in which an interest accrual period commences the most recently published
National Cost of Funds Index relates to a month before the fourth preceding
month, the applicable index for the interest accrual period and each succeeding
interest accrual period will be based on LIBOR, as determined by the calculation
agent in accordance with the Agreement relating to the series of certificates. A
change of index from the Eleventh District Cost of Funds Index to an alternative
index will result in a change in the index level and could increase its
volatility, particularly if LIBOR is the alternative index.
The establishment of COFI by the calculation agent and its calculation
of the rates of interest for the applicable classes for the related interest
accrual period shall (in the absence of manifest error) be final and binding.
Treasury Index
The applicable prospectus supplement may specify some other basis for
determining and defining the Treasury index, but if it does not, on the Treasury
index determination date for each class of securities of a series for which the
applicable interest rate is determined by reference to an index denominated as a
Treasury index, the calculation agent will ascertain the Treasury index for
Treasury securities of the maturity and for the period (or, if applicable, date)
specified in the related prospectus supplement. The Treasury index for any
period means the average of the yield
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for each business day during the specified period (and for any date means the
yield for the date), expressed as a per annum percentage rate, on U.S. Treasury
securities adjusted to the "constant maturity" specified in the prospectus
supplement or if no "constant maturity" is so specified, U.S. Treasury
securities trading on the secondary market having the maturity specified in the
prospectus supplement, in each case as published by the Federal Reserve Board in
its Statistical Release No. H.15 (519). Statistical Release No. H.15 (519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551 (202) 452-3244. If
the calculation agent has not yet received Statistical Release No. H.15 (519)
for a week, then it will use the Statistical Release from the preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived
from the U.S. Treasury's daily yield curve. This curve, which relates the yield
on a security to its time to maturity, is based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. Government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security with
that exact maturity is outstanding. In the event that the Treasury Index is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular series of
securities. The Calculation Agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
Interest Accrual Period shall (in the absence of manifest error) be final and
binding.
Prime Rate
The applicable prospectus supplement may specify the party responsible
for determining the Prime Rate, but if it does not, on the Prime Rate
Determination Date (as that term is defined in the related prospectus
supplement) for each class of securities of a series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the calculation agent will ascertain the Prime Rate for the related
interest accrual period. The applicable prospectus supplement may provide for
the means of determining the Prime Rate, but if it does not, the Prime Rate for
an interest accrual period will be the "Prime Rate" as published in the "Money
Rates" section of The Wall Street Journal (or if not so published, the "Prime
Rate" as published in a newspaper of general circulation selected by the
calculation agent in its sole discretion) on the related Prime Rate
Determination Date. If a prime rate range is given, then the average of the
range will be used. In the event that the Prime Rate is no longer published, a
new index based upon comparable data and methodology will be designated in
accordance with the Agreement relating to the particular series of securities.
The calculation agent's determination of the Prime Rate and its calculation of
the rates of interest for the related interest accrual period shall (in the
absence of manifest error) be final and binding.
Book-entry Registration of Securities
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As described in the related prospectus supplement, if not issued in
fully registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in the securities
("Security Owners") will hold their securities through the Depository Trust
Company ("DTC") in the United States, or Clearstream, Luxembourg or Euroclear
(in Europe) if they are participants of those systems, or indirectly through
organizations which are participants in those systems. The book-entry securities
will be issued in one or more certificates which equal the aggregate principal
balance of the securities and will initially be registered in the name of Cede &
Co., the nominee of DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream, Luxembourg's and Euroclear's names on the books of their
respective depositaries which in turn will hold those positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A., will act as depositary for Clearstream, Luxembourg and The Chase Manhattan
Bank will act as depositary for Euroclear (in those capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Except as
described below, no person acquiring a book-entry security (each, a "beneficial
owner") will be entitled to receive a physical certificate representing the
security (a "Definitive Security"). Unless and until Definitive Securities are
issued, it is anticipated that the only "securityholders" of the securities will
be Cede & Co., as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through the participating organizations that use the
services of DTC, including securities brokers and dealers, banks and trust
companies and clearing corporations and certain other organizations and DTC.
A Security Owner's ownership of a book-entry security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of the book-entry security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of Clearstream, Luxembourg or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the securities from the applicable trustee through DTC and DTC
participants. While the securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC must make
book-entry transfers among participants on whose behalf it acts with respect to
the securities and is required to receive and transmit distributions of
principal of, and interest on, the securities. Participants and organizations
that have indirect access to the DTC system, such as banks, brokers, dealers,
trust companies and other indirect participants that clear through or maintain a
custodial relationship with a participant, with whom Security Owners have
accounts for securities are similarly required to make book-entry transfers and
receive and transmit those distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess physical
certificates, the Rules provide a mechanism by which Security Owners will
receive distributions and will be able to transfer their interest.
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Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the book-entry securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not participants may transfer
ownership of securities only through participants and indirect participants by
instructing them to transfer securities, by book-entry transfer, through DTC for
the account of the purchasers of the securities, which account is maintained
with their respective participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of securities will be executed through
DTC and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Security Owners.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Those credits or any
transactions in those securities will be reported to the relevant Euroclear or
Clearstream, Luxembourg participants on the business day following the DTC
settlement date. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream, Luxembourg
participant or Euroclear participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream, Luxembourg or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Notes, see "Material Federal Income Tax Consequences
-- Tax Treatment of Foreign Investors" and " -- Tax Consequences to Holders of
the Notes -- Backup Withholding" in this prospectus and "Global Clearance,
Settlement And Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I attached to this prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg participants and Euroclear
participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depositary. However, these
cross-market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with
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normal procedures for same day funds settlement applicable to DTC. Clearstream,
Luxembourg participants and Euroclear participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A," a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On 10 January
2000, Cedelbank's parent company, Cedel International, societe anonyme merged
its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG. The merger involved the transfer by Cedel International of
substantially all of its assets and liabilities to a new Luxembourg company, New
Cedel International, societe anonyme, which is 50% owned by Cedel International
and 50% owned by Deutsche Borse Clearing AG's parent company Deutsche Borse AG.
The shareholders of these two entities are banks, securities dealers and
financial institutions. Cedel International currently has 92 shareholders,
including U.S. financial institutions or their subsidiaries. No single entity
may own more than 5 percent of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to re-name the companies in the group to give them a
cohesive brand name. The new brand name that was chosen is "Clearstream." With
effect from 14 January 2000 New Cedel International has been renamed
"Clearstream International, societe anonyme." On 18 January 2000, Cedelbank was
renamed "Clearstream Banking, societe anonyme," and Cedel Global Services was
renamed "Clearstream Services, societe anonyme."
On 17 January 2000 Deutsche Borse Clearing AG was renamed "Clearstream
Banking AG." This means that there are now two entities in the corporate group
headed by Clearstream International which share the name "Clearstream Banking,"
the entity previously named "Cedelbank" and the entity previously named
"Deutsche Brse Clearing AG."
Clearstream, Luxembourg holds securities for its pustomers and
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg participants through electronic book-entry changes in
accounts of Clearstream, Luxembourg participants, thereby eliminating the need
for physical movement of securities. Transactions may be settled in Clearstream,
Luxembourg in any of 36 currencies, including United States dollars.
Clearstream, Luxembourg provides to its participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
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countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
which supervises Luxembourg banks. Clearstream, Luxembourg's participants are
world-wide financial institutions including underwriters, securities brokers and
dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. participants are limited to securities brokers and dealers and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada and
the United States. Indirect access to Clearstream, Luxembourg is also available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the operator of the Euroclear System ("MGT/EOC") in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and deals
with domestic securities markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by MGT/EOC under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation. All operations are conducted by MGT/EOC, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not Euroclear Clearance Systems, S.C.
Euroclear Clearance Systems S.C. establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
MGT/EOC is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with MGT/EOC are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
MGT/EOC acts under the Terms and
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Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the book-entry
securities may experience some delay in their receipt of payments, since those
payments will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions with respect to securities held through Clearstream, Luxembourg or
Euroclear will be credited to the cash accounts of Clearstream, Luxembourg
participants or Euroclear participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Those
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Federal Income Tax Consequences --
Tax Treatment of Foreign Investors" and " -- Tax Consequences to Holders of the
Notes -- Backup Withholding" in this prospectus and "Global Clearance,
Settlement And Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I attached to this prospectus. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a Security
Owner to pledge book-entry securities to persons or entities that do not
participate in the depository system may be limited due to the lack of physical
certificates for the book-entry securities. In addition, issuance of the
book-entry securities in book-entry form may reduce the liquidity of those
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Security Owners
upon request, in accordance with the Rules, and to the Financial Intermediaries
to whose DTC accounts the book-entry securities of those Security Owners are
credited.
DTC has advised the depositor and the trustee that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by the holders of the book-entry securities under the applicable Agreement only
at the direction of one or more Financial Intermediaries to whose DTC accounts
the book-entry securities are credited, to the extent that the actions are taken
on behalf of Financial Intermediaries whose holdings include the book-entry
securities. Clearstream, Luxembourg or MGT/EOC, as the case may be, will take
any other action permitted to be taken by a securityholder under the Agreement
on behalf of a Clearstream, Luxembourg participant or Euroclear participant only
in accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect the actions on its behalf through DTC. DTC
may take actions, at the direction of the related participants, with respect to
some securities which conflict with actions taken with respect to other
securities.
The applicable prospectus supplement may specify when and for what
reasons Definitive Securities may be issued, but if it does not, Definitive
Securities will be issued to Security Owners or their nominees, rather than to
DTC, only if
. DTC or the depositor advises the trustee in writing that DTC is
no longer willing, qualified or able to discharge properly its
responsibilities as nominee and
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depository with respect to the book-entry securities and the
depositor or the trustee is unable to locate a qualified
successor;
. the depositor, at its sole option, elects to terminate the
book-entry system through DTC; or
. after the occurrence of an event of default under the applicable
Agreement, beneficial owners of securities representing not less
than 51% of the aggregate percentage interests evidenced by each
class of securities of the related series issued as book-entry
securities advise the trustee and the DTC through the financial
intermediaries in writing that the continuation of a book-entry
system through DTC, or a successor to it, is no longer in the
best interests of the beneficial owners.
Upon the availability of Definitive Securities, the applicable trustee
will be required to notify all Security Owners of the occurrence of the event
resulting in their availability and the availability through DTC of Definitive
Securities. Upon surrender by DTC of the global certificate or certificates
representing the book-entry securities and instructions for re-registration, the
applicable trustee will issue Definitive Securities, and thereafter the
applicable trustee will recognize the holders of Definitive Securities as
securityholders under the applicable Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform those procedures and those
procedures may be discontinued at any time.
The foregoing information with respect to DTC, Clearstream, Luxembourg
and Euroclear has been provided for informational purposes only and is not a
representation, warranty or contract modification of any kind by DTC,
Clearstream, Luxembourg or Euroclear.
None of the master servicer, the depositor or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes
of a series of securities or with respect to the related Trust Fund Assets.
Credit enhancement may be in the form of a limited financial guaranty policy
issued by an entity named in the related prospectus supplement, the
subordination of one or more classes of the securities of the series, the
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establishment of one or more reserve funds, the use of a cross-collateralization
feature, use of a mortgage pool insurance policy, FHA Insurance, VA Guarantee,
bankruptcy bond, special hazard insurance policy, surety bond, letter of credit,
guaranteed investment contract, overcollateralization, or another method of
credit enhancement contemplated in this prospectus and described in the related
prospectus supplement, or any combination of the foregoing. The applicable
prospectus supplement may provide for credit enhancement which covers all the
classes of securities, but if it does not, credit enhancement will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the securities and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, securityholders will bear their allocable share of
any deficiencies.
Subordination
If so specified in the related prospectus supplement, protection
afforded to holders of one or more classes of securities of a series by means of
the subordination feature may be accomplished by the preferential right of
holders of one or more other classes of the series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
subordinated securities under the circumstances and to the extent specified in
the related prospectus supplement. Protection may also be afforded to the
holders of Senior Securities of a series by: (i) reducing the ownership interest
(if applicable) of the related subordinated securities; (ii) a combination of
the immediately preceding sentence and clause (i) above; or (iii) as otherwise
described in the related prospectus supplement. If so specified in the related
prospectus supplement, delays in receipt of scheduled payments on the loans and
losses on defaulted loans may be borne first by the various classes of
subordinated securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in the prospectus supplement. The aggregate distributions in respect
of delinquent payments on the loans over the lives of the securities or at any
time, the aggregate losses in respect of defaulted loans which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Securityholders that
will be distributable to Senior Securityholders on any distribution date may be
limited as specified in the related prospectus supplement. If aggregate
distributions in respect of delinquent payments on the loans or aggregate losses
in respect of the loans were to exceed an amount specified in the related
prospectus supplement, holders of Senior Securities would experience losses on
the securities.
In addition to or in lieu of the foregoing, if so specified in the
related prospectus supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any distribution date may
instead be deposited into one or more reserve funds established with the trustee
or distributed to holders of Senior Securities. Those deposits may be made on
each distribution date, for specified periods or until the balance in the
reserve fund to holders of Senior Securities or otherwise, thereafter to the
extent necessary to restore the balance in the reserve
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fund to required levels, in each case as specified in the related prospectus
supplement. Amounts on deposit in the reserve fund may be released to the
holders of certain classes of securities at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among those classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related prospectus supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any reserve
fund will be allocated as specified in the related prospectus supplement.
Letter of Credit
The letter of credit, if any, with respect to a series of securities
will be issued by the bank or financial institution specified in the related
prospectus supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related prospectus supplement of the aggregate principal
balance of the loans on the related cut-off date or of one or more Classes of
securities (the "L/C Percentage"). If so specified in the related prospectus
supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the federal Bankruptcy Code, or losses resulting from denial of insurance
coverage due to misrepresentations in connection with the origination of a loan.
The amount available under the letter of credit will, in all cases, be reduced
to the extent of the unreimbursed payments thereunder. The obligations of the
L/C Bank under the letter of credit for each series of securities will expire at
the earlier of the date specified in the related prospectus supplement or the
termination of the trust fund. See "The Agreements -- Termination: Optional
Termination." A copy of the letter of credit for a series, if any, will be filed
with the Securities and Exchange Commission (the "SEC") as an exhibit to a
Current Report on Form 8-K to be filed after the issuance of the securities of
the related series.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related
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series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or determined
in the manner specified in the related prospectus supplement. In addition, if
specified in the related prospectus supplement, a trust fund may also include
bankruptcy bonds, special hazard insurance policies, other insurance or
guaranties for the purpose of (i) maintaining timely payments or providing
additional protection against losses on the assets included in the trust fund,
(ii) paying administrative expenses or (iii) establishing a minimum reinvestment
rate on the payments made in respect of those assets or a principal payment rate
on those assets. These arrangements may include agreements under which
securityholders are entitled to receive amounts deposited in various accounts
held by the trustee upon the terms specified in the prospectus supplement. A
copy of any related instrument for a series will be filed with the SEC as an
exhibit to a Current Report on Form 8-K to be filed with the SEC after the
issuance of the securities of the related series.
Over-collateralization
If so provided in the prospectus supplement for a series of securities,
a portion of the interest payment on each loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of securities and, thus, accelerate the rate of payment
of principal on that class or those classes of securities. Reducing the
principal balance of the securities without a corresponding reduction in the
principal balance of the underlying Trust Fund Assets will result in
over-collateralization.
Reserve Accounts
If specified in the related prospectus supplement, credit support with
respect to a series of securities will be provided by the establishment and
maintenance with the trustee for the series of securities, in trust, of one or
more reserve funds for the series. The related prospectus supplement will
specify whether or not any reserve funds will be included in the trust fund for
a series.
The reserve fund for a series will be funded (i) by the deposit of
cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related prospectus supplement, (ii) by the deposit from time to
time of certain amounts, as specified in the related prospectus supplement to
which the Subordinate Securityholders, if any, would otherwise be entitled or
(iii) in such other manner as may be specified in the related prospectus
supplement.
Any amounts on deposit in the reserve fund and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
"Permitted Investments" which may include
(i) obligations of the United States or any agency thereof, provided
those obligations are backed by the full faith and credit of the
United States;
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(ii) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the
highest long-term debt rating of each Rating Agency rating the
related series of securities, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then
assigned to the securities by each Rating Agency;
(iii) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each
Rating Agency, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to the
securities by each Rating Agency;
(iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust
company incorporated under the laws of the United States or of
any state thereof and subject to supervision and examination by
federal and/or state banking authorities, provided that the
commercial paper and/or long term unsecured debt obligations of
the depository institution or trust company (or in the case of
the principal depository institution in a holding company
system, the commercial paper or long-term unsecured debt
obligations of such holding company, but only if Moody's
Investors Service, Inc. ("Moody's") is not a Rating Agency) are
then rated one of the two highest long-term and the highest
short-term ratings of each Rating Agency for the securities, or
such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the securities by any
Rating Agency;
(v) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that
the deposits are fully insured by the FDIC;
(vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the
issuance of the agreements, terms and conditions that will not
result in the downgrading or withdrawal of the rating then
assigned to the securities by any Rating Agency;
(vii) repurchase obligations with respect to any security described in
clauses (i) and (ii) above, in either case entered into with a
depository institution or trust company (acting as principal)
described in clause (iv) above;
(viii) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the
face amount thereof) bearing interest or sold at a discount
issued by any corporation incorporated under the laws of the
United States or any state thereof which, at the time of the
investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating
shall be the highest commercial paper rating of Moody's for any
such securities), or such lower rating as will not result in the
downgrading or
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withdrawal of the rating then assigned to the securities by any
Rating Agency, as evidenced by a signed writing delivered by
each Rating Agency;
(ix) interests in any money market fund which at the date of
acquisition of the interests in the fund and throughout the time
the interests are held in the fund has the highest applicable
rating by each Rating Agency or such lower rating as will not
result in the downgrading or withdrawal of the ratings then
assigned to the securities by each Rating Agency;
(x) short term investment funds sponsored by any trust company or
national banking association incorporated under the laws of the
United States or any state thereof which on the date of
acquisition has been rated by each Rating Agency in their
respective highest applicable rating category or such lower
rating as will not result in the downgrading or withdrawal of
the ratings then assigned to the securities by each Rating
Agency; and
(xi) other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency
that will not result in the downgrading or withdrawal of the
rating then assigned to the securities by any Rating Agency, as
evidenced by a signed writing delivered by each Rating Agency;
provided that no instrument shall be a Permitted Investment if
the instrument evidences the right to receive interest only
payments with respect to the obligations underlying the
instrument; and provided, further, that no investment specified
in clause (ix) or clause (x) above shall be a Permitted
Investment for any pre-funding account or any related
Capitalized Interest Account.
If a letter of credit is deposited with the trustee, that letter of
credit will be irrevocable and will name the trustee, in its capacity as trustee
for the holders of the securities, as beneficiary and will be issued by an
entity acceptable to each Rating Agency that rates the securities of the related
series. Additional information with respect to the instruments deposited in the
reserve funds will be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the reserve fund for distribution to the
holders of securities of the related series for the purposes, in the manner and
at the times specified in the related prospectus supplement.
Pool Insurance Policies
If specified in the related prospectus supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the pool and
issued by the insurer (the "Pool Insurer") named in the prospectus supplement.
Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on loans in the pool in an amount
equal to a percentage specified in the prospectus supplement of the aggregate
principal balance of
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the loans on the cut-off date which are not covered as to their entire
outstanding principal balances by Primary Mortgage Insurance Policies. As more
fully described below, the master servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the trustee and the holders of the securities
of the related series. The Pool Insurance Policies, however, are not blanket
policies against loss, since claims thereunder may only be made respecting
particular defaulted loans and only upon satisfaction of certain conditions
precedent described below. The applicable prospectus supplement may provide for
the extent of coverage provided by the related Pool Insurance Policy, but if it
does not, the Pool Insurance Policies will not cover losses due to a failure to
pay or denial of a claim under a Primary Mortgage Insurance Policy.
The applicable prospectus supplement may provide for the conditions for
the presentation of claims under a Pool Insurance Policy, but if it does not,
the Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real estate
taxes and other protection and preservation expenses have been paid; (iii) if
there has been physical loss or damage to the Property, it has been restored to
its physical condition (reasonable wear and tear excepted) at the time of
issuance of the policy; and (iv) the insured has acquired good and merchantable
title to the Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the Property securing the defaulted loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Loan Rate to the date of purchase and certain expenses incurred by the
master servicer on behalf of the trustee and securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the claim
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Property securing a defaulted loan is damaged and proceeds, if any, from the
related 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 master
servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) the restoration will increase the
proceeds to securityholders on liquidation of the loan after reimbursement of
the master servicer for its expenses and (ii) the expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
The applicable prospectus supplement may provide for a Pool Insurance
Policy covering losses resulting from defaults, but if it does not, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things,
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. fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or
persons involved in the origination thereof, or
. failure to construct a Property in accordance with plans and
specifications.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the related seller's representations described above and might
give rise to an obligation on the part of the related seller to repurchase the
defaulted loan if the breach cannot be cured by the related seller. No Pool
Insurance Policy will cover (and many Primary Mortgage Insurance Policies do not
cover) a claim in respect of a defaulted loan occurring when the servicer of the
loan, at the time of default or thereafter, was not approved by the applicable
insurer.
The applicable prospectus supplement may provide for a Pool Insurance
Policy featuring a fixed amount of coverage over the life of the policy, but if
it does not, the original amount of coverage under each Pool Insurance Policy
will be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The applicable prospectus
supplement may provide for the exclusion of specified expenses from the coverage
of the Pool Insurance Policy, but if it does not, the amount of claims paid will
include certain expenses incurred by the master servicer as well as accrued
interest on delinquent loans to the date of payment of the claim. Accordingly,
if aggregate net claims paid under any Pool Insurance Policy reach the original
policy limit, coverage under that Pool Insurance Policy will be exhausted and
any further losses will be borne by the related securityholders.
Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the mortgage pool and will be
issued by the insurer named in the prospectus supplement. Each special hazard
insurance policy will, subject to policy limitations, protect holders of the
related securities from loss caused by the application of the coinsurance clause
contained in hazard insurance policies and loss from damage to mortgaged
properties caused by certain hazards not insured against under the standard form
of hazard insurance policy in the states where the mortgaged properties are
located or under a flood insurance policy if the Property is located in a
federally designated flood area. Some of the losses covered include earthquakes
and, to a limited extent, tidal waves and related water damage and other losses
that may be specified in the related prospectus supplement. See "The Agreements
-- Hazard Insurance." No special hazard insurance policy will cover losses from
fraud or conversion by the trustee or master servicer, war, insurrection, civil
war, certain governmental action, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear or chemical reaction,
flood (if the Property is located in a federally designated flood area), nuclear
or chemical contamination and certain other risks. The amount of coverage under
any special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard and, if applicable,
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flood insurance on the Property securing the mortgage loan have been kept in
force and other protection and preservation expenses have been paid.
The applicable prospectus supplement may provide for other payment
coverage, but if it does not, each special hazard policy will insure against
damage to mortgaged properties caused by special hazard losses in an amount
equal to the lesser of:
. the cost of repair to or replacement of the damaged Property, or
. upon transfer of the Property to the special hazard insurer, the
unpaid principal balance of the mortgage loan at the time of
acquisition of the Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim
settlement and certain expenses incurred by the master servicer
with respect to the Property.
If the unpaid principal balance of a mortgage loan, plus accrued interest and
expenses, is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the Property. In addition, any amount
paid to repair or replace the Property will further reduce special hazard
coverage by that amount.
No special hazard policy will insure against damage that is covered by
a hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the master servicer.
So long as a mortgage pool insurance policy remains in effect, the
payment by the special hazard insurer of the cost of repair or of the unpaid
principal balance of the related mortgage loan plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to
certificateholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
To the extent specified in the prospectus supplement, the master
servicer may deposit cash, an irrevocable letter of credit, or any other
instrument acceptable to each rating agency rating the securities of the related
series at the request of the depositor in a special trust account to provide
protection in lieu of or in addition to that provided by a special hazard
insurance policy. The amount of any special hazard insurance policy or of the
deposit to the special trust account relating to the securities may be reduced
so long as the reduction will not result in a downgrading of the rating of the
securities by a rating agency rating securities at the request of the depositor.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a mortgage loan will supplement. Each bankruptcy bond will
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cover, to the extent specified in the related prospectus supplement, certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a mortgage loan or a reduction by the court of the
principal amount of a mortgage loan and will cover certain unpaid interest on
the amount of a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under each bankruptcy bond will be set
forth in the related prospectus supplement. Coverage under a bankruptcy bond may
be canceled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating or ratings of the related
securities. See "Legal Aspects of the Mortgage Loans -- Anti-deficiency
Legislation and Other Limitations on Lenders."
To the extent specified in the prospectus supplement, the master
servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
certificates of the related series at the request of the depositor in a special
trust account to provide protection in lieu of or in addition to that provided
by a bankruptcy bond. The amount of any bankruptcy bond or of the deposit to the
special trust account relating to the certificates may be reduced so long as the
reduction will not result in a downgrading of the rating of the certificates by
a rating agency rating certificates at the request of the depositor.
Cross Support
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of the related series of securities. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on securities evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe the
manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application of
the coverage to the identified trust funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust Fund Assets included in the related trust
fund. The original terms to maturity of the loans in a given pool will vary
depending upon the type of loans included the pool. Each prospectus supplement
will contain information with respect to the type and maturities of the loans in
the related pool. The related prospectus supplement will specify the
circumstances, if any, under
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which the related loans will be subject to prepayment penalties. The prepayment
experience on the loans in a pool will affect the weighted average life of the
related series of securities.
The rate of prepayment on the loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant volume
only during the past few years and the depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of these types of
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, home equity loans and
home improvement loans may experience a higher rate of prepayment than
traditional first mortgage loans. On the other hand, because home equity loans
such as the revolving credit line loans generally are not fully amortizing, the
absence of voluntary borrower prepayments could cause rates of principal
payments lower than, or similar to, those of traditional fully-amortizing first
mortgage loans. The prepayment experience of the related trust fund may be
affected by a wide variety of factors, including general economic conditions,
prevailing interest rate levels, the availability of alternative financing,
homeowner mobility and the frequency and amount of any future draws on any
revolving credit line loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying senior
mortgage loans, and the use of first mortgage loans as long-term financing for
home purchase and subordinate mortgage loans as shorter-term financing for a
variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles. Accordingly, these loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity loans for federal income tax purposes may
further increase the rate of prepayments of the loans. The enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related loan. See "Legal Aspects of the Loans -- Due-on-Sale
Clauses". The yield to an investor who purchases securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the loans is actually different than the rate anticipated
by the investor at the time the securities were purchased.
Collections on revolving credit line loans may vary because, among
other things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for that month or, during the interest-only period for
certain revolving credit line loans and, in more limited circumstances,
closed-end loans, with respect to which an interest-only payment option has been
selected, the interest and the fees and charges for that month or (ii) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
loans may vary due to seasonal purchasing and the payment habits of borrowers.
Generally, all conventional loans will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the loan upon sale or
certain transfers by the borrower of the related Property. Loans insured by the
FHA, and single family loans partially guaranteed by the VA, are assumable with
the consent of the FHA and the VA, respectively. Thus, the rate of
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prepayments on those types of loans may be lower than that of conventional loans
bearing comparable interest rates. The master servicer generally will enforce
any due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of
the conveyance or further encumbrance or the proposed conveyance or proposed
further encumbrance of the Property and reasonably believes that it is entitled
to do so under applicable law; provided, however, that the master servicer will
not take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. See "The Agreements -- Collection
Procedures" and "Legal Aspects of the Loans" for a description of certain
provisions of each Agreement and certain legal developments that may affect the
prepayment experience on the loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the loans, the loans are more likely
to be subject to higher prepayment rates than if prevailing interest rates
remain at or above the Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the loans, the loans are more likely
to experience a lower prepayment rate than if prevailing rates remain at or
below the Loan Rates. However, there can be no assurance that this will be the
case.
When a full prepayment is made on a loan, the borrower is charged
interest on the principal amount of the loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather than
for a full month. The effect of prepayments in full will be to reduce the amount
of interest passed through or paid in the following month to holders of
securities because interest on the principal amount of any loan so prepaid will
generally be paid only to the date of prepayment. Partial prepayments in a given
month may be applied to the outstanding principal balances of the loans so
prepaid on the first day of the month of receipt or in the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through or paid in the month of receipt. The applicable
prospectus supplement may specify when prepayments are passed through to
securityholders, but if it does not, neither full nor partial prepayments will
be passed through or paid until the month following receipt.
Even assuming that the Properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
liquidation of defaulted loans and corresponding delays in the receipt of
related proceeds by securityholders could occur. An action to foreclose on a
Property securing a 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.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the master servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related loan. In
addition, the master servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
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Liquidation expenses with respect to defaulted mortgage loans generally
do not vary directly with the outstanding principal balance of the loan at the
time of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the remaining principal balance of the small
mortgage loan than would be the case with the other defaulted mortgage loan
having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of loans. In addition, most have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices which may apply to the origination,
servicing and collection of the 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 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.
If the rate at which interest is passed through or paid to the holders
of securities of a series is calculated on a loan-by-loan basis,
disproportionate principal prepayments among loans with different Loan Rates
will affect the yield on those securities. In most cases, the effective yield to
securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate or interest rate and purchase price, because while
interest will generally accrue on each loan from the first day of the month, the
distribution of the interest will not be made earlier than the month following
the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any person specified in the related prospectus
supplement may have the option to purchase the assets of a trust fund thereby
effecting earlier retirement of the related series of securities. See "The
Agreements -- Termination; Optional Termination".
The relative contribution of the various factors affecting prepayment
may vary from time to time. There can be no assurance as to the rate of payment
of principal of the Trust Fund Assets at any time or over the lives of the
securities.
The prospectus supplement relating to a series of securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of the securities.
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THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, the provisions or terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the securities of a
series, the depositor will cause the loans comprising the related trust fund to
be assigned to the trustee, without recourse, together with all principal and
interest received by or on behalf of the depositor on or with respect to the
loans after the cut-off date, other than principal and interest due on or before
the cut-off date and other than any Retained Interest specified in the related
prospectus supplement. The trustee will, concurrently with the assignment,
deliver the securities to the depositor in exchange for the loans. Each loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. This schedule will include information as to the outstanding
principal balance of each loan after application of payments due on or before
the cut-off date, as well as information regarding the Loan Rate or APR, the
maturity of the loan, the Loan-to-Value Ratios or Combined Loan-to-Value Ratios,
as applicable, at origination and certain other information.
In addition, the depositor will also deliver or cause to be delivered
to the trustee (or to the custodian) for each single family loan or home equity
loan,
. the mortgage note or contract endorsed without recourse in
blank or to the order of the trustee, except that the
depositor may deliver or cause to be delivered a lost note
affidavit in lieu of any original mortgage note that has been
lost,
. the mortgage, deed of trust or similar instrument (a
"Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public
recording office, in which case the depositor will deliver or
cause to be delivered a copy of the Mortgage together with a
certificate that the original of the Mortgage was delivered to
the recording office),
. an assignment of the Mortgage in blank, which assignment will
be in recordable form in the case of a Mortgage assignment,
and any other security documents, including those relating to
any senior interests in the Property, as may be specified in
the related prospectus supplement or the related Agreement.
The applicable prospectus supplement may provide other arrangements for
assuring the priority of assignments, but if it does not, the depositor will
promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except
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in those states designated by the Rating Agencies where recording is not
required to protect the trustee's interest in those loans against the claim of
any subsequent transferee or any successor to or creditor of the depositor or
the originator of the related loans.
With respect to any loans that are cooperative loans, the depositor
will cause to be delivered to the trustee (or to the custodian) for each
cooperative loan,
. the related original cooperative note endorsed without recourse
in blank or to the order of the trustee or, to the extent the
related Agreement so provides, a lost note affidavit,
. the original security agreement,
. the proprietary lease or occupancy agreement,
. the recognition agreement,
. an executed financing agreement and the relevant stock
certificate, together with the related blank stock powers, and
. any other document specified in the related prospectus
supplement.
The depositor will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the trustee's security interest
in each cooperative loan.
The applicable prospectus supplement may provide for the depositor's
delivery obligations in connection with home improvement contracts, but if it
does not, the depositor will as to each home improvement contract, deliver or
cause to be delivered to the trustee (or to the custodian) the original home
improvement contract and copies of documents and instruments related to each
home improvement contract and the security interest in the Property securing the
home improvement contract. In general, it is expected that the home improvement
contracts will not be stamped or otherwise marked to reflect their assignment to
the trustee. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the home improvement
contracts without notice of the assignment, the interest of securityholders in
the home improvement contracts could be defeated. See "Legal Aspects of the
Loans -- The Home Improvement Contracts."
The trustee (or the custodian) will review the loan documents within
the time period specified in the related prospectus supplement after receipt
thereof, and the trustee will hold the loan documents in trust for the benefit
of the related securityholders. Generally, if the document is found to be
missing or defective in any material respect, the trustee (or the custodian)
will notify the master servicer and the depositor, and the master servicer will
notify the related seller. If the seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of notice, the seller will be obligated to either purchase the
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related loan from the trust fund at the Purchase Price or if so specified in the
related prospectus supplement, remove the loan from the trust fund and
substitute in its place one or more other loans that meets certain requirements
set forth in the related prospectus supplement. There can be no assurance that a
seller will fulfill this purchase or substitution obligation. Although the
master servicer may be obligated to enforce the obligation to the extent
described above under "Loan Program -- Representations by Sellers; Repurchases,"
neither the master servicer nor the depositor will be obligated to purchase or
replace a loan if the seller defaults on its obligation, unless the breach also
constitutes a breach of the representations or warranties of the master servicer
or the depositor, as the case may be. The applicable prospectus supplement may
provide other remedies, but if it does not, this obligation to cure, purchase or
substitute constitutes the sole remedy available to the securityholders or the
trustee for omission of, or a material defect in, a constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of a representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase (at the Purchase Price) or if
so specified in the related prospectus supplement, replace the loan. The
applicable prospectus supplement may provide other remedies, but if it does not,
this obligation to cure, purchase or substitute constitutes the sole remedy
available to the securityholders or the trustee for a breach of representation
by the master servicer.
Assignment of Agency Securities. The depositor will cause the agency
securities to be registered in the name of the trustee or its nominee, and the
trustee concurrently will execute, countersign and deliver the certificates.
Each agency security will be identified in a schedule appearing as an exhibit to
the pooling and servicing agreement, which will specify as to each agency
security the original principal amount and outstanding principal balance as of
the cut-off date, the annual pass-through rate and the maturity date.
Assignment of Private Mortgage-Backed Securities. The depositor will
cause the private mortgage-backed securities to be registered in the name of the
trustee. The trustee or the custodian will have possession of any certificated
private mortgage-backed securities. Generally, the trustee will not be in
possession of or be assignee of record of any underlying assets for a private
mortgage-backed security. See "The Trust Fund -- Private Mortgage-Backed
Securities." Each private mortgage-backed security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing agreement
which will specify the original principal amount, outstanding principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date and other specified pertinent information for each private mortgage-backed
security conveyed to the trustee.
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Conveyance of Subsequent Loans. With respect to a series of securities
for which a Pre-Funding Arrangement is provided, in connection with any
conveyance of Subsequent loans to the trust fund after the issuance of the
related securities, the related Agreement will require the seller and the
depositor to satisfy the following conditions, among others:
. each Subsequent loan purchased after the applicable closing date
must satisfy the representations and warranties contained in the
subsequent transfer agreement to be entered into by the depositor,
the seller and the trustee and in the related Agreement;
. the seller will not select the Subsequent loans in a manner that
it believes is adverse to the interests of the securityholders;
. as of the related cut-off date, all of the loans in the loan pool
at that time, including the Subsequent loans purchased after the
closing date, will satisfy the criteria set forth in the related
Agreement;
. the Subsequent loans will have been approved by any third party
provider of credit enhancement, if applicable; and
. before the purchase of each Subsequent loan the trustee will
perform an initial review of certain related loan file
documentation for the loan and issue an initial certification for
which the required documentation in the loan file has been
received with respect to each Subsequent loan.
The Subsequent loans, on an aggregate basis, will have characteristics
similar to the characteristics of the initial pool of loans as described in the
related prospectus supplement. Each acquisition of any Subsequent loans will be
subject to the review by any third party provider of credit enhancement, if
applicable, the rating agencies and the seller's accountants of the aggregate
statistical characteristics of the related loan pool for compliance with the
applicable statistical criteria set forth in the related Agreement.
Notwithstanding the foregoing provisions, with respect to a trust fund
for which a REMIC election is to be made, no purchase or substitution of a loan
will be made if the purchase or substitution would result in a prohibited
transaction tax under the Code.
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Payments on Loans; Deposits to Security Account
The master servicer will establish and maintain or cause to be
established and maintained with respect to the related trust fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the trust fund (the "Security Account"). The applicable prospectus
supplement may provide for other requirements for the Security Account, but if
it does not, the Security Account must be either (i) maintained with a
depository institution the debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the obligations of which) are rated in one of the two highest rating categories
by the Rating Agency or Rating Agencies that rated one or more classes of the
related series of securities, (ii) an account or accounts the deposits in which
are fully insured by either the Bank Insurance Fund (the "BIF") of the FDIC or
the Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")), (iii) an account or accounts the deposits
in which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the securityholders have a claim with
respect to the funds in the security account or a perfected first priority
security interest against any collateral securing those funds that is superior
to the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to Permitted Investments. A
Security Account may be maintained as an interest bearing account or the funds
held in a Security Account may be invested pending each succeeding distribution
date in Permitted Investments. To the extent provided in the related prospectus
supplement, the master servicer or its designee will be entitled to receive any
interest or other income earned on funds in the Security Account as additional
compensation and will be obligated to deposit in the Security Account the amount
of any loss immediately as realized. The Security Account may be maintained with
the master servicer or with a depository institution that is an affiliate of the
master servicer, provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the Security
Account for each trust fund, to the extent applicable and unless otherwise
specified in the Agreement, the following payments and collections received or
advances made by or on behalf of it subsequent to the cut-off date (other than
payments due on or before the cut-off date and exclusive of any amounts
representing Retained Interest):
. all payments on account of principal, including Principal
Prepayments and, if specified in the related prospectus
supplement, any applicable prepayment penalties, on the loans;
. all payments on account of interest on the loans, net of
applicable servicing compensation;
. all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses")
incurred, and unreimbursed
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advances made, by the master servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to
the extent those proceeds are not applied to the restoration of
the Property or released to the Mortgagor in accordance with the
master servicer's normal servicing procedures (collectively,
"Insurance Proceeds") and all other cash amounts (net of
unreimbursed expenses incurred in connection with liquidation or
foreclosure ("Liquidation Expenses") and unreimbursed advances
made, by the master servicer, if any) received and retained in
connection with the liquidation of defaulted loans, by foreclosure
or otherwise ("Liquidation Proceeds"), together with any net
proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by
foreclosure or deed in lieu of foreclosure;
. all proceeds of any loan or Property in respect thereof purchased
by the master servicer, the depositor or any seller as described
under "Loan Program -- Representations by Sellers; Repurchases" or
" -- Assignment of Trust Fund Assets" above and all proceeds of
any loan repurchased as described under " -- Termination; Optional
Termination" below;
. all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy
described under " -- Hazard Insurance" below;
. any amount required to be deposited by the master servicer in
connection with losses realized on investments for the benefit of
the master servicer of funds held in the Security Account and, to
the extent specified in the related prospectus supplement, any
payments required to be made by the master servicer in connection
with prepayment interest shortfalls; and
. all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The master servicer (or the depositor, as applicable) may from time to
time direct the institution that maintains the Security Account to withdraw
funds from the Security Account for the following purposes:
. to pay to the master servicer the servicing fees described in the
related prospectus supplement, the master servicing fees (subject
to reduction) and, as additional servicing compensation, earnings
on or investment income with respect to funds in the amounts in
the Security Account credited thereto;
. to reimburse the master servicer for advances, this right of
reimbursement with respect to any loan being limited to amounts
received that represent late recoveries of payments of principal
and/or interest on the loan (or Insurance Proceeds or
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Liquidation Proceeds with respect thereto) with respect to which
the advance was made;
. to reimburse the master servicer for any advances previously made
which the master servicer has determined to be nonrecoverable;
. to reimburse the master servicer from Insurance Proceeds for
expenses incurred by the master servicer and covered by the
related insurance policies;
. to reimburse the master servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the
master servicer in the performance of its servicing obligations,
this right of reimbursement being limited to amounts received
representing late recoveries of the payments for which the
advances were made;
. to pay to the master servicer, with respect to each loan or
Property acquired in respect thereof that has been purchased by
the master servicer pursuant to the Agreement, all amounts
received thereon and not taken into account in determining the
principal balance of the repurchased loan;
. to reimburse the master servicer or the depositor for expenses
incurred and reimbursable pursuant to the Agreement;
. to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
. to clear and terminate the Security Account upon termination of
the Agreement.
In addition, the Agreement will generally provide that, on or prior to
the business day immediately preceding each distribution date, the master
servicer shall withdraw from the Security Account the amount of Available Funds,
to the extent on deposit, for deposit in an account maintained by the trustee
for the related series of securities.
Pre-funding Account
If so provided in the related prospectus supplement, the master servicer
will establish and maintain an account (the "Pre-Funding Account"), in the name
of the related trustee on behalf of the related securityholders, into which the
depositor will deposit cash in an amount specified in the prospectus supplement
(the "Pre-Funded Amount") on the related Closing Date. The Pre-Funding Account
will be maintained with the trustee for the related series of securities and is
designed solely to hold funds to be applied by the trustee during the period
from the closing date to a date not more than a year after the closing date (the
"Funding Period") to pay to the depositor the purchase price for loans purchased
during the Funding Period (the "Subsequent Loans"). Monies on deposit in the
Pre-Funding Account will not be available to cover losses on or in
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respect of the related loans. The Pre-Funded Amount will not exceed 50% of the
initial aggregate principal amount of the certificates and notes of the related
series. The Pre-Funded Amount will be used by the related trustee to purchase
Subsequent Loans from the depositor from time to time during the Funding Period.
The Funding Period, if any, for a trust fund will begin on the related Closing
Date and will end on the date specified in the related prospectus supplement,
which in no event will be later than the date that is one year after the related
Closing Date. Monies on deposit in the Pre-Funding Account may be invested in
Permitted Investments under the circumstances and in the manner described in the
related Agreement. Earnings on investment of funds in the Pre-Funding Account
will be deposited into the related Security Account or such other trust account
as is specified in the related prospectus supplement and losses will be charged
against the funds on deposit in the Pre-Funding Account. Any amounts remaining
in the Pre-Funding Account at the end of the Funding Period will be distributed
to the related securityholders in the manner and priority specified in the
related prospectus supplement, as a prepayment of principal of the related
securities.
In addition, if so provided in the related prospectus supplement, on the
related Closing Date the depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related series of securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the trustee for the related series of
securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related loans. To the extent
that the entire amount on deposit in the Capitalized Interest Account has not
been applied to cover shortfalls in interest on the related series of securities
by the end of the Funding Period, any amounts remaining in the Capitalized
Interest Account will be paid to the depositor.
Sub-servicing by Sellers
Each seller of a loan or any other servicing entity may act as the
sub-servicer for the loan pursuant to a sub-servicing agreement, which will not
contain any terms inconsistent with the related Agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the sub-servicer, the Agreement pursuant to which a series of securities is
issued will provide that, if for any reason the master servicer for the series
of securities is no longer the master servicer of the related loans, the trustee
or any successor master servicer must recognize the sub-servicer's rights and
obligations under the sub-servicing agreement. Notwithstanding any subservicing
arrangement, unless otherwise provided in the related prospectus supplement, the
master servicer will remain liable for its servicing duties and obligations
under the Sale and Servicing Agreement as if the master servicer alone were
servicing the loans.
Collection Procedures
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The master servicer, directly or through one or more sub-servicers,
will make reasonable efforts to collect all payments called for under the loans
and will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or
alternative arrangements, follow those collection procedures as are customary
with respect to loans that are comparable to the loans. Consistent with the
above, the master servicer may, in its discretion, waive any assumption fee,
late payment or other charge in connection with a loan and to the extent not
inconsistent with the coverage of the loan by a Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or
alternative arrangements, if applicable, arrange with a borrower a schedule for
the liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment.
In any case in which Property securing a loan has been, or is about to
be, conveyed by the mortgagor or obligor, the master servicer will, to the
extent it has knowledge of the conveyance or proposed conveyance, exercise or
cause to be exercised its rights to accelerate the maturity of the loan under
any due-on-sale clause applicable thereto, but only if the exercise of those
rights is permitted by applicable law and will not impair or threaten to impair
any recovery under any Primary Mortgage Insurance Policy. If these conditions
are not met or if the master servicer reasonably believes it is unable under
applicable law to enforce the due-on-sale clause or if the loan is a mortgage
loan insured by the FHA or partially guaranteed by the VA, the master servicer
will enter into or cause to be entered into an assumption and modification
agreement with the person to whom the Property has been or is about to be
conveyed, pursuant to which the person becomes liable for repayment of the loan
and, to the extent permitted by applicable law, the mortgagor remains liable
thereon. Any fee collected by or on behalf of the master servicer for entering
into an assumption agreement will be retained by or on behalf of the master
servicer as additional servicing compensation. See "Legal Aspects of the Loans
-- Due-on-Sale Clauses". In connection with the assumption of any loan, the
terms of the related loan may not be changed.
With respect to cooperative loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Legal Aspects of the Loans". This
approval is usually based on the purchaser's income and net worth and numerous
other factors. Although the cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring the approval could
limit the number of potential purchasers for those shares and otherwise limit
the trust fund's ability to sell and realize the value of those shares.
In general a "tenant-stockholder" (as defined in Code Section 216(b)(2)
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which those items are allowable as a deduction
to the corporation, that Section
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requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders (as defined in Code Section
216(b)(2)). By virtue of this requirement, the status of a corporation for
purposes of Code Section 216(b)(1) must be determined on a year-to-year basis.
Consequently, there can be no assurance that cooperatives relating to the
cooperative loans will qualify under that Section for any particular year. In
the event that a cooperative fails to qualify for one or more years, the value
of the collateral securing any related cooperative loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that a failure would be permitted
to continue over a period of years appears remote.
Hazard Insurance
In general, the master servicer will require the mortgagor or obligor on
each loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Property in the state in which the Property is
located. This coverage will be in an amount that is at least equal to the lesser
of
. the maximum insurable value of the improvements securing the loan
or
the greater of
(1) the outstanding principal balance of the loan, and
(2) an amount such that the proceeds of the policy shall be sufficient
to prevent the mortgagor and/or the mortgagee from becoming a
co-insurer.
All amounts collected by the master servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or released
to the mortgagor or obligor in accordance with the master servicer's normal
servicing procedures) will be deposited in the related Security Account. In the
event that the master servicer maintains a blanket policy insuring against
hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. This blanket policy may contain a deductible
clause, in which case the master servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited in the Security Account but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
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applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most of those
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and hurricanes. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. If the Property securing a loan is located in a federally
designated special flood area at the time of origination, the master servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured Property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of
. the actual cash value (generally defined as replacement cost at
the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or
. such proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of
the improvements.
Since the amount of hazard insurance the master servicer may cause to be
maintained on the improvements securing the loans declines as the principal
balances owing thereon decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged Property. If specified in the related
prospectus supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described above. See "Credit
Enhancement".
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the Property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged Property, any damage to the borrower's cooperative
dwelling or the cooperative's building could significantly reduce the value of
the collateral securing the related cooperative loan to the extent not covered
by other credit support.
If the Property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the master servicer is
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not required to expend its own funds to restore the damaged Property unless it
determines (i) that restoration will increase the proceeds to securityholders on
liquidation of the loan after reimbursement of the master servicer for its
expenses and (ii) that the related expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by an Insurance Policy, the master servicer will
be obligated to follow or cause to be followed those normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
loan. If the proceeds of any liquidation of the Property securing the defaulted
loan are less than the principal balance of the related loan plus interest
accrued thereon that is payable to securityholders, the trust fund will realize
a loss in the amount of the difference plus the aggregate of expenses incurred
by the master servicer in connection with the liquidation proceedings and which
are reimbursable under the Agreement. In the unlikely event that any liquidation
proceedings result in a total recovery which is, after reimbursement to the
master servicer of its expenses, in excess of the principal balance of the loan
plus interest accrued thereon that is payable to securityholders, the master
servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to the loan
and amounts representing the balance of the excess, exclusive of any amount
required by law to be forwarded to the related borrower, as additional servicing
compensation.
If the master servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the master servicer, exceed the principal balance of
the loan plus interest accrued thereon that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to the loan.
In the event that the master servicer has expended its own funds to restore the
damaged Property and those funds have not been reimbursed under the related
hazard insurance policy, it will be entitled to withdraw from the Security
Account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to those expenses incurred by it, in which event the trust fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the master servicer,
no such payment or recovery will result in a recovery to the trust fund which
exceeds the principal balance of the defaulted loan together with accrued
interest thereon. See "Credit Enhancement".
The proceeds from any liquidation of a loan will be applied in the
following order of priority: first, to reimburse the master servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the master servicer with respect
to the loan; second, to reimburse the master servicer for any unreimbursed
advances with respect to the loan; third, to accrued and unpaid interest (to the
extent no advance has been made for that amount) on the loan; and fourth, as a
recovery of principal of the loan.
Realization upon Defaulted Loans
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Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the master servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each loan for which this type of coverage is
required. Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. The master servicer will not
cancel or refuse to renew any Primary Mortgage Insurance Policy in effect at the
time of the initial issuance of a series of securities that is required to be
kept in force under the applicable Agreement unless the replacement Primary
Mortgage Insurance Policy for the cancelled or nonrenewed policy is maintained
with an insurer whose claims-paying ability is sufficient to maintain the
current rating of the classes of securities of the series that have been rated.
FHA Insurance; VA Guaranties. Loans designated in the related prospectus
supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA, see "Legal Aspects of the Loans -- Title I Program", certain
loans will be insured under various FHA programs including the standard FHA
203(b) program to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. These programs generally
limit the principal amount and interest rates of the mortgage loans insured.
Loans insured by FHA generally require a minimum down payment of approximately
5% of the original principal amount of the loan. No FHA-insured loans relating
to a series may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of the loan.
Loans designated in the related prospectus supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain instances
the spouse of a veteran) to obtain a mortgage loan guaranty by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans of up to 30 years' duration. However, no loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guaranty for the loan. The maximum guaranty that may be issued by the VA under a
VA guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for each series of securities will be
equal to the percentage per annum described in the related prospectus supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each loan, and this compensation will be retained by it from
collections of interest on the loan in the related trust fund (the "Master
Servicing Fee"). As compensation for its servicing duties, a sub-servicer or, if
there is no sub-servicer, the master servicer will be entitled to a monthly
servicing fee as described in the related prospectus
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supplement. In addition, generally, the master servicer or sub-servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from borrowers, and any benefit that may accrue as a result of
the investment of funds in the applicable Security Account.
The master servicer will pay or cause to be paid certain ongoing
expenses associated with each trust fund and incurred by it in connection with
its responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the trustee, any
custodian appointed by the trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
sub-servicers and sellers. The master servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of sub-servicers and sellers
under certain limited circumstances. In addition, the master servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
any defaulted mortgage loan as to which it has determined that all recoverable
liquidation proceeds and insurance proceeds have been received, and in
connection with the restoration of mortgaged properties, the right of
reimbursement being before the rights of certificateholders to receive any
related liquidation proceeds, including insurance proceeds.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
trustee to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the master servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Attestation
Program for Mortgage Bankers, it is required to report. In rendering its
statement the firm may rely, as to matters relating to the direct servicing of
loans by sub-servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of the statement) of firms of independent public accountants
with respect to the related sub-servicer.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the master servicer to the effect that the master servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
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Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by securityholders of the
related series without charge upon written request to the master servicer at the
address set forth in the related prospectus supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The applicable prospectus supplement may provide that another entity
will act as the master servicer under a Pooling and Servicing Agreement or Sale
and Servicing Agreement, as applicable, but if it does not, the master servicer
will be First Horizon Home Loan Corporation, a Kansas corporation ("First
Horizon"). First Horizon is an indirect wholly owned subsidiary of First
Tennessee National Corporation, a Tennessee corporation incorporated in 1968 and
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended. First Horizon is not a party to any legal proceedings that could
have a material impact on its ability to service the mortgage loans under the
applicable Agreement. First Horizon maintains its principal office at 4000
Horizon Way, Dallas, Texas 75063. Its telephone number is (214) 441-4000.
First Horizon or any other entity acting as master servicer under a
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
may have normal business relationships with the depositor or the depositor's
affiliates.
Each Agreement will provide that the master servicer may not resign
from its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law. The
master servicer may, however, be removed from its obligations and duties as set
forth in the Agreement. No resignation by the master servicer will become
effective until the trustee or a successor servicer has assumed the master
servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the master servicer,
the depositor nor any director, officer, employee or agent of the master
servicer or the depositor will be under any liability to the related trust fund
or securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the master servicer, the depositor nor any
director, officer, employee or agent of the master servicer or the depositor
will be protected against any liability which would otherwise be imposed by
reason of wilful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Each Agreement will further provide that the master servicer,
the depositor and any director, officer, employee or agent of the master
servicer or the depositor will be entitled to indemnification by the related
trust fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
securities, other than any loss, liability or expense related to any specific
loan or loans (except for any loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
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thereunder. In addition, each Agreement will provide that neither the master
servicer nor the depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The master servicer or the depositor may, however, in
its discretion undertake any action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the securityholders thereunder. In this event, the legal
expenses and costs of the action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust fund and the master servicer or the
depositor, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to securityholders.
In general, any person into which the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the master servicer is a party, or any person succeeding to the business of the
master servicer, will be the successor of the master servicer under each
Agreement, provided that
. that person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, Fannie Mae or Freddie Mac and
. the related merger, consolidation or succession does not adversely
affect the then current rating or ratings of the class or classes
of securities of the related series that have been rated.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Sale and Servicing Agreement. The
applicable prospectus supplement may provide for other Events of Default under
any Pooling and Servicing Agreement or Sale and Servicing Agreement, but if it
does not, the Events of Default will consist of
. any failure by the master servicer to distribute or cause to be
distributed to securityholders of any class any required payment
(other than an advance) which continues unremedied for five days
after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master
servicer, the depositor and the trustee by the holders of
securities of the class evidencing not less than 25% of the total
distributions allocated to the class ("percentage interests");
. any failure by the master servicer to make an advance as required
under the Agreement, unless cured as specified in the Agreement;
. any failure by the master servicer duly to observe or perform in
any material respect any of its other covenants or agreements in
the Agreement which continues unremedied for thirty days after the
giving of written notice of
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the failure to the master servicer by the trustee or the
depositor, or to the master servicer, the depositor and the
trustee by the holders of securities of any class evidencing not
less than 25% of the aggregate percentage interests constituting
the class; and
. certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceeding and certain actions
by or on behalf of the master servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the trustee to sell the Trust Fund Assets and the other assets of the
trust fund described under "Credit Enhancement" in this prospectus in the event
that payments in respect thereto are insufficient to make payments required in
the Agreement. The assets of the trust fund will be sold only under the
circumstances and in the manner specified in the related prospectus supplement.
The applicable prospectus supplement may provide for steps required to be
taken if an Event of Default remains unremedied, but if it does not, so long as
an Event of Default under an Agreement remains unremedied, the depositor or the
trustee may, and at the direction of holders of securities of any class
evidencing not less than 25% of the aggregate percentage interests constituting
the class and under such other circumstances as may be specified in the
Agreement, the trustee shall terminate all of the rights and obligations of the
master servicer under the Agreement relating to the trust fund and in and to the
related Trust Fund Assets, whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
Agreement, including, if specified in the related prospectus supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of a least
$10,000,000 to act as successor to the master servicer under the Agreement.
Pending that appointment, the trustee is obligated to act in that capacity. The
trustee and any successor to the master servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the master servicer under the Agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of the holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding with respect
to the Agreement, unless the holder previously has given to the trustee written
notice of default and unless the holders of securities of any class of the
series evidencing not less than 25% of the aggregate percentage interests
constituting the class have made written request upon the trustee to institute
the proceeding in its own name as trustee thereunder and have offered to the
trustee reasonable indemnity, and the trustee for 60 days has neglected or
refused to institute the proceeding.
Indenture. The applicable prospectus supplement may provide for other
Events of Default, but if it does not, the Events of Default under each
Indenture will consist of:
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. a default in the payment of any principal of or interest on any
note of the series which continues unremedied for five days after
the giving of written notice of the default is given as specified
in the related prospectus supplement;
. failure to perform in any material respect any other covenant of
the depositor or the trust fund in the Indenture which continues
for a period of thirty (30) days after notice thereof is given in
accordance with the procedures described in the related prospectus
supplement;
. certain events of bankruptcy, insolvency, receivership or
liquidation of the depositor or the trust fund; or
. any other Event of Default provided with respect to notes of that
series including but not limited to certain defaults on the part
of the issuer, if any, of a credit enhancement instrument
supporting the notes.
If an Event of Default with respect to the notes of any series at the
time outstanding occurs and is continuing, either the trustee or the holders of
a majority of the then aggregate outstanding amount of the notes of the series
may declare the principal amount (or, if the notes of the series have an
interest rate of 0%, that portion of the principal amount as may be specified in
the terms of the series, as provided in the related prospectus supplement) of
all the notes of the series to be due and payable immediately. This declaration
may, under certain circumstances, be rescinded and annulled by the holders of
more than 50% of the percentage interests of the notes of the series.
If, following an Event of Default with respect to any series of notes,
the notes of the series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration of acceleration. In
addition, the trustee may not sell or otherwise liquidate the collateral
securing the notes of a series following an Event of Default, other than a
default in the payment of any principal or interest on any note of the series
for five days or more, unless
. the holders of 100% of the percentage interests of the notes of
the series consent to the sale,
. the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale or
. the trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on the notes as the
payments would have become due
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if the notes had not been declared due and payable, and the
trustee obtains the consent of the holders of 66 2/3% of the
percentage interests of the notes of the series.
In the event that the trustee liquidates the collateral in connection
with an Event of Default involving a default for five days or more in the
payment of principal of or interest on the notes of a series, the Indenture
provides that the trustee will have a prior lien on the related liquidation
proceeds for unpaid fees and expenses. As a result, upon the occurrence of such
an Event of Default, the amount available for distribution to the noteholders
would be less than would otherwise be the case. However, the trustee may not
institute a proceeding for the enforcement of its lien except in connection with
a proceeding for the enforcement of the lien of the Indenture for the benefit of
the noteholders after the occurrence of such an Event of Default.
In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of any notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
trustee, in case an Event of Default shall occur and be continuing with respect
to a series of notes, the trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of notes of the series, unless the holders offered to the trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority of the then aggregate
outstanding amount of the notes of the series shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee or exercising any trust or power conferred on the trustee with
respect to the notes of the series, and the holders of a majority of the then
aggregate outstanding amount of the notes of the series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
holders of the outstanding notes of the series affected thereby.
Amendment
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, each Agreement may be amended by the depositor,
the master servicer and the trustee, without the consent of any of the
securityholders,
(a) to cure any ambiguity;
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(b) to correct any defective provision in the Agreement or to
supplement any provision in the Agreement that may be inconsistent
with any other provision in it; or
(c) to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the
provisions in it,
provided that the action will not adversely affect in any material respect the
interests of any securityholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the securityholders if the
person requesting the amendment obtains a letter from each Rating Agency
requested to rate the class or classes of securities of the series stating that
the amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to the securities.
In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the securityholders, to
change the manner in which the Security Account is maintained, provided that any
change does not adversely affect the then current rating on the class or classes
of securities of the series that have been rated. Moreover, the related
Agreement may be amended to modify, eliminate or add to any of its provisions to
the extent necessary to maintain the qualification of the related trust fund as
a REMIC or to avoid or minimize the risk of imposition of any tax on the REMIC,
if a REMIC election is made with respect to the trust fund, or to comply with
any other requirements of the Code, if the trustee has received an opinion of
counsel to the effect that the action is necessary or helpful to maintain the
qualification, avoid or minimize that risk or comply with those requirements, as
applicable.
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, each Agreement may also be amended by the
depositor, the master servicer and the trustee with consent of holders of
securities of the series evidencing not less than 66% of the aggregate
percentage interests of each class affected thereby for the purpose of adding
any provisions to or changing in an manner or eliminating any of the provisions
of the Agreement or of modifying in any manner the rights of the holders of the
related securities; provided, however, that no amendment may
. reduce in any manner the amount of or delay the timing of,
payments received on loans which are required to be distributed on
any security without the consent of the holder of the security, or
. reduce the aforesaid percentage of securities of any class the
holders of which are required to consent to any such amendment,
in each case without the consent of the holders of all securities of the class
covered by the Agreement then outstanding.
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If a REMIC election is made with respect to a trust fund, the trustee
will not be entitled to consent to an amendment to the related Agreement without
having first received an opinion of counsel to the effect that the amendment
will not cause the trust fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. The applicable
prospectus supplement may provide for the timing by which the Agreement
terminates, but if it does not, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each series of securities will
terminate upon the payment to the related securityholders of all amounts held in
the Security Account or by the master servicer and required to be paid to them
pursuant to the Agreement following the later of
(i) the final payment of or other liquidation of the last of the Trust
Fund Assets subject thereto or the disposition of all Property
acquired upon foreclosure of any Trust Fund Assets remaining in
the trust fund, and
(ii) the purchase by the master servicer or, if REMIC treatment has
been elected and if specified in the related prospectus
supplement, by the holder of the residual interest in the REMIC
(see "Federal Income Tax Consequences" below), from the related
trust fund of all of the remaining Trust Fund Assets and all
Property acquired in respect of the Trust Fund Assets.
Any purchase of Trust Fund Assets and Property acquired in respect of
Trust Fund Assets evidenced by a series of securities will be made at the option
of the master servicer, or the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price
specified in the related prospectus supplement. The exercise of this right will
effect early retirement of the securities of that series, but the right of the
master servicer, or the other party or, if applicable, the holder of the REMIC
residual interest, to so purchase is subject to the principal balance of the
related Trust Fund Assets being less than the percentage specified in the
related prospectus supplement of the aggregate principal balance of the Trust
Fund Assets at the cut-off date for the series. The foregoing is subject to the
provision that if a REMIC election is made with respect to a trust fund, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
Indenture. The Indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the trustee for cancellation of all the notes of
the series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of the series.
In addition to the discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the notes of any series, the
related trust fund will be discharged from
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any and all obligations in respect of the notes of the series (except for
certain obligations relating to temporary notes and exchange of notes, to
register the transfer of or exchange notes of the series, to replace stolen,
lost or mutilated notes of the series, to maintain paying agencies and to hold
monies for payment in trust) upon the deposit with the trustee, in trust, of
money and/or direct obligations of or obligations guaranteed by the United
States of America which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the notes
of the series on the last scheduled distribution date for the notes and any
installment of interest on the notes in accordance with the terms of the
Indenture and the notes of the series. In the event of any defeasance and
discharge of notes of a series, holders of notes of the series would be able to
look only to this money and/or direct obligations for payment of principal and
interest, if any, on their notes until maturity.
The Trustee
The trustee under each Agreement will be named in the applicable
prospectus supplement. The commercial bank or trust company serving as trustee
may have normal banking relationships with the depositor, the master servicer
and any of their respective affiliates.
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the loans. Because the legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor encompass the laws of all states
in which the security for the loans is situated. The descriptions are qualified
in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the Property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the Property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the Property, 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 formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the Property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
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payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
Property to the grantee until the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperatives. Certain of the loans may be cooperative loans. The
cooperative owns all the Property that comprises the project, including the
land, separate dwelling units and all common areas. The cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
cooperative and/or underlying land, as is generally the case, the cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the cooperative in
connection with the construction or purchase of the cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make the final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing the tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise
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proceed against the collateral or tenant-stockholder as an individual as
provided in the security agreement covering the assignment of the proprietary
lease or occupancy agreement and the pledge of cooperative shares.
Foreclosure
Deed of Trust. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the Property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
the foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states (including California), the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states (including California), the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states (including California), published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the Property and sent to all
parties having an interest of record in the Property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings upon
all parties having an interest in the Property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the Property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the Property, the
possible deterioration of the Property during the foreclosure proceedings and a
requirement that the purchaser pay for the Property in cash or by cashier's
check. Thus the
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foreclosing lender often purchases the Property from the trustee or referee for
an amount equal to the principal amount outstanding under the loan, accrued and
unpaid interest and the expenses of foreclosure in which event the mortgagor's
debt will be extinguished or the lender may purchase for a lesser amount in
order to preserve its right against a borrower to seek a deficiency judgment in
states where the judgment is available. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making the repairs at its own expense as are necessary to render
the Property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the Property. Depending upon market conditions, the ultimate proceeds of the
sale of the Property may not equal the lender's investment in the Property. Any
loss may be reduced by the receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
Cooperative Loans. The cooperative shares owned by the tenant-
stockholder and pledged to the lender are, in almost all cases, subject to
restrictions on transfer as set forth in the cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be cancelled by the cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owed by the tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate the lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
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The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds form the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the Property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the cooperative when the building was so converted.
Environmental Risks
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Property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
Property may give rise to a lien on the Property to assure the payment of the
costs of clean-up. In several states this type of lien has priority over the
lien of an existing mortgage against the Property. In addition, under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), the EPA may impose a lien on Property where EPA has incurred
clean-up costs. However, a CERCLA lien is subordinate to pre-existing, perfected
security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for those costs on any
and all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest (the "secured
creditor exclusion") but without "participating in the management" of the
Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or Property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or Property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or Property as an investment (including leasing
the facility or Property to third party), or fails to market the Property in a
timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a Property, or the business of a borrower, so as to render the
secured creditor exemption unavailable to a lender has been a matter of judicial
interpretation of the statutory language, and court decisions have been
inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit suggested
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996, which was signed into law by President Clinton on September 30, 1996. This
legislation provides that in order to be deemed to have participated in the
management of a Property, a lender must actually participate in the operational
affairs of the Property or the borrower. The legislation also provides that
participation in the management of the Property does not include "merely having
the capacity to influence, or unexercised right to control" operations. Rather,
a lender will lose the protection of the secured creditor exemption only if it
exercises decision-making control over the borrower's environmental compliance
and hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the Property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental
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hazard, but those persons or entities may be bankrupt or otherwise judgment
proof. The costs associated with environmental cleanup may be substantial. It is
conceivable that the costs arising from the circumstances set forth above would
result in a loss to certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. Moreover, under the Asset Conservation Act, the protections accorded
to lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. It should be noted, however, that liability
for cleanup of petroleum contamination may be governed by state law, which may
not provide for any specific protection for secured creditors.
In general, at the time the loans were originated no environmental
assessment, or a very limited environmental assessment, of the Properties was
conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the Property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed Property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the Property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem Property after a trustee's sale under a deed of trust.
Anti-deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory and judicial restrictions that
limit the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount
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due to the lender and the fair market value of the Property at the time of the
foreclosure sale. In certain states, including California, if a lender
simultaneously originates a loan secured by a senior lien on a particular
Property and a loan secured by a junior lien on the same Property, the lender,
as the holder of the junior lien, may be precluded from obtaining a deficiency
judgment with respect to the excess of the aggregate amount owed under both
loans over the proceeds of any sale under a deed of trust or other foreclosure
proceedings. As a result of these prohibitions, it is anticipated that in most
instances the master servicer will utilize the non-judicial foreclosure remedy
and will not seek deficiency judgments against defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower. In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the Property. Finally, other statutory provisions limit any deficiency
judgment against the former borrower following a foreclosure sale to the excess
of the outstanding debt over the fair market value of the Property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the foreclosure sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is not
the debtor's principal residence and the court determines that the value of the
Property is less than the principal balance of the mortgage loan, for the
reduction of the secured indebtedness to the value of the Property as of the
date of the commencement of the bankruptcy, rendering the lender a general
unsecured creditor for the difference, and also may reduce the monthly payments
due under the mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. The effect of these types of proceedings under the
federal Bankruptcy Code, including but not limited to any
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automatic stay, could result in delays in receiving payments on the loans
underlying a series of securities and possible reductions in the aggregate
amount of the payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party.
Due-on-sale Clauses
Generally, each conventional loan will contain a due-on-sale clause
which will generally provide that if the mortgagor or obligor sells, transfers
or conveys the Property, the loan or contract may be accelerated by the
mortgagee or secured party. Court decisions and legislative actions have placed
substantial restriction on the right of lenders to enforce due-on-sale clauses
in many states. For instance, the California Supreme Court in August 1978 held
that due-on-sale clauses were generally unenforceable. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject
to certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of those
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other than
national banks, federal savings institutions and federal credit unions. FHLMC
has taken the position in its published mortgage servicing standards that, out
of a total of eleven "window period states," five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of window period loans. Also, the
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered by the Act
may not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the Property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
loans and the number of loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some
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circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Under
certain state laws, prepayment charges may not be imposed after a certain period
of time following the origination of mortgage loans with respect to prepayments
on loans secured by liens encumbering owner-occupied residential properties.
Since many of the Properties will be owner-occupied, it is anticipated that
prepayment charges may not be imposed with respect to many of the loans. The
absence of a prepayment penalty, particularly with respect to fixed rate loans
having higher Loan Rates, may increase the likelihood of refinancing or other
early retirement of the those loans or contracts. Late charges and prepayment
penalties are typically retained by servicers as additional servicing
compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted these laws prior to the April 1, 1983 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
Home Improvement Contracts
General. Some home improvement contracts may in addition to being
secured by mortgages on real estate, also be secured by purchase money security
interests in home improvements financed thereby (these home improvement
contracts are referred to in this section as "contracts"). These contracts
generally are "chattel paper" or constitute "purchase money security interests"
each as defined in the UCC. Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the related Agreement, the depositor will transfer physical
possession of the contracts to the trustee or a designated custodian or may
retain possession of the contracts as custodian for the trustee. In addition,
the depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to, among other things, give notice of the trust fund's
ownership of the contracts. In general, the contracts will not be stamped or
otherwise marked to reflect their assignment from the depositor to the trustee.
Therefore, if through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the contracts without notice of the
assignment, the trust fund's interest in the contracts could be defeated.
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Security Interests in Home Improvements. The contracts that are secured
by the home improvements financed thereby grant to the originator of the
contracts a purchase money security interest in the home improvements to secure
all or part of the purchase price of the home improvements and related services.
A financing statement generally is not required to be filed to perfect a
purchase money security interest in consumer goods. These purchase money
security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of the
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in the home improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home improvement contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
this characterization upon incorporation of the materials into the related
Property, will not be secured by a purchase money security interest in the home
improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
home improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting a repossession sale. The law in most states also requires that the
debtor be given notice of any sale prior to resale of the unit that the debtor
may redeem at or before the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called holder in due course rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer the
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of a contract to all claims and defenses which
the debtor could assert against the seller of goods. Liability under this rule
is limited to amounts paid under a contract;
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however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the trustee against the
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related contract.
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 contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions governing, among other things, 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 this type of 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.
Installment Contracts
The loans may also consist of installment contracts. Under an
installment contract the seller (referred to in this section as the "lender")
retains legal title to the Property and enters into an agreement with the
purchaser (referred to in this section as the "borrower") for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the Property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the installment contract, the borrower
is generally responsible for maintaining the Property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the Property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
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 this
type of 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 installment 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
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the early years of an installment 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 installment contracts from the harsh consequences of forfeiture.
Under these 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 installment 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 an installment
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 an installment contract in a given
state are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a Property subject to one or more
liens.
Soldiers and Sailors Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of the borrower's loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of the borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the master servicer to collect
full amounts of interest on certain of the loans. Unless otherwise provided in
the related prospectus supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to
securityholders. The Relief Act also imposes limitations which would impair the
ability of the master servicer to foreclose on an affected loan during the
borrower's period of active duty status. Moreover, the Relief Act permits the
extension of a loan's maturity and the re-adjustment of its payment schedule
beyond the completion of military service. Thus, in the event that a loan that
is subject to the Relief Act goes into default, there may be delays and losses
occasioned by the inability to realize upon the Property in a timely fashion.
Junior Mortgages and Rights of Senior Mortgagees
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under the junior mortgage, are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
Property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the Property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior
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mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure a default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply these proceeds and awards to any indebtedness secured
by the mortgage, in the order determined by the mortgagee. Thus, in the event
improvements on the Property are damaged or destroyed by fire or other casualty,
or in the event the Property is taken by condemnation, the mortgagee or
beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the Property and, when due, all
encumbrances, charges and liens on the Property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
Property, to maintain and repair the Property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the Property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any Mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage lien securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed or
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mortgage, provided that the total amount of advances under the home equity
credit line does not exceed the maximum specified principal amount of the
recorded trust deed or mortgage, except as to advances made after receipt by the
lender of a written notice of lien from a judgment lien creditor of the trustor.
The Title I Program
General. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan means a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a Property and includes single family improvement
loans.
There are two basic methods of lending or originating these loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's irregular
flow of income. The first or last payments (or both) may vary in amount but may
not exceed 150% of the regular installment payment, and the first scheduled
payment may be due no later than two months from the date of the loan. The note
must contain a provision permitting full or partial prepayment of the loan. The
interest rate may be established by the lender and must be fixed for the term of
the loan and recited in the note. Interest on an insured loan must accrue from
the date of the loan and be calculated on a simple interest basis.
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The lender must assure that the note and all other documents evidencing the loan
are in compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In this case, provided that the validity of any lien on the Property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless the material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that the maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single Property, in each
case as long as the total outstanding balance of all Title I Loans in the same
Property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if the loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the Property as disclosed in
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the loan application. The Secretary of HUD has published a list of items and
activities which cannot be financed with proceeds from any Title I Loan and from
time to time the Secretary of HUD may amend the list of items and activities.
With respect to any dealer Title I Loan, before the lender may disburse funds,
the lender must have in its possession a completion certificate on a HUD
approved form, signed by the borrower and the dealer. With respect to any direct
Title I Loan, the borrower is required to submit to the lender, promptly upon
completion of the improvements but not later than six months after disbursement
of the loan proceeds with one six month extension if necessary, a completion
certificate, signed by the borrower. The lender or its agent is required to
conduct an on-site inspection on any Title I Loan where the principal obligation
is $7,500 or more, and on any direct Title I Loan where the borrower fails to
submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to the loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, FHA will not refund the insurance premium, but will
abate any insurance charges falling due after the prepayment.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to the insured loans and (ii)
the amount of insurance coverage attributable to insured loans sold by the
lender. The balance of the lender's FHA insurance coverage reserve account will
be further adjusted as required under Title I or by the FHA, and the insurance
coverage in the lender's FHA insurance coverage reserve account may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring the eligible
loans registered with the FHA for insurance under the Title I Program. The
Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
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The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of the loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of the loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on the loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the Property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the Property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the Property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than nine months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lieu of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If a defect is discovered after the FHA has paid a claim,
the FHA may require the lender to repurchase the paid claim and to accept a
reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any
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time up to two years from the date the claim was certified for payment and may
do so thereafter in the event of fraud or misrepresentation on the part of the
lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against Property securing the loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorney's fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z, requires certain
disclosures to the borrowers regarding the terms of the loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder 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; the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of these laws may limit the ability of the sellers to collect all or
part of the principal of or interest on the loans and could subject the sellers
and in some cases their assignees to damages and administrative enforcement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the securities
and is based on advice of Andrews & Kurth L.L.P., special counsel to the
depositor. The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
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The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold securities as "capital assets" (generally, Property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective Investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the securities.
The federal income tax consequences to Holders will vary depending on
whether
. the securities of a series are classified as indebtedness;
. an election is made to treat the trust fund relating to a
particular series of securities as a real estate mortgage
investment conduit ("REMIC") under the Internal Revenue Code of
1986, as amended (the "Code");
. the securities represent an ownership interest in some or all of
the assets included in the trust fund for a series; or
. an election is made to treat the trust fund relating to a
particular series of certificates as a partnership.
The prospectus supplement for each series of securities will specify how
the securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series. Prior
to issuance of each series of securities, the depositor shall file with the SEC
a Form 8-K on behalf of the related trust fund containing an opinion of Andrews
& Kurth L.L.P. with respect to the validity of the information set forth under
"Material Federal Income Tax Consequences" in this prospectus and in the related
prospectus supplement.
Taxation of Debt Securities
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to collectively as "Debt
securities" in this section.
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Debt securities that are Compound Interest securities will, and certain
of the other Debt securities may, be issued with "original issue discount"
("OID"). The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Code and the related Treasury
regulations (the "OID Regulations"). A Holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt security and its issue price. A holder of
a Debt security must include the OID in gross income as ordinary interest income
as it accrues under a method taking into account an economic accrual of the
discount. In general, OID must be included in income in advance of the receipt
of the cash representing that income. The amount of OID on a Debt security will
be considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt security is the first price at which a
substantial amount of Debt securities of that class is sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt securities is sold for cash on
or prior to the related Closing Date, the issue price for the class will be
treated as the fair market value of the class on the Closing Date. The issue
price of a Debt security also includes the amount paid by an initial Debt
security holder for accrued interest that relates to a period prior to the issue
date of the Debt security. The stated redemption price at maturity of a Debt
security includes the original principal amount of the Debt security, but
generally will not include distributions of interest if the distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
the Debt securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt securities do not provide for default remedies, the interest payments
may be included in the Debt security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of those Debt securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first distribution date on a Debt
security is either longer or shorter than the interval between subsequent
distribution dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described
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below. In the case of a Debt security with a long first period which has non-de
minimis OID, all stated interest in excess of interest payable at the effective
interest rate for the long first period will be included in the stated
redemption price at maturity. Holders of Debt securities should consult their
own tax advisors to determine the issue price and stated redemption price at
maturity of a Debt security.
Under the de minimis rule, OID on a Debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the Debt security multiplied by the weighted average maturity of the Debt
security. For this purpose, the weighted average maturity of the Debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt security and the
denominator of which is the stated redemption price at maturity of the Debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and the income will be capital gain if the Debt security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally,
. the interest is unconditionally payable at least annually,
. the issue price of the debt instrument does not exceed the total
noncontingent principal payments by more than a specified amount
and
. interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers
interest payments on the Debt security.
In the case of Compound Interest securities, certain Interest Weighted
Securities, and certain of the other Debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption
price.
The Internal Revenue Services (the "IRS") issued final regulations in
June 1996 (the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
specifically do not apply for purposes of calculating OID on debt instruments
that are REMIC regular interests or that may be accelerated by reason of
prepayments of other debt instruments securing them, and thus are subject to
Code Section 1272(a)(6), such as the Debt securities. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance
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to the contrary, the trustee intends to base its computation on Code Section
1272(a)(6) and the OID Regulations as described in this prospectus. However,
because no regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that this methodology represents the correct manner of
calculating OID.
The holder of a Debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the Debt
security, the sum of the "daily portions" of the original issue discount. The
amount of OID includible in income by a holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the loans, the amount
of OID includible in income of a Holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt security and the adjusted issue
price of the Debt security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals of OID, reduced by the total payments made with respect to the Debt
security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt securities, that is subject to
acceleration due to prepayments on other debt obligations securing those
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of original issue discount required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to Holders that
loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the loans,
although the OID Regulations do not provide for these
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adjustments. If the IRS were to require that OID be accrued without these
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the related
prospectus supplement, the trustee intends, based on the OID Regulations, to
calculate OID on those securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt security will also be required to include
OID in gross income, but a subsequent holder who purchases the Debt security for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt security's issue price) to offset the
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. Holders will be required to
report income with respect to the related securities under an accrual method
without giving effect to delays and reductions in distributions attributable to
a default or delinquency on the loans, except possibly to the extent that it can
be established that those amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of a security in any period could
significantly exceed the amount of cash distributed to the holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the securities is deducted as a result of a loan default.
However, the timing and character of any losses or reductions in income are
uncertain and, accordingly, holders of securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under " -- Tax Status as a Grantor Trust; General" in this prospectus)
the payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The Issuer
intends to take the position that all of the income derived from an Interest
Weighted Security should be treated as OID and that the amount and rate of
accrual of the OID should be calculated by treating the Interest Weighted
Security as a Compound Interest security. However, in the case of Interest
Weighted Securities that are entitled to some payments of principal and that are
Regular Interest Securities the Internal Revenue Service could assert that
income derived from an Interest Weighted Security should be calculated as if the
security were a security purchased at a premium equal to the excess of the price
paid by the holder for the security over its stated principal amount, if any.
Under this approach, a holder would be entitled to amortize the premium only if
it has in effect an election under Section 171 of the Code with respect to all
taxable debt instruments held by the holder, as described below. Alternatively,
the Internal Revenue Service could assert that an Interest Weighted Security
should be taxable under the rules governing bonds issued with contingent
payments. This treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See " -- Tax Status
as a Grantor Trust -- Discount or Premium on Pass-Through Securities."
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Variable Rate Debt Securities. In the case of Debt securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of those Debt
securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on those Debt securities, should be calculated
as if the interest index remained at its value as of the issue date of those
securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt security is uncertain, holders of variable rate Debt securities should
consult their own tax advisers regarding the appropriate treatment of those
securities for federal income tax purposes.
Market Discount. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt security, or the
adjusted issue price if the Debt security is issued with OID, over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt security received in that month
and, if the securities are sold, the gain realized. This market discount would
accrue in a manner to be provided in Treasury regulations but, until those
regulations are issued, this market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
securities (or in the case of a Pass-Through Security, as set forth below, the
loans underlying the security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of securities (or, in the case of a Pass-Through Security, as described below,
the loans underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that the excess of interest paid or
accrued to purchase or carry a security (or, in the case of a Pass-Through
Security, as described below, the underlying loans) with market discount over
interest received on the security is allowed as a current deduction only to the
extent the excess is greater than the market discount that accrued during the
taxable year in which the interest expense was incurred. In general, the
deferred portion of any interest expense will be deductible when the market
discount is included in income, including upon the sale, disposition, or
repayment of the security (or in the case of a Pass-Through Security, an
underlying loan). A holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by the
holder during the taxable year the election is made and thereafter, in which
case the interest deferral rule will not apply.
Premium. A holder who purchases a Debt security, other than an Interest
Weighted Security to the extent described above, at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of
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the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a class
of Pay-Through Securities will be calculated using the prepayment assumption
used in pricing the class. If a holder makes an election to amortize premium on
a Debt security, the election will apply to all taxable debt instruments,
including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations, held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments subsequently acquired by the holder, and
will be irrevocable without the consent of the IRS. Purchasers who pay a premium
for the securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
On December 30, 1997 the IRS issued final regulations (the "Final Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Debt securities. Absent further guidance from the IRS,
the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the securities should consult their
tax advisors regarding the possible application of the Final Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for debt. If this election
were to be made with respect to a Debt security with market discount, the holder
of the Debt security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the holder of the Debt security acquires during the
year of the election or thereafter. Similarly, a holder of a Debt security that
makes this election for a Debt security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Andrews & Kurth L.L.P., special counsel to
the depositor, if a REMIC election is made with respect to a series of
securities, then the arrangement by which the securities of that series are
issued will be treated as a REMIC as long as all of the provisions of the
applicable Agreement are complied with and the statutory and regulatory
requirements are satisfied. Securities will be designated as "Regular Interests"
or "Residual Interests" in a REMIC, as specified in the related prospectus
supplement.
Except to the extent specified otherwise in a prospectus supplement, if
a REMIC election is made with respect to a series of securities, (i) securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of
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Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(B),
and income with respect to the securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in (i) or (ii)
above, then a security will qualify for the tax treatment described in (i), (ii)
or (iii) in the proportion that the REMIC assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a "pass-
through interest holder," including certain pass-through entities but not
including real estate investment trusts, the expenses will be deductible only to
the extent that the expenses, plus other "miscellaneous itemized deductions" of
the Holder, exceed 2% of the Holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the specified amount (which
amount will be adjusted for inflation for taxable years beginning after 1990)
will be reduced by the lesser of
. 3% of the excess of adjusted gross income over the specified
amount, or
. 80% of the amount of itemized deductions otherwise allowable for
the taxable year.
The reduction or disallowance of this deduction may have a significant
impact on the yield of the Regular Interest Security to a Holder. In general
terms, a single class REMIC is one that either
. would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal
income tax purposes) or
. is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules.
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The applicable prospectus supplement may provide for the allocation of REMIC
expenses, but if it does not, the expenses of the REMIC will be allocated to
holders of the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC
is determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between
. the gross income produced by the REMIC's assets, including
stated interest and any original issue discount or market
discount on loans and other assets, and
. deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization
of any premium with respect to loans, and servicing fees and
other expenses of the REMIC.
A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that the expenses, when aggregated with the holder's
other miscellaneous itemized deductions for that year, do not exceed two percent
of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on these loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount, i.e., under the constant yield method taking
into account the Prepayment Assumption. The REMIC will deduct OID on the Regular
Interest Securities in the same manner that the holders of the Regular Interest
Securities include this discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities" above.
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However, a REMIC that acquires loans at a market discount must include the
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before this date, it is possible that
this premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
. subject to limited exceptions, the sale or other disposition of
any qualified mortgage transferred to the REMIC;
. subject to a limited exception, the sale or other disposition of a
cash flow investment;
. the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
. the receipt of any fees or other compensation for services
rendered by the REMIC.
It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The holders of Residual Interest securities will
generally be responsible for the payment of these taxes imposed on the REMIC. To
the extent not paid by the holders or otherwise, however, these taxes will be
paid out of the trust fund and will be allocated pro rata to all outstanding
classes of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
the holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for the quarter, and by allocating that
amount among the holders (on that day) of the Residual Interest Securities in
proportion to their respective holdings on that day.
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The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to the income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of this type of a
bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder
may take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which the loss arises. A holder's basis in a
Residual Interest Security will initially equal the holder's purchase price, and
will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which the holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security, whether at
their scheduled times or as a result of prepayments, will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of the payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain, treated as
gain from the sale of the Residual Interest Security, to the extent of the
excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the holder's adjusted
basis in the Residual Interest Security at the time of the sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder
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acquires any residual interest in a REMIC or similar mortgage pool within six
months before or after the disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder
of a Residual Interest Security consisting of "excess inclusion" income may not
be offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the holder's excess inclusion income will be
treated as unrelated business taxable income of the holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust fund, or certain cooperatives were
to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust, or other entity, would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
In addition, there are three rules for determining the effect on excess
inclusions on the alternative minimum taxable income of a residual holder.
First, alternative minimum taxable income for the residual holder is determined
without regard to the special rule that taxable income cannot be less than
excess inclusions. Second, a residual holder's alternative minimum taxable
income for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for the quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of the Residual Interest Security at
the beginning of the quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price,
calculated in a manner analogous to the determination of the issue price of a
Regular Interest, increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased, but not below zero, by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Treasury regulations, in certain circumstances,
transfers of Residual Interest Securities may be disregarded. See " --
Restrictions on Ownership and Transfer of Residual Interest Securities" and " --
Tax Treatment of Foreign Investors" below.
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Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include 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, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if the entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization in violation of the restrictions set forth above, a substantial tax
can be imposed on the transferor of the Residual Interest Security at the time
of the transfer. In addition, if a Disqualified Organization holds an interest
in a pass-through entity (including, among others, a partnership, trust, real
estate investment trust, regulated investment company, or any person holding as
nominee) that owns a Residual Interest Security, the pass-through entity will be
required to pay an annual tax on its allocable share of the excess inclusion
income of the REMIC. If an "electing large partnership" holds a Residual
Interest Security, all interests in the electing large partnership are treated
as held by disqualified organizations for purposes of the tax imposed upon a
pass-through entity under section 860E(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
the affidavits are false, is not available to an electing large partnership. For
these purposes, an "electing large partnership" means any partnership having
more than 100 members during the preceding tax year, other than some service
partnerships and commodity pools, which elects to apply simplified reporting
provisions under the Code.
Under the REMIC Treasury regulations, if a Residual Interest Security is
a "noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer
. the present value of the expected future distributions on the
Residual Interest Security at least equals the product of the
present value of the anticipated excess inclusions and the highest
rate of tax for the year in which the transfer occurs, and
. the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the
taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes.
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The REMIC Treasury regulations presume that the transferor of a REMIC
residual interest did not have impeding the assessment or collection of tax as a
significant purpose of the transfer if it: (i) conducts a reasonable
investigation of the transferee's financial condition and concludes that the
transferee has historically paid its debts as they come due and finds no
significant evidence indicating that the transferee will not continue to pay its
debts as they come due in the future, and (ii) receives a representation from
the transferee that the transferee understands the tax obligations associated
with holding a residual interest and intends to pay those taxes as they come
due.
Proposed Treasury regulations issued on February 4, 2000 (the "New
Proposed Regulations") would modify the safe harbor under which transfers of
noneconomic residual interests are treated as not disregarded for federal income
tax purposes. Under the New Proposed Regulations, a transfer of a noneconomic
residual interest will not qualify under this safe harbor unless the present
value of the anticipated tax liabilities associated with holding the residual
interest does not exceed the sum of the present value of the sum of (i) any
consideration given to the transferee to acquire the interest, (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value is calculated using a discount rate equal to
applicable federal rate. The New Proposed Regulations have a proposed effective
date of February 4, 2000.
If a transfer of a Residual Interest is disregarded, the transferor
would be liable for any Federal income tax imposed upon taxable income derived
by the transferee from the REMIC. The REMIC Treasury regulations provide no
guidance as to how to determine if a significant purpose of a transfer is to
impede the assessment or collection of tax. A similar type of limitation exists
with respect to certain transfers of residual interests by foreign persons to
United States persons. See " -- Tax Treatment of Foreign Investors."
Mark to Market Rules. A REMIC Residual Interest Security acquired after
January 3, 1995 cannot be marked-to-market.
In addition, President Clinton's Fiscal Year 2001 Budget Proposal
contains a provision under which a REMIC would be secondarily liable for the tax
liability of its residual interest. The proposal states that it would be
effective for REMICs created after the date of enactment. It is unknown whether
this provision will be included in any bill introduced to Congress or if
introduced whether it will be enacted. Prospective investors in REMIC residual
interests should consult their tax advisors regarding the New Proposed
Regulations and the Fiscal Year 2001 Budget Proposals.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any
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adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit, by the IRS in a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As specified in the related prospectus supplement if a REMIC
or partnership election is not made, in the opinion of Andrews & Kurth L.L.P.,
special counsel to the depositor, the trust fund relating to a series of
securities will be classified for federal income tax purposes as a grantor trust
under subpart E, Part I of Subchapter J of chapter 1 of subtitle A of the Code
and not as an association taxable as a corporation (the securities of the
series, "Pass-Through Securities"). In some series there will be no separation
of the principal and interest payments on the loans. In these circumstances, a
Holder will be considered to have purchased a pro rata undivided interest in
each of the loans. In other cases ("Stripped Securities"), sale of the
securities will produce a separation in the ownership of all or a portion of the
principal payments from all or a portion of the interest payments on the loans.
Each Holder must report on its federal income tax return its share of
the gross income derived from the loans (not reduced by the amount payable as
fees to the trustee and the servicer and similar fees (collectively, the
"Servicing Fee")), at the same time and in the same manner as the items would
have been reported under the Holder's tax accounting method had it held its
interest in the loans directly, received directly its share of the amounts
received with respect to the loans, and paid directly its share of the Servicing
Fees. In the case of Pass-Through Securities other than Stripped Securities, the
income will consist of a pro rata share of all of the income derived from all of
the loans and, in the case of Stripped Securities, the income will consist of a
pro rata share of the income derived from each stripped bond or stripped coupon
in which the Holder owns an interest. The holder of a security will generally be
entitled to deduct the Servicing Fees under Section 162 or Section 212 of the
Code to the extent that the Servicing Fees represent "reasonable" compensation
for the services rendered by the trustee and the servicer (or third parties that
are compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing the
holder's regular tax liability only to the extent that the fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross income and
may not be deductible to any extent in computing the holder's alternative
minimum tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the specified amount (which amount will be adjusted for inflation in
taxable years beginning after 1990) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the specified amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the loans in
proportion to their fair market values, determined as of the time of purchase of
the securities. In the typical case, the trustee (to the extent necessary to
fulfill its reporting obligations) will treat each loan as having a fair market
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value proportional to the share of the aggregate principal balances of all of
the loans that it represents, because the securities, generally, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
loan, other than to a right to receive any accrued interest thereon and any
undistributed principal payments, is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a loan could arise, for example, by virtue of the financing of
points by the originator of the loan, or by virtue of the charging of points by
the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the loans underlying the certificate, rather than with respect to the
security. A Holder that acquires an interest in a loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See " -- Taxation of Debt Securities; Market
Discount" and " -- Premium" above.
In the case of market discount on a Pass-Through Security attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the loans, a right to receive
only principal payments on the loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each loan. The separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. The OID rules apply to stripped
bonds and stripped coupons. For purposes of computing original issue discount, a
stripped bond or a stripped coupon is treated as a debt instrument issued on the
date that the stripped interest is purchased with an issue price equal to its
purchase price or, if more than one
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stripped interest is purchased, the ratable share of the purchase price
allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the loan
principal balance) or the securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a loan by loan basis, which could result in some loans being
treated as having more than 100 basis points of interest stripped off.
The OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during the period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying loans, rather than
being debt instruments "secured by" those loans. For tax years beginning after
August 5, 1997 the Taxpayer Relief Act of 1997 may allow use of the Cash Flow
Bond Method with respect to Stripped Securities and other Pass-Through
Securities because it provides that this method applies to any pool of debt
instruments the yield on which may be affected by prepayments. Nevertheless, it
is believed that the Cash Flow Bond Method is a reasonable method of reporting
income for those securities, and it is expected that OID will be reported on
that basis; provided that the applicable prospectus supplement may provide for
the reporting of OID on an alternative basis. In applying the calculation to
Pass-Through securities, the trustee will treat all payments to be received by a
holder with respect to the underlying loans as payments on a single installment
obligation. The IRS could, however, assert that original issue discount must be
calculated separately for each loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
security, the trustee intends, absent contrary authority, to report income to
security holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that
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. in certain series, each non-Interest Weighted Security is composed
of an unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped principal payments;
. the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Contingent Regulations; or
. each Interest Weighted Stripped security is composed of an
unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character is not carried over to the
securities in these circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the securities may cause a proportionate reduction in the
above-described qualifying status categories of securities.
Sale or Exchange
Subject to the discussion below with respect to trust funds as to which a
partnership election is made, a Holder's tax basis in its security is the price
the holder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on the Regular
Interest security had equaled 110% of the applicable federal rate as of the
beginning of the holder's holding period, over the amount of ordinary income
actually recognized by the holder
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with respect to the Regular Interest security. In general, the maximum tax rate
on ordinary income for individual taxpayers is 39.6% and the maximum tax rate on
long-term capital gains for individual taxpayers is 20%. The maximum tax rate on
both ordinary income and long-term capital gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to trust
funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the securities. This withholding generally applies
if the holder of a security
. fails to furnish the trustee with its taxpayer identification
number ("TIN");
. furnishes the trustee an incorrect TIN;
. fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
. under certain circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to Holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain Nonresidents (as defined below). Holders
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The trustee will report to the Holders and to the servicer for each
calendar year the amount of any "reportable payments" during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to trust funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), the interest will normally qualify as portfolio interest
(except where the recipient is a holder, directly or by attribution, of 10% or
more of the capital or profits
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interest in the issuer, or the recipient is a controlled foreign corporation to
which the issuer is a related person) and will be exempt from federal income
tax. Upon receipt of appropriate ownership statements, the issuer normally will
be relieved of obligations to withhold tax from those interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless this
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that this
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed,
or when the Residual Interest Security is disposed of. The Treasury has
statutory authority, however, to promulgate regulations which would require
these amounts to be taken into account at an earlier time in order to prevent
the avoidance of tax. These regulations could, for example, require withholding
prior to the distribution of cash in the case of Residual Interest Securities
that do not have significant value. Under the REMIC Treasury regulations, if a
Residual Interest Security has tax avoidance potential, a transfer of a Residual
Interest Security to a Nonresident will be disregarded for all federal tax
purposes. A Residual Interest Security has tax avoidance potential unless, at
the time of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal at
least 30% of each excess inclusion, and that these amounts will be distributed
at or after the time at which the excess inclusions accrue and not later than
the calendar year following the calendar year of accrual. If a Nonresident
transfers a Residual Interest Security to a United States person, and if the
transfer has the effect of allowing the transferor to avoid tax on accrued
excess inclusions, then the transfer is disregarded and the transferor continues
to be treated as the owner of the Residual Interest Security for purposes of the
withholding tax provisions of the Code. See " -- Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Andrews & Kurth L.L.P., special counsel to the depositor, will deliver
its opinion that a trust fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based
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on the assumption that the terms of the Trust Agreement and related documents
will be complied with, and on counsel's conclusions that the nature of the
income of the trust fund will exempt it from the rule that certain publicly
traded partnerships are taxable as corporations or the issuance of the
securities has been structured as a private placement under an IRS safe harbor,
so that the trust fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its taxable
income. The trust fund's taxable income would include all its income, possibly
reduced by its interest expense on the notes. Any such corporate income tax
could materially reduce cash available to make payments on the notes and
distributions on the certificates, and certificateholders could be liable for
the amount of tax that is not otherwise paid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the notes as Indebtedness. In the case of notes for which
a REMIC election is not made, the trust fund will agree, and the noteholders
will agree by their purchase of notes, to treat the notes as debt for federal
income tax purposes. Special counsel to the depositor will, except as otherwise
provided in the related prospectus supplement, advise the depositor that the
notes will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the notes is correct.
OID, Indexed securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not indexed securities or Stripped Securities. Moreover, the discussion assumes
that the interest formula for the notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the notes (i.e.,
any excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the notes will not be considered issued
with OID. The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with the
noteholder's method of tax accounting. Under the OID regulations, a holder of a
note issued with a de minimis amount of OID must include the OID in income, on a
pro rata basis, as principal payments are made on the note. It is believed that
any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
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A holder of a note that has a fixed maturity date of not more than one
year from the issue date of the note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a noteholder sells a note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the note. The
adjusted tax basis of a note to a particular noteholder will equal the holder's
cost for the note, increased by any market discount, acquisition discount, OID
and gain previously included by the noteholder in income with respect to the
note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by the noteholder
with respect to the note. Any such gain or loss will be capital gain or loss if
the note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made, or accrued, to a noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person
. is not actually or constructively a "10 percent shareholder" of
the trust fund or the seller, including a holder of 10% of the
outstanding certificates, or a "controlled foreign corporation"
with respect to which the trust fund or the seller is a "related
person" within the meaning of the Code and
. provides the owner trustee or other person who is otherwise
required to withhold U.S. tax with respect to the notes with an
appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner
of the note is a foreign person and providing the foreign person's
name and address.
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If a note is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the foreign person that owns the note. If the interest is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income and withholding tax, provided that the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and in the case of an individual foreign person,
the foreign person is not present in the United States for 183 days or more in
the taxable year.
Backup Withholding. Each holder of a note, other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident, will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt noteholder fail
to provide the required certification, the trust fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the depositor, the IRS successfully asserted that
one or more of the notes did not represent debt for federal income tax purposes,
the notes might be treated as equity interests in the trust fund. If so treated,
the trust fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
depositor, the trust fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the notes as equity interests in a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates for a Trust Fund Treated as a
Partnership
Treatment of the Trust Fund as a Partnership. If the trust fund is to
be treated as a partnership for tax purposes, the trust fund and the master
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a
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partnership for purposes of federal and state income tax, franchise tax and any
other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the trust fund, the partners of the
partnership being the certificateholders, and the notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the trust fund, the certificates, the notes, the trust fund and the servicer is
not clear because there is no authority on transactions closely comparable to
that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the certificates are denominated in U.S. dollars, none of the
certificates are Indexed securities or Strip certificates, and that a series of
securities includes a single class of certificates. If these conditions are not
satisfied with respect to any given series of certificates, additional tax
considerations with respect to the certificates will be disclosed in the
applicable prospectus supplement.
Partnership Taxation. As a partnership, the trust fund will not be
subject to federal income tax. Rather, each certificateholder will be required
to separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions upon collection or disposition of loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the certificateholders will be allocated taxable
income of the trust fund for each month equal to the sum of (i) the interest
that accrues on the certificates in accordance with their terms for the month,
including interest accruing at the Pass-Through Rate for the month and interest
on amounts previously due on the certificates but not yet distributed; (ii) any
trust fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the certificates over their initial issue
price (iii) prepayment premium payable to the certificateholders for the month;
and (iv) any other amounts of income payable to the certificateholders for the
month. This allocation will be reduced by any amortization by the trust fund of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor or an affiliate. Based on the
economic arrangement of the parties, this approach for allocating trust fund
income should be permissible
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under applicable Treasury regulations, although no assurance can be given that
the IRS would not require a greater amount of income to be allocated to
certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of this amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay the
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to that holder under the Code.
An individual taxpayer's share of expenses of the trust fund (including
fees to the servicer but not interest expense) would be miscellaneous itemized
deductions. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income
and allocations to certificateholders on an aggregate basis. If the IRS were to
require that the calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued
with OID, and, therefore, the trust fund should not have OID income. However,
the purchase price paid by the trust fund for the loans may be greater or less
than the remaining principal balance of the loans at the time of purchase. If
so, the loan will have been acquired at a premium or discount, as the case may
be. (As indicated above, the trust fund will make this calculation on an
aggregate basis, but might be required to recompute it on a loan by loan basis.)
If the trust fund acquires the loans at a market discount or premium,
the trust fund will elect to include the discount in income currently as it
accrues over the life of the loans or to offset the premium against interest
income on the loans. As indicated above, a portion of the market discount income
or premium deduction may be allocated to certificateholders.
Section 708 Termination. Under Code Section 708, a sale or exchange of
50% or more of the capital and profits in a partnership would cause a deemed
contribution of assets of the partnership (the "old partnership") to a new
partnership (the "new partnership") in exchange for
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interests in the new partnership. These interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. Accordingly under these new regulations, if the
trust fund were characterized as a partnership and a sale of certificates
terminated the partnership under Code Section 708, the purchaser's basis in its
ownership interest would not change.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust fund income (includible
in income) and decreased by any distributions received with respect to the
certificate. In addition, both the tax basis in the certificates and the amount
realized on a sale of a certificate would include the holder's share of the
notes and other liabilities of the trust fund. A holder acquiring certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in the certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of the aggregate tax basis to the certificates
sold, rather than maintaining a separate tax basis in each certificate for
purposes of computing gain or loss on a sale of that certificate.
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to the special reporting requirements. Thus, to avoid those
special reporting requirements, the trust fund will elect to include market
discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, the excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of the month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
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Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make this
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The owner trustee is required to keep or have
kept complete and accurate books of the trust fund. These books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the trust fund will be the calendar year. The trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the trust fund and will report each certificateholder's allocable share
of items of trust fund income and expense to holders and the IRS on Schedule
K-1. The trust fund will provide the Schedule K-l information to nominees that
fail to provide the trust fund with the information statement described below
and those nominees will be required to forward this information to the
beneficial owners of the certificates. Generally, holders must file tax returns
that are consistent with the information return filed by the trust fund or be
subject to penalties unless the holder notifies the IRS of all inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. This information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
certificates that were held, bought or sold on behalf of the person throughout
the year. In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Securities Exchange Act of 1934, as amended
is not required to furnish this information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
Unless otherwise specified in the related prospectus supplement, the
depositor will be designated as the tax matters partner in the related Trust
Agreement and will be responsible for representing the certificateholders in any
dispute with the IRS. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three
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years after the date on which the partnership information return is filed. Any
adverse determination following an audit of the return of the trust fund by the
appropriate taxing authorities could result in an adjustment of the returns of
the certificateholders, and, under certain circumstances, a certificateholder
may be precluded from separately litigating a proposed adjustment to the items
of the trust fund. An adjustment could also result in an audit of a
certificateholder's returns and adjustments of items not related to the income
and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described in this prospectus. Although it is not
expected that the trust fund would be engaged in a trade or business in the
United States for those purposes, the trust fund will withhold as if it were so
engaged in order to protect the trust fund from possible adverse consequences of
a failure to withhold. The trust fund expects to withhold on the portion of its
taxable income, as calculated for this purpose which may exceed the
distributions to certificateholders, that is allocable to foreign
certificateholders pursuant to Section 1446 of the Code, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the trust fund to change its
withholding procedures. In determining a holder's withholding status, the trust
fund may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes created or organized in or under the
laws of the United States, any state thereof or the District of Columbia (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), or an estate whose income is subject to U.S.
federal income tax regardless of its source of income, or a trust if a court
within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior to that
date that elect to continue to be so treated also shall be considered U.S.
Persons.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the trust fund taking the
position that no taxes were due because the trust fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
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guaranteed payments to the extent those payments are determined without regard
to the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In that case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations
Final regulations dealing with withholding tax on income paid to
foreign persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations generally attempt to unify certification requirements
and modify reliance standards. In particular, the New Withholding Regulations
replace the current IRS Form W-8, Form 4224 and Form 1001 with various revised
IRS Forms W-8 and provide that the current Form W-8, Form 4224 and Form 1001
will be invalid after December 31, 2000. Therefore, the holder of securities
will be required to file the appropriate revised Form W-8 before December 31,
2000. The New Withholding Regulations generally will be effective for payments
made after December 31, 2000, subject to certain transition rules. Prospective
investors are strongly urged to consult their own tax advisors with respect to
the New Withholding Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the
Code, which apply only to securities of a series that are not divided into
subclasses. If securities are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to those securities.
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ERISA and Section 4975 of the Code impose requirements on employee
benefit plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities and Keogh plans as well as
collective investment funds and separate accounts in which those plans, accounts
or arrangements are invested) (collectively, "Plans") subject to ERISA or to
Section 4975 of the Code and on persons who are fiduciaries with respect to
those Plans. Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of those Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of the Plan (subject to
certain exceptions not here relevant). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to requirements imposed by ERISA and Section
4975 of the Code. Accordingly, assets of those plans may be invested in
securities without regard to the considerations described above and below,
subject to the provisions of applicable state law. Any of those plans which is
qualified and exempt from taxation under Code Sections 401(a) and 501(a),
however, is subject to the prohibited transaction rules set forth in Code
Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101). Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation generally provides that, in addition to certain other
technical exceptions, the assets of a corporation or partnership in which a Plan
invests will not be deemed for purposes of ERISA to be assets of the Plan if the
equity interest acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Labor Reg. Section 2510.3-101, is a
security that is widely held, freely transferable and registered under the
Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
impose additional prohibitions where Parties in Interest are fiduciaries with
respect to the Plan. Because the loans may be deemed Plan assets of each Plan
that purchases securities, an investment in the securities by a Plan might be a
prohibited transaction under ERISA Sections 406 and 407 and subject to an excise
tax under Code Section 4975 unless a statutory, regulatory or administrative
exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), the DOL exempted
from ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-
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through certificates" in the initial issuance of those certificates. PTE 83-1
permits, subject to certain conditions, transactions which might otherwise be
prohibited between Plans and Parties in Interest with respect to those Plans
related to the origination, maintenance and termination of mortgage pools
consisting of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition and holding of
certain mortgage pool pass-through certificates representing an interest in
those mortgage pools by Plans. If the general conditions (discussed below) of
PTE 83-1 are satisfied, investments by a Plan in securities that represent
interests in a pool consisting of loans ("Single Family Securities") will be
exempt from the prohibitions of ERISA Sections 406(a) and 407 (relating
generally to transactions with Parties in Interest who are not fiduciaries) if
the Plan purchases the Single Family Securities at no more than fair market
value and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and
(2) (relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, unless otherwise provided in the related prospectus supplement, no
transfer of a Subordinate Security or a security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i) securities
issued in a series consisting of only a single class of securities; and (ii)
senior securities issued in a series in which there is only one class of senior
securities; provided that the securities in the case of clause (i), or the
senior securities in the case of clause (ii), evidence the beneficial ownership
of both a specified percentage (greater than 0%) of future interest payments and
a specified percentage (greater than 0%) of future principal payments on the
loans. It is not clear whether a class of securities that evidences beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments
would be a "mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption:
. the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and
for indemnifying securityholders against reductions in
pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of
the aggregate principal balance of all covered pooled mortgage
loans or the principal balance of the largest covered pooled
mortgage loan;
. the existence of a pool trustee who is not an affiliate of the
pool sponsor; and
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. a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not
more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool
sponsor to the pool.
The depositor believes that the first general condition referred to above
will be satisfied with respect to the securities in a series issued without a
subordination feature, or the senior securities only in a series issued with a
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, pool insurance or other form of credit
enhancement described under "Credit Enhancement" in this prospectus (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
series of securities is maintained in an amount not less than the greater of one
percent of the aggregate principal balance of the loans or the principal balance
of the largest loan. See "Description of the Securities" in this prospectus. In
the absence of a ruling that the system of insurance or other protection with
respect to a series of securities satisfies the first general condition referred
to above, there can be no assurance that these features will be so viewed by the
DOL. In any event, the trustee will not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations and the servicing, operation and
management of those asset-back pass-through trusts, provided the conditions and
requirements of the Underwriter Exemptions are met.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially identical, and include the
following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
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(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest
generic rating categories from Standard & Poor's Ratings Group, a
Division of The McGraw-Hill Companies ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents
not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust fund
represents not more than the fair market value of such loans; the
sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation
for such person's services under the agreement pursuant to which
the loans are pooled and reimbursements of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933 as amended.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's or
Fitch for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
Plan fiduciary causes the Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor, provided
that, among other requirements:
. in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each
class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group;
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. the fiduciary (or its affiliate) is an obligor with respect to
five percent (5%) or less of the fair market value of the
obligations contained in the trust;
. the Plan's investment in certificates of any class does not exceed
twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and
. immediately after the acquisition, no more than twenty-five
percent (25%) of the assets of the Plan with respect to which such
person is a fiduciary is invested in certificates representing an
interest in one or more trusts containing assets sold or serviced
by the same entity.
The Underwriter Exemptions generally do not apply to Plans sponsored by
the seller, the related Underwriter, the trustee, the master servicer, any
insurer with respect to the loans, any obligor with respect to loans included in
the trust fund constituting more than five percent (5%) of the aggregate
unamortized principal balance of the assets in the trust fund, or any affiliate
of those parties (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Underwriter Exemptions, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Pre-Funding Period"),
instead of requiring that all those Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions
for eligibility as the original Obligations used to create the
trust, which terms and conditions have been approved by a Rating
Agency.
(3) The transfer of such Additional Obligations to the trust during
the Pre-Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from a
Rating Agency upon termination of the Pre-Funding Period than the
rating that was obtained at the time of the initial issuance of
the certificates by the trust.
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(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the
trust at the end of the Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the
Obligations transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations
which were transferred to the trust fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider
that is independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided
to each Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not
the characteristics of the Additional Obligations conform
to the characteristics described in the related prospectus
or prospectus supplement and/or pooling and servicing
agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were
applicable to the Obligations transferred to the trust as
of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments ("Certain
Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
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(iv) that the amounts remaining in the pre-funding account at
the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Certain Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus
or prospectus supplement, the terms and conditions for eligibility
of Additional Obligations.
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
The DOL has proposed amendments (the "Proposed Amendments") to the
Underwriter Exemptions that, if finalized in current form, generally will be
effective as of August 23, 2000. Among other changes, it is anticipated that the
amended exemption would permit a Plan to purchase subordinate certificates rated
in any of the four highest ratings categories (provided that all other
requirements of the Underwriter Exemptions are met). It is not certain if and
when the Proposed Amendments will be issued in final form, and it is not certain
that the Proposed Amendments, if finalized, will contain the same relief as is
currently proposed. Fiduciaries of Plans should, and other potential investors
who may be analyzing the potential liquidity of their investment may wish to,
consult with their advisors regarding the Proposed Amendments.
Any Plan fiduciary which proposes to cause a Plan to purchase securities
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of PTE 83-1 and the Underwriter Exemptions, and the potential
consequences in their specific circumstances, prior to making an investment in
the securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify
which, if any, of the classes of securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of securities that qualify as "mortgage related
securities" will be legal investments for 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
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any of those entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of those entities with
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respect to "mortgage related securities", securities will constitute legal
investments for entities subject to the legislation only to the extent provided
in the legislation. Approximately twenty-one states adopted this legislation
prior to the October 4, 1991 deadline. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in securities, or require the
sale or other disposition of securities, so long as the contractual commitment
was made or the securities were acquired prior to the enactment of the
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities (in each case whether or not the
class of securities under consideration for purchase constituted a "mortgage
related security"). The NCUA issued final regulations effective December 2, 1991
that restrict and in some instances prohibit the investment by Federal Credit
Unions in certain types of mortgage related securities.
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-
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assets limits and provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying," or in securities
which are issued in book-entry form.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the securities constitute legal investments for them.
METHOD OF DISTRIBUTION
Securities are being offered hereby in series from time to time (each
series evidencing or relating to a separate trust fund) through any of the
following methods:
. by negotiated firm commitment underwriting and public reoffering
by underwriters;
. by agency placements through one or more placement agents
primarily with institutional investors and dealers; and
. by placement directly by the depositor with institutional
investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any underwriters thereof and either the price at which that
series is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the depositor, or the method by which the price at which the underwriters will
sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the securities of the series if any securities are purchased. Securities may be
acquired by the underwriters for their own accounts 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.
This prospectus, together with the related prospectus supplement, may be
used by First Tennessee Securities Corporation or First Tennessee Capital
Markets, Inc., each an affiliate of First Horizon Asset Securities Inc. and
First Horizon Home Loan Corporation, in connection with offers and sales related
to market making transactions in the securities in which either First Tennessee
Securities Corporation or First Tennessee Capital Markets may act as principal.
First Tennessee Securities Corporation or First Tennessee Capital Markets, Inc.
may also act as agent
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in those transactions. Sales in those transactions will be made at prices
related to prevailing prices at the time of sale.
Underwriters and agents may be entitled under agreements entered into
with the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which those underwriters or agents
may be required to make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating thereto will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of securities of the series.
LEGAL MATTERS
The validity of the securities of each series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the depositor by Andrews & Kurth L.L.P., 1717 Main Street, Suite 3700, Dallas,
Texas 75201.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of
securities and no trust fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of the securities of each series
offered hereby and by the prospectus supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related prospectus supplement.
A rating is based on, among other things, the adequacy of the value of
the Trust Fund Assets and any credit enhancement with respect to a class of
securities and will reflect the Rating Agency's assessment solely of the
likelihood that holders of that class of securities will receive payments to
which the holders are entitled under the related Agreement. A rating will not
constitute an assessment of the likelihood that principal prepayments on the
related loans will be made, the degree to which the rate of those prepayments
might differ from that originally anticipated or the likelihood of early
optional termination of the series of securities. A rating should not be deemed
a recommendation to purchase, hold or sell securities, inasmuch as it does not
address market price or suitability for a particular investor. Each security
rating should be evaluated independently of any other security rating. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause the investor to
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experience a lower than anticipated yield or that an investor purchasing a
security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
There is also no assurance that any rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a series of securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such series. These
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. This analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any Properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If the residential real
estate markets should experience an overall decline in property values such that
the outstanding principal balances of the loans in a particular trust fund and
any secondary financing on the related Properties become equal to or greater
than the value of the Properties, the rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. In additional, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any trust fund.
To the extent that those losses are not covered by credit enhancement, they will
be borne, at least in part, by the holders of one or more classes of the
securities of the related series.
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INDEX TO DEFINED TERMS
"Additional Obligations" ................................................... 134
"Agreement" ................................................................. 19
"APR" ....................................................................... 24
"Available Funds" ........................................................... 34
"Belgian Cooperative" ....................................................... 50
"BIF" ....................................................................... 64
"Capitalized Interest Account" .............................................. 67
"Cash Flow Bond Method" .................................................... 116
"CERCLA" .................................................................... 85
"Certain Investments" ...................................................... 135
"Claimable Amount" .......................................................... 99
"Class Security Balance" .................................................... 34
"Clearstream, Luxembourg Participants" ...................................... 49
"Code" ................................................................. 33, 100
"COFI Securities" ........................................................... 45
"Collateral Value" ...................................................... 24, 25
"Combined Loan-to-Value Ratio" .............................................. 24
"Contingent Regulations" ................................................... 102
"cooperative loans" ......................................................... 20
"cooperatives" .............................................................. 20
"Cut-off Date Principal Balance" ............................................ 32
"Definitive Security" ....................................................... 47
"Detailed Description" ...................................................... 20
"DOL" ...................................................................... 129
"DTC" ....................................................................... 47
"Eleventh District" ......................................................... 44
"ERISA" ..................................................................... 33
"Euroclear Operator" ........................................................ 49
"Euroclear Participants" .................................................... 49
"European Depositaries" ..................................................... 47
"FHA" ....................................................................... 20
"FHLBSF" .................................................................... 44
"Final Bond Premium Regulations" ........................................... 106
"Financial Intermediary" .................................................... 48
"Fitch" .................................................................... 132
"foreign person" ........................................................... 121
"Funding Period" ............................................................ 67
"Garn-St Germain Act" ....................................................... 89
"Indenture" ................................................................. 31
"Insurance Proceeds" ........................................................ 65
"Insured Expenses" .......................................................... 65
"Interest Weighted Securities".............................................. 104
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"IRS" ...................................................................... 102
"L/C Bank" .................................................................. 53
"L/C Percentage" ............................................................ 53
"Liquidation Expenses" ...................................................... 65
"Liquidation Proceeds" ...................................................... 65
"Loan Rate" ................................................................. 20
"Loan-to-Value Ratio" ....................................................... 24
"Master Servicing Fee" ...................................................... 73
"Moody's" .............................................................. 55, 132
"Morgan" .................................................................... 49
"Mortgage" .................................................................. 62
"National Cost of Funds Index" .............................................. 45
"NCUA" ..................................................................... 136
"New Proposed Regulations" ................................................. 113
"New Withholding Regulations" .............................................. 128
"Nonresidents" ............................................................. 119
"Obligations" .............................................................. 133
"OID Regulations" .......................................................... 101
"OID" ...................................................................... 101
"OTS" ....................................................................... 45
"Parties in Interest" ...................................................... 129
"Pass-Through Rate" ......................................................... 18
"Pass-Through Securities" .................................................. 114
"Pay-Through Security" ..................................................... 103
"Percentage Interests" ...................................................... 75
"Permitted Investments" ..................................................... 54
"Plans" .................................................................... 129
"Policy Statement" ......................................................... 136
"Pool Insurance Policy" ..................................................... 56
"Pool Insurer" .............................................................. 56
"Pooling and Servicing Agreement" ........................................... 31
"Prepayment Assumption" .................................................... 103
"Pre-Funded Amount" ......................................................... 67
"Pre-Funding Account" ....................................................... 67
"Pre-Funding Limit" ........................................................ 134
"Pre-Funding Period" ....................................................... 133
"Primary Mortgage Insurance Policy" ......................................... 22
"Prime Rate" ................................................................ 47
"Principal Prepayments" ..................................................... 36
"Properties" ................................................................ 22
"Property Improvement Loans" ................................................ 95
"PTE 83-1".................................................................. 130
"Purchase Price" ............................................................ 30
"Rating Agency" ............................................................ 138
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"Ratio Strip Securities" ................................................... 116
"RCRA" ...................................................................... 87
"Record Date" ............................................................... 33
"Refinance Loan" ............................................................ 25
"Regular Interest Securities" .............................................. 100
"Relevant Depositary" ....................................................... 47
"Relief Act" ................................................................ 93
"REMIC" .................................................................... 100
"Residual Interest Security" ............................................... 109
"Restricted Group" ......................................................... 133
"Retained Interest" ......................................................... 32
"Rules" ..................................................................... 48
"S&P" ...................................................................... 132
"SAIF" ...................................................................... 64
"Sale and Servicing Agreement" .............................................. 19
"Security Account" .......................................................... 64
"Security Owners" ........................................................... 47
"Security Register" ......................................................... 33
"SEC" ....................................................................... 53
"Sellers" ................................................................... 18
"Senior Securities" ......................................................... 52
"Servicing Fee" ............................................................ 114
"Short-Term Note" .......................................................... 121
"Single Family Properties" .................................................. 22
"Single Family Securities" ................................................. 130
"SMMEA" .................................................................... 135
"Stripped Securities" ...................................................... 114
"Subsequent Loans" .......................................................... 67
"Terms and Conditions" ...................................................... 50
"TIN" ...................................................................... 118
"Title I Loans" ............................................................. 95
"Title I Program" ........................................................... 95
"Title V" ............................................................... 90, 92
"Trust Agreement" ....................................................... 19, 31
"Trust Fund Assets" ......................................................... 18
"U.S. Person" .............................................................. 127
"UCC" ....................................................................... 85
"Underwriter Exemptions" ................................................... 131
"VA Guaranty" ............................................................... 73
"VA" ........................................................................ 20
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the book-entry securities will
be available only in book-entry form. Investors in the book-entry securities may
hold them through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg or Euroclear. The book-entry securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding interests in
book-entry securities through Clearstream, Luxembourg and Euroclear will be
conducted in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice. Secondary market trading between
investors holding interests in book-entry securities through DTC will be
conducted according to the rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between investors holding interests in
book-entry securities through Clearstream, Luxembourg or Euroclear and investors
holding interests in book-entry securities through DTC participants will be
effected on a delivery-against-payment basis through the respective depositories
of Clearstream, Luxembourg and Euroclear (in that capacity) and other DTC
participants.
Although DTC, Euroclear and Clearstream, Luxembourg are expected to
follow the procedures described below to facilitate transfers of interests in
the book-entry securities among participants of DTC, Euroclear and Clearstream,
Luxembourg, they are under no obligation to perform or continue to perform those
procedures, and those procedures may be discontinued at any time. Neither the
Issuer nor the indenture trustee will have any responsibility for the
performance by DTC, Euroclear and Clearstream, Luxembourg or their respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their obligations.
Non-U.S. holders (as described below) of book-entry securities will be
subject to U.S. withholding taxes unless the holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
The book-entry securities will be registered in the name of Cede & Co.
as nominee of DTC. Investors" interests in the book-entry securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. Clearstream, Luxembourg and Euroclear will hold
positions on behalf of their participants through their respective depositories,
which in turn will hold the positions in accounts as DTC participants.
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Investors electing to hold interests in book-entry securities through
DTC participants, rather than through Clearstream, Luxembourg or Euroclear
accounts, will be subject to the settlement practices applicable to similar
issues of pass-through notes. Investors" securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold interests in book-entry securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Interests in
book-entry securities will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Transfers between DTC Participants. Secondary market trading between
DTC participants will be settled using the DTC procedures applicable to similar
issues of pass-through notes in same-day funds.
Transfers between Clearstream, Luxembourg and/or Euroclear
Participants. Secondary market trading between Clearstream, Luxembourg
participants or Euroclear participants and/or investors holding interests in
book-entry securities through them will be settled using the procedures
applicable to conventional eurobonds in same-day funds.
Transfers between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When interests in book-entry securities are to be transferred on
behalf of a seller from the account of a DTC participant to the account of a
Clearstream, Luxembourg participant or a Euroclear participant or a purchaser,
the purchaser will send instructions to Clearstream, Luxembourg or Euroclear
through a Clearstream, Luxembourg participant or Euroclear participant at least
one business day before settlement. Clearstream, Luxembourg or the Euroclear
operator will instruct its respective depository to receive an interest in the
book-entry securities against payment. Payment will include interest accrued on
the book-entry securities from and including the last distribution date to but
excluding the settlement date. Payment will then be made by the respective
depository to the DTC participant's account against delivery of an interest in
the book-entry securities. After settlement has been completed, the interest
will be credited to the respective clearing system, and by the clearing system,
in accordance with its usual procedures, to the Clearstream, Luxembourg
participant's or Euroclear participant's account. The credit of the interest
will appear on the next business day and the cash debit will be back-valued to,
and the interest on the book-entry securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not
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completed through DTC on the intended value date (i.e., the trade fails), the
Clearstream, Luxembourg or Euroclear cash debit will be valued instead as of the
actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will
need to make available to the respective clearing system the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement from cash on hand, in which case the
Clearstream, Luxembourg participants or Euroclear participants will take on
credit exposure to Clearstream, Luxembourg or the Euroclear operator until
interests in the book-entry securities are credited to their accounts one day
later.
As an alternative, if Clearstream, Luxembourg or the Euroclear operator
has extended a line of credit to them, Clearstream, Luxembourg participants or
Euroclear participants can elect not to pre-position funds and allow that credit
line to be drawn upon. Under this procedure, Clearstream, Luxembourg
participants or Euroclear participants receiving interests in book-entry
securities for purchasers would incur overdraft charges for one day, to the
extent they cleared the overdraft when interests in the book-entry securities
were credited to their accounts. However, interest on the book-entry securities
would accrue from the value date. Therefore, the investment income on the
interest in the book-entry securities earned during that one-day period would
tend to offset the amount of the overdraft charges, although this result will
depend on each Clearstream, Luxembourg participant's or Euroclear participant's
particular cost of funds.
Since the settlement through DTC will take place during New York
business hours, DTC participants are subject to DTC procedures for transferring
interests in book-entry securities to the respective depository of Clearstream,
Luxembourg or Euroclear for the benefit of Clearstream, Luxembourg participants
or Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the seller settling the sale through a DTC
participant, a cross-market transaction will settle no differently than a sale
to a purchaser settling through a DTC participant.
Finally, intra-day traders that use Clearstream, Luxembourg
participants or Euroclear participants to purchase interests in book-entry
securities from DTC participants or sellers settling through them for delivery
to Clearstream, Luxembourg participants or Euroclear participants should note
that these trades will automatically fail on the sale side unless affirmative
action is taken. At least three techniques SHOULD be available to eliminate this
potential condition:
(a) borrowing interests in book-entry securities through
Clearstream, Luxembourg or Euroclear for one day (until the
purchase side of the intra-day trade is reflected in the
relevant Clearstream, Luxembourg or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing interests in book-entry securities in the United
States from a DTC participant no later than one day before
settlement, which would give sufficient
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time for the interests to be reflected in the relevant
Clearstream, Luxembourg or Euroclear accounts to settle the
sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
participant is at least one day before the value date for the
sale to the Clearstream, Luxembourg participant or Euroclear
participant.
Transfers between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which interests in book-entry securities are to be
transferred by the respective clearing system, through the respective
depository, to a DTC participant. The seller will send instructions to
Clearstream, Luxembourg or the Euroclear operator through a Clearstream,
Luxembourg participant or Euroclear participant at least one business day before
settlement. Clearstream, Luxembourg or Euroclear will instruct its respective
depository to credit an interest in the book-entry securities to the DTC
participant's account against payment. Payment will include interest accrued on
the book-entry securities from and including the last distribution date to but
excluding the settlement date. The payment will then be reflected in the account
of the Clearstream, Luxembourg participant or Euroclear participant the
following business day, and receipt of the cash proceeds in the Clearstream,
Luxembourg participant's or Euroclear participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred
through DTC in New York). If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream,
Luxembourg participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of book-entry securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the United States) will be subject to the 30% U.S. withholding
tax that generally applies to payments of interest (including original issue
discount) on registered debt issued by U.S. Persons, unless (i) each clearing
system, bank or other financial institution that holds customers" securities in
the ordinary course of its trade or business in the chain of intermediaries
between the Beneficial Owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) the beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons ([Form W-8 or] W-8BEN). Beneficial
Owners of Notes that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed [Form W-8 (Note of Foreign Status) or]
Form W-8BEN (Note of Foreign Status of Beneficial Ownership for United States
Tax Withholding). If the information shown on Form [W-8] changes a new Form
[W-8] must be filed within 30 days of the change. [As of December 31, 2000 only
Form W-8BEN will be acceptable.]
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Exemption for non-U.S. Persons with effectively connected income ([Form
4224 or] Form W-8ECI). A non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing [Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States) or] Form W-8ECI (Note of Foreign Person's
Claim for Exemption from Withholding or Income Effectively Connected with the
Conduct of a Trade or Business in the United States). [As of December 31, 2000,
only Form W-8ECI will be acceptable.] Exemption or reduced rate for non-U.S.
Persons resident in treaty countries ([Form 1001 or] Form W-8BEN). Non-U.S.
Persons that are Beneficial Owners residing in a country that has a tax treaty
with the United States can obtain an exemption or reduced tax rate (depending on
the treaty terms) by filing [Form 1001 (Ownership, Exemption or Reduced Rate
Note) or] Form W-8BEN (Note of Foreign Status of Beneficial Ownership for United
States Tax Withholding). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form [W-8]. Form [1001] may be filed by the Beneficial Owner or his agent.
[As of December 31, 2000 only Form W-8BEN will be acceptable.] Exemption for
U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from the
withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification
Number and Certification).
[U.S. Federal Income Tax Reporting Procedure. The Beneficial Owner of a
book-entry security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency).
Form W-8, Form 1001 and Form 4224 are effective until December 31,
2000. Form W-8BEN and Form W-8ECI are effective until the third succeeding
calendar year from the date the form is signed.]
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership or other entity treated as a
corporation or partnership for federal income tax purposes created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source or (iv) a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust.] This summary does
not deal with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the book-entry securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the book-entry securities.
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PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 14. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the issuance and distribution of the securities
offered hereby, other than underwriting discounts and commissions.
SEC Registration Fee...................... $ 250,000
Printing and Engraving Expenses........... 7,500
Accounting Fees and Expenses.............. 137,500
Legal Fees and Expenses................... 250,000
Trustee Fees and Expenses................. 50,000
Rating Agency Fees........................ 500,000
Miscellaneous............................. 50,000
----------
Total........................... $1,245,000
----------
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended, the Registrant's Certificate of Incorporation provides that a
director of the Registrant shall not be personally liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or ( iv)
for any transaction from which the director derived an improper personal
benefit.
The Registrant's Certificate of Incorporation and Bylaws provide that the
Registrant will indemnify each person who is or was a director or officer of the
Registrant to the maximum extent permitted from time to time by law.
First Tennessee National Corporation, the indirect parent of First Horizon
Asset Securities Inc., provides insurance from commercial carriers against
certain liabilities incurred by its officers and directors and by the officers
and directors of certain of its subsidiaries and other affiliated corporations.
See Item 17(c) below.
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<PAGE>
Item 16. Exhibits.
Exhibit No.
-----------
1.1 Form of Underwriting Agreement***
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.1 Form of Pooling and Servicing Agreement for Mortgage Pass-Through
Certificates**
4.2 Form of Indenture****
4.3 Form of Trust Agreement****
5.1 Opinion of Andrews & Kurth L.L.P. regarding legality of the
Securities****
8.1 Opinion of Andrews & Kurth L.L.P., regarding certain tax matters****
10.1 Form of Sale and Servicing Agreement****
23.1 Consents of Andrews & Kurth L.L.P. (contained in their opinions filed
as Exhibits 5.1 and 8.1 to this Registration Statement)****
24.1 Powers of Attorney****
______________
* Previously filed with the Commission on March 16, 1999 as an Exhibit to the
Registrant's Registration Statement on Form S-3 (No. 333-74467)
** Previously filed with the Commission on May 20, 1999 as an Exhibit to
Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (No. 333-
74467)
*** Previously filed with the Commission on December 20, 1999 as an Exhibit to
Amendment No. 3 to the Registrant's Registration Statement on Form S-3 (No.
333-74467).
****Previously filed with the Commission on October 12, 2000 as an Exhibit to
the Registrant's Registration Statement on Form S-3 (No. 333-47798)
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a post-effective amendment
to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment hereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement.
Provided, however, that the undertakings set forth in clauses (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those clauses is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes 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 Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under 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 Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in
II-2
<PAGE>
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that (i) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and (ii) it reasonably believes that the
security rating requirement of Transaction Requirement B.5 of Form S-3 will be
met by the time of sale of each series of securities to which this Amendment No.
2 to Registration Statement relates and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irving, State of Texas, on the 5th day of
January, 2001.
FIRST HORIZON ASSET SECURITIES INC.
By: /s/ Gerald L. Baker
---------------------------------
Gerald L. Baker, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President
/s/ Gerald L. Baker Chief Executive Officer and Director January 5, 2001
---------------------------------
Gerald L. Baker (Principal Executive Officer)
/s/ Peter F. Makowiecki Chief Financial Officer and January 5, 2001
--------------------------------- Treasurer
Peter F. Makowiecki (Principal Financial Officer and
Principal Accounting Officer)
J. Kenneth Glass* Director January 5, 2001
---------------------------------
J. Kenneth Glass
Thomas J. Wageman* Director January 5, 2001
---------------------------------
Thomas J. Wageman
*By: /s/ Gerald L. Baker
-----------------------------
Gerald L. Baker
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
-----------
1.1 Form of Underwriting Agreement***
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.1 Form of Pooling and Servicing Agreement for Mortgage Pass-Through
Certificates**
4.2 Form of Indenture****
4.3 Form of Trust Agreement****
5.1 Opinion of Andrews & Kurth L.L.P. regarding legality of the
Securities****
8.1 Opinion of Andrews & Kurth L.L.P., regarding certain tax
matters****
10.1 Form of Sale and Servicing Agreement****
23.1 Consents of Andrews & Kurth L.L.P. (contained in their opinions
filed as Exhibits 5.1 and 8.1 to this Registration Statement)****
24.1 Powers of Attorney****
______________
* Previously filed with the Commission on March 16, 1999 as an Exhibit to the
Registrant's Registration Statement on Form S-3 (No. 333-74467)
** Previously filed with the Commission on May 20, 1999 as an Exhibit to
Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (No. 333-
74467)
*** Previously filed with the Commission on December 20, 1999 as an Exhibit to
Amendment No. 3 to the Registrant's Registration Statement on Form S-3 (No.
333-74467).
****Previously filed with the Commission on October 12, 2000 as an Exhibit to
the Registrant's Registration Statement on Form S-3 (No. 333-47798).
